Media, Mania and the Markets

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AND byJohn Campbell and William Bonner Foreword by Lord Rees-Mogg

© Copyright 1994 Fleet Street Publications Ltd., Communications House, 36-38 Willesden Lane, London NW6 7SW We do try and research all our facts thoroughly, but wc disclaim all liability for any inaccuracies or omissions found in this publication. Description of business is available on request, Remember! Never invest more than you can afford 10 lose. The value of any investment, and the income derived from it. ｾ can go down as well all ul". Investments in smaller companies have a higher risk factor. Published .. by Fleet Street Publications Ltd.. 36·38 Willcsden Lane. London NW6 7SW. Tcl: 071-625 8656. Fax: 071·625 5998.

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Printed in Great Britain by The Bath Press, Avon

Media Maniaand the Markets

CONTENTS

Foreword Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter8 Chapter 9

by Lord Rees Mogg Introduction The Madness of Crowds 1992 And All That Why Contrarian Investing Works The Fleet Street Letter 56 years of good advice AModem Mania: The Great ERM Disaster The Media - Crowd Pullers Investors and the DistortingMirror Eleven Things You Should Know About The Future, Now.

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FOREWORD The twentieth century has become avery disturbing place for many people. Our ancestors would live their whole lives without having to adjust to as big social or financial changes as most of us meet in a decade. Few people nowadays are lucky enough to live in the place they were born, or to be able to work for most of their lives with the same skills, letalone inthesame job. That makes it essential that people should manage change in their own lives - and in their investments - as though they were managing a business. We all have to think through what we are trying to achieve, and what may happen next. Yet we cannot afford to follow the crowd, because the crowd isusually wrong. We have all noticed that when everyone expects something to happen, it usually does not, and often the opposite happens. The favourite does not always, or often, win the Grand National. In investment when everyone wants the same share - or the same Picasso - the price goes through the roof. It is the person who buys when the crowd is selling and sells when thecrowd isbuying who gets the bargains and makes theprofits. The mass media talk to the crowds, and to themselves and get overexcited by the same story. They cannot be expected to give the quiet contrarian advice that helps people to go their own way, free from the madness of crowds. The mass media is actually in the business ofover excitement. This book isintended to help readers seethedeeper causes ofthe changes around usand to help them develop a successful strategy, not only tocope with these changes, butto benefit from them. WlWAM REES-MOGG

loNDON, JUNE 1994

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Chapter 1:

INTRODUCTION "Mary, Mary, quite contrary, howdoes your gardengrow?" (Traditional nursery rhyme) Investing successfully isn't easy. It looks as if it ought to be easy - and with the benefit of hindsight, it's simplicityitself. Just think how much you could now be worth if you'd invested heavily in the Stock Market during the recession of 1980·81, taken your profits before the Crash of 1987, and piled back in during the turmoil of 'Black' Wednesday. Imagine the home you could afford today if you'd sold out at the peak of the property market in 1988, put your capital on deposit and spent the next five years renting. Chances are, you did none of these things. It's more likely, in fact, that you did the exact opposite. Millions bought shares for the first time in the excitement of 1987 and a year later millions more panicked onto the housing ladder before prices moved out of reach for ever. All those people got their fingers burnt. Thousands have had their livesruined as a result. What went wrong? Most people are not stupid or reckless. They try to manage their finances sensibly, avoid going out on a limb and have no desire to gamble all their savings. Nevertheless, investment success remains stubbornly out of reach - and it's not just the speculators who get burnt. What went wrong is what always goes wrong. Most people seek safety in numbers and follow the crowd. To be more exact, they follow the crowd when it seems to have found the key to wealth. When your colleagues and friends start boasting about how well they've done on the Stock Market, or the fortune

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they've made from their new house, it's easy to feel out-of-touch and a bit of a loser. When the media start reinforcing the message (as, in the end, they always do) resistance crumbles. In the end, jumping on the bandwagon seems the only sensible thing to do. The fact is, you could have made a lot of money - and protected yourself from losses - many, many times over in the last few years. But not by following the crowd. And very few people did make that money. I'll explain the reason for that more fully. Plus, later in this book, I'll tell you about some specific opportunities that are available to you right now. So that even if you missed out on the great financial opportunities of the past, you need not do so in the future. For example, a huge financial setback for millions of Britons is on the horizon, due to the inevitable decline of the pound (more on this in Chapter 8, with some suggestions as to how investors can avoid the consequences of this). A few figures: in 1938, the pound was worth 21 Swiss francs, now it's only worth 2.135 francs. You'd be ten times richer just by keeping your money in the Swiss currency. The pound has declined dramatically, but the 'hard' currency of the Swiss franc has retained its value. Yet very few people actually moved their money out of the pound into Swiss francs, although they would have profited enormously. The majority went with the trend and saw the real value of their money decline. With the right advice and information, you could have protected yourself against this and against other dangerous trends - for example Lloyds and the devastating losses it brought about. (We warned against them as early as 1985.) We'll tell you what we expect to happen to the pound... and the British Stock Market... and to Britain in general so you can guard against - and take advantage of - future trends.

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You'll discover why to bet against what you see on the news - and how you can use unconventional sources of information to find out the truth behind the media camouflage. And we'll give you three specific investments that we tip to soar overthe coming years. You'll find out the real story behind the Lloyds disaster... how American lawyers nearly destroyed Britain's middle class landowners at an average loss of at least £300,000 to £500,000 per Lloyds Name. You'll also learn what's ahead for British property prices and why you shouldn't listen to what your estate agent says and count on a solid recovery. We'll also showyou how to use the banks to figure out what not to do with your money!

The road to ruin Investment is not only - or even mainly - about inside information, economic theory and sophisticated numbercrunching. It is also about raw emotion: greed, fear and mass hysteria. Theseemotions have an extremely powerful impact on the way markets work and no-one, like it or not, is immune from their influence. Let me explain the mechanics of this. When prices are rising, the psychology works something like this: The average investor hears just enough about the latest market trend to spark his interest. Growing pressure from friends, colleagues and the media make him feel afraid that perhaps he is 'missing out' on a major opportunity to profit. The trend remains intact, causing the investor to regret his past caution and start to question his own judgment. By now, the trend has hit the headlines, which is the final strawfor his sense of caution. His resistance breaks down and he panics into the market.

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Now, he is most likely extremely relieved. And in the short term, he may have good reason to feel pleased with himself since others, having gone through the same thoughts and emotions, will follow in his wake. The investor then shows a profit, feels more confident and may even reinforce his 'success' by buying more. But before long, the music stops - and all those average investors are left holding the baby. By average, I hasten to add, I don't just mean the man in the street. Most City fund managers and financial advisers get caught in exactly the same trap. Institutional investment in the Stock Market peaked in the summer of 1987 - just in time for the massive Stock Market crash. Disillusioned with shares, the institutions then piled into the commercial property market - jumping straight out of the frying pan into a very hot fire. Moreover, it wasn't just private homeowners who suffered from the slump in house prices. Most of the banks and building societies carelessly loosened their lending criteria as the 1980s boom took off. As a result, they were all later caught with massive bad debts and thousands of unsaleable properties they'd been forced to repossess. Some, notably Lloyds Bank and the mighty Prudential, even decided to move heavily into estate agency - right at the very top of the housing market. Needless to say.zhey suffered appalling losses. Big banks are almost legendary in their ability to make bad decisions. Out of hundreds of different places to put their money, bankers are able to find the few that are on the brink of disaster: loans to the Third World in the '70s... oil loans in the early '80s... shares just before the '87 crash... property right up to the collapse of property prices in '88. So simply following the professionals is no solution. All the training and 'expertise' in the world doesn't stop investors making ghastly mistakes. Moreover, as we shall see in Chapter 2, investors have gone on making the same old mistakes, for the

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same old reasons, for centuries. To invest successfully, there is one vital, unavoidable prerequisite - you simply must learn to resist the pressures of the crowd. Sounds easy? We all like to think that we have independent minds, and exercise independent judgment. The truth is that we are all - to a greater or lesser degree - influenced by the opinions of our fellows. That applies even in areas where we are sure of our ground, where we have the knowledge, experience and self-confidence to form an independent viewpoint. But understandably, not many people are sure of their ground when it comes to investment matters. Most people get dazed by the complicated economic theories and confused by the language of high finance, which is deliberately sophisticated and intimidating (even for many 'insiders' within the City). Yet it is precisely this language and these theories which are used to justify the crowd's activities and get you to agree with them and go along. With all this complicated theory and jargon, you can end up feeling unsure, a bit ignorant - and if you go against it, just plain awkward.

The Antidote - Contrarianism We believe that there are four rules which any investor must grasp if he is to achieve success: 1) The Crowd is always wrong In any healthy market, opinion is always divided - for anyone happy to buy at a particular price, there must be others willing to sell. When a market becomes 'one-way', when virtually everyone believes that prices will rise or fall, it is dangerous. Dangerous, that is, for the crowd. For anyone with the courage to bet the other way, it presents a major opportunity. 2) Trust your instincts, not your emotions Everyone knows that he ought to be trying to buy low and sell high. Moreover, I believe that most people know the

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difference instinctively. The problem is that emotions governed by crowd pressures - pull in the opposite direction and usually win out. Buying low and selling high almost always requires you to defy both conventional wisdom and your own emotional responses - easy in theory, but very difficult in practice. Indeed, it can feel extremely uncomfortable. 3) Jargon is poison Jargon is a useful shorthand for use among professionals - in economics and finance as in any other field. But there is nothing important which cannot be explained to reasonably intelligent laymen in plain English. If market behaviour is being justified in terms you cannot understand, beware. Jargon and cloudy abstractions can be used to justify virtually anything, however inherently absurd - and it is used ruthlessly to control crowd behaviour. When you think the emperor has no clothes, you are probably right, and all the emperor's courtiers wrong. You should not be afraid to act accordingly. 4) Question the obvious Develop a deeper, more fundamental understanding of what is going on in the world. Things do not 'just happen'. They have causes, roots, reasons. Understand the causes of market movements and you are on your way to profiting from them on a grand scale. But don't expect to find the answers in the media. For reasons I'll describe in Chapter 7, the media is more apt to mislead people than to describe the real causes of events. In this regard, the media can unwittingly be a help to you. It helps drive the crowd to pay absurd prices, enriching the sober, prudent investor. These four precepts form the essence of an investment philosophy called 'contrarianism'. It is not always an easy philosophy to put into practice, unless you are naturally perverse or bloody-minded. But it works.

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All the great investors, from John Maynard Keynes to SirJohn Templeton, have been contrarians of some sort or another. Templeton, who built up huge investment operations around the globe, has even gone to the extent of basing himself and his closest advisers in the Bahamas. Why? So they can think and analyse in peace, undistracted by the perpetual (and superficially compelling) 'noise' of the crowd in major financial centres like New York and London. Unfortunately, we cannot all insulate ourselves from the crowd to that extent. But we believe that private investors need some help to apply the contrarian philosophy in a way which will bring them lasting success. For over five decades, THE FLEET STREET LETI'ER has been providing just such assistance. THE FLEET STREET LETTER is by far the oldest investment newsletter in Britain, dating back to before the War. And with over half a century of experience, we've seen and learned a lot. And in our considered opinion, contrarianism is the only investment philosophy which produces results. In Chapter 5, we show how we have consistently combated the conventional 'wisdom' of the day, through all the chaos of recent decades, using all our insights to guide investors away from traps, and keep them several steps ahead of the crowd. We do not use elaborate investment theories, or claim that we have access to some magical formula. But what we can promise to do is to look behind superficial trends to discover the fundamental realities which govern the workings of governments, economies and markets. If we are sceptics, it is because we have learned that scepticism pays and credulity does not. In our time, we have seen one trend after another come to a sticky end and we know that all trends will eventually swing into reverse. Our job is to predict those breakdowns, to identify new trends waiting to get underway and to give our readers the

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information - and the confidence - to profitaccordingly. To that end, we take a completely different approach to that employed in the general news media. As we shall see in Chapter 7, modern journalism is largely about running 'stories' for all they are worth. Any trend - be it towards European integration or ever-higher house prices - is a story to be milked, nursed and extended for as long as humanly possible. As a result, the media locks itself into a trend-following stance. While this makes life easierfor journalists, it can bring disaster to investors. At THE FLEET STREET LETTER, we couldn't care less whethera storywill 'run'. All we are interested in is whether it is true - because if it isn't true, it may cost our readers dearly. To get at the truth, we ask our contacts hard questions: simple but probing questions like "why?" and "how?", We require sensible, clearly thought-out answers in plain English and we will not be fobbed off with jargon, swayed by fashion or blinded with science. We are not afraid to be thought perverse, ignorant or foolish - accusations levelled by conformists at their critics down the ages. We know, again from experience, that people who cannot express themselves clearly are deluding themselves as much as anyone else. And when they resort to bully-boy tactics, it is theywho have lost touch withreality. In Chapter 9, we explain who we are, what we do, and how we help thousands of investors make the most of their money. But this little book is not just to blow our own trumpet. It is to show how trends are generated and sustained, how they spin out of control and how they trap generation aftergeneration of politicians, businessmen and investors. At the end of it, we think you will agree with us that the only sure route to financial success is avoiding the media-driven crowd and paying close attention to the fundamentals. Ifyou are persuaded that we can help you to stayon that route, so much the better.

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Chapter 2:

THE MADNESS OF CROWDS "Madness is rare in individualsbut in groups, parties and nations, it is the rule. " (Nietzsche) There is nothing new about the tendency of investors to succumb to mass hysteria. Speculative manias and investment fads have existed for as long as financial instruments have been around to tempt the unwary. Here we look at two famous examples from the past - when we weren't around to give contemporaries the contrarian view - and in Chapters 3 and 6, we will examine three manias painfully fresh in everyone's memories, when we were. These episodes are worth looking at in some detail, because however bizarre they seem in retrospect, they all seemed highly plausible at the time. Human nature never changes and nor does the psychology of investment.

TULIPS FROM AMSTERDAM Perhaps the strangest episode in investment history took place in seventeenth-century Holland. Then, as now, Holland was a relatively small country surrounded by large and potentially dangerous neighbours. But it was also a commercial superpower - the Japan of the day - and Amsterdam was by far the biggest and most sophisticated financial centre in Europe. Unlike other countries, Holland had a large and diverse middle class - and all sections of the population (except, perhaps, the aristocracy) were incomparably better-off than their equivalents

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elsewhere. The Dutch had plenty of cash to spare and their bourgeois culture was highly entrepreneurial. Everyone was on the make and anxious to get richquick. Oddly enough, they chose speculation in tulip bulbs as the means to that end. Of course, the tulip is now Holland's national flower and common enough anywhere. But in the early seventeenth centuryit was still an exotic rarity. Introduced from Turkey in the 1590s, the tulip gradually established itselfas the flower of fashion throughout Europe. Gentlemen connoisseurs everywhere prided themselves on the rare and expensive blooms growing in their flower beds. The Dutch aristocracy was no exception - but in Holland, uniquely, there was also a wealthy and socially-insecure bourgeoisie anxious to acquire this fashionable status symbol. By the late 1620s, Dutch market gardeners found they could not keep up with demand - and as demand outstripped supply, so the prices of tulip bulbs inevitably rose. By the early 1630s, they were rising fast. Those who pre-ordered bulbs during the planting season found that they could always sell at a big profitwhen they took delivery at harvest-tirne.

The Great Tulip Mania With prices rising inexorably, and over a long period, tulips came to be regarded as a sure-fire investment - and this aspect quickly took over from any horticultural or even fashionable interest. Moreover, everyone could get in on the action. With the horticulturalists working overtime, common varieties could be produced relatively cheaply, though the newest, rarest and most spectacular hybrids achieved astronomical prices. There were investment tulips for every pocket - ranging from the humble Gouda to the fabulously rare and desirable Semper Augustus. Between 1634 and 1636, rising tulipprices mushroomedinto

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one of the most powerful speculative bubbles ever recorded. In two years, even the Gouda doubled in price to 3 florins (the weekly wage of a skilled workman), while the middle-ranking Centen soared from 40 to 350 florins (the price of a small town house) in the space of a single growing season. At the peak of the market, a single bulb of Semper Augustus fetched a phenomenal 6,000 florins - perhaps £500,000in today's money. In these circumstances, an. awful lot of people were making spectacular gains - at least they were on paper, as profits were invariably reinvested in the market. An army of travelling salesmen spread the mania to the remotest villages - while in the provincial towns, popular 'colleges' were set up in taverns where people could spend their evenings discussing the form and bidding in frenzied tulip auctions. In the end, the financial whizz-kids of Amsterdam even produced sophisticated derivative contracts - in effect, highly-geared tulip futures. Farms were mortgaged and heirlooms pawned as everyone scrambled into the market; and by the end of 1636 commercial tulip beds had to be placed under armed guard. As the hysteria grew, foreign visitors could only gape in amazement. The entire Dutch population seemed to be living, eating and breathing tulips. Of course, it all ended in tears. In Jan uary 1637, the authorities in Haarlem began to worry that the speculative frenzy was getting out of hand and threatening to destabilise the local economy. On 2 February, official attempts to quieten the market caused a crash - which in two days spread throughout the entire country. As prices had long since lost touch with demand from genuine tulip-fanciers, there was nothing to support them - so when confidence evaporated, bulbs became practically unsaleable. As soon as the bubble burst, thousands of people in all walks of life were ruined. And in Amsterdam, even the biggest merchant houses were rocked to their foundations

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by the financial repercussions. So were the seventeenth-century Dutch particularly stupid? Hardly. In the mid-1980s, a similar speculative ramp (admittedly on a much smaller scale) was built on the jojoba bean. There was an investment boom in rare stamps at the end of the 1970s, and another in coins a decade later. In both cases, investors forgot that once they had pushed prices beyond the reach of genuine collectors, there was no real demand to support them and that a collapse was inevitable. And what are we to make of the explosion in UK house prices between 1985 and 1988? After three decades of rising prices, the British had come to see houses as a one-way investment first and places to live in second. Like the Dutch three hundred years before, they used borrowed money to play the market for profit. And in the end, after a speculative boom, they got burnt.

me soum SEA BUBBLE Let's shift the action forward ninety years, to the early eighteenth century. By this time, England had taken over from Holland as Europe's leading trading nation and all the ingredients were in place for another speculative boom. Once again, commercial opportunities seemed limitless, people had more money and confidence than ever before and the itch for self-improvement was universal. To become seriously wealthy no longer seemed an impossible pipe-dream. This time, the speculation at least focused on what seemed to be a genuine trading venture. The South Sea Company had been established by royal charter in 1711 and was granted a trading monopoly for territories to be filched from Spain at the end of the War of the Spanish Succession. In return for this privilege, it was obliged to take on £9m-worth of unfunded government debt, loanholders being forced to exchange their government bonds for stock in the new company.

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Unfortunately, trading opportunities in the South Seas turned out to be minimal and the company was heavily over-capitalised from the start. But that's not how it appeared to contemporaries. In a classic ramp, they were made to believe that the south seas represented the great growth market of the eighteenth century and that the SSC would soon rival the mighty East India Company in its wealth and power. The company's stock rose steadily on the exchanges and, as it did so, the directors succumbed to megalomania. In 1719 they concocted a scheme to convert the entire government war debt of £31m into company stock. This was astonishingly ambitious (rather as.if all the 1980s privatisations had been concentrated into a single issue) - and to make it work, a good deal of manipulation was needed. The government had every motive to support the scheme, since the SSC was offering it a much lower rate of interest than that payable on its own wartime bonds . Government hacks were duly mobilised to puff the company's prospects to the skies - and just to make sure that the conversion would 'go', the initial tranches were carefully pitched below known demand. To start with, all this pump-priming worked beautifully. The first conversion offer, in April 1720, was massively oversubscribed - and as disappointed investors bought in the market, South Sea stock (of £100 par) soared to £325. No surprise, then, that the second (and much bigger) offer was also heavily oversubscribed and had a similar impact on the stock price. But the third, in June, involved serious money. To ensure its success, the South Sea Company decided to use its massive capital reserves to fund purchases of its own stock. For every £100 stock deposited with the company, investors were entitled to a loan of £250 to buy more in the offer - in effect to defer payment. This, too, worked brilliantly. By the end of June, South Sea stock was trading at £1,000.

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Unfortunately, the situation was spinning out of control. The fabulous gains in South Sea stock sparked off a classic speculative orgy. People of all classes swarmed into London to get a pieceof the action and the streets of the City were choked with crowds searching for investment opportunities: Our greatestLadies hither come And plyin Chariots daily, Oftpawn theirJewels for a Sum To venture in the Alley. Young Harlots too from Drury Lane Approach the Change in Coaches to fool away the Gold theygain By their obsceneDebauches Ofcourse it couldn't go on and it didn't. At £1,000, SSC stock was miles above anything which could be justified by future dividend payments. Worse still, the company was now facing competition for funds. With the public desperate to invest, a host of share promoters materialised to satisfy the demand. They didn't even have to bother dreaming up business ideas one bizarre venture, 'A Companie for the Furtherance of a Project', sold out just as quickly as the rest. With money being siphoned off in quantity, the SSC's fourth (and biggest) subscription offer in August failed. The most cautious investors started cashing in their profits, euphoria abruptly switched to panic and the whole house of cards collapsed. Thousands were ruined, the directors of the SSC had their estates sequestered to help relieve the distress and several of the most deeply implicated ministers fell. It was only with great difficulty that the King himself was protected from the scandal. George I and his mistresses had been into the South Sea scheme up to their necks.

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Once again, there was nothing uniquely silly about the population of eighteenth-century England. Time and again, countries in the first flush of economic supremacy have succumbed to speculative mania. The United States emerged triumphant from World War I only to run into the Wall Street Crash a decade later. Japan, clearly an economic superpower by the 1980s, managed to produce an extraordinary boom in both equity and property prices - not surprising when even ladies' hairdressers had dealing screens in order to attract custom. By the end of the decade, the grounds of the Emperor's palace in Tokyo were worth as much (on paper) as the entire state of California. Naturally, as contrarians, we warned our readers to be cautious. On 3 March 1990, we said, "This extraordinary phase [in the Japanese market] which has lasted so long now appears on the brink of being over....the Japanese Stock Market is becoming unstable. Despite the Government's attempts to stabilise it, it won't hold fast." Others were only too keen to cash in on the boom. They, like the Japanese, are still nursing a terrible hangover. Of course, these are only the most spectacular cases of 'the madness of crowds'. There are hundreds of less serious examples - the boom and bust of share prices in 1987 being fairly typical. Even now, there are plenty of people paying silly prices to buy into obscure biotechnology and other 'jamtomorrow' companies with incomprehensible products - and no prospect of making a profit for many years, if ever. But let's turn now to something subtly different. So far we've been discussing manias which originated in the markets themselves. But here is one, which everyone can remember and from which we are still suffering, which was generated by politicians and the media. However, it did have its investment implications, and a lot of people managed to lose a great deal of money.

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CHAPTER}

1992 AND ALL THAT "All statesmenare obliged to talk the clap-trap oftheirage. " (AjP Taylor) The Single European Act, passed in 1986, laid the groundwork for turning the whole of the European Community into a single trading entity by 1 January 1993. At first, it attracted relatively little attention. But by the late 1980s, '1992' (as the single market was known) was all the rage in Westminster and Fleet Street. A wave of Euromania swept the country. Ministers never tired of lecturing businessmen and the public on the need to prepare for the great new opponunities for European trade. The press and business organisations hammered home the message. Before long, no self-respecting businessman could be seen to lack ambitious plans for expanding into Europe. Now no-one is denying that the single European market is extremely important, So is the GATT round, the North American Free Trade Agreement and the explosive growth of Far Eastern markets. But none of these has sparked off the same sort of media circus. The Euro-hype was excessive, clearly politically motivated, and caused both companies and investors to make some appalling decisions. Moreover, it was all built on a largely symbolic event. Measures to break down European trade barriers had come into force long before 1986 and it was obvious that the process would still be far from complete by the end of 1992. More worryingly, agreement had not (and still has not) been reached over areas of vital concern to British interests such as financial and airline services. None of which was allowed to get in the way of 1992

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euphoria. We first suspected that the hype was getting out of control when we attended a printing industry conference in 1989. Speaker after speaker waxed lyrical about the glittering prospects for British printers on the Continent and the vital need for companies to have an action plan in place before the magic date. At the end of one such harangue, the speaker (the chairman of a middle-sized printing group who had better remain nameless) fielded a very simple and obvious question. "Can you tell us", the questioner asked, "precisely what opportunities you perceive for your own company in Europe and how you intend to pursue them?" A simple enough question. But to our amazement, the speaker was floored though he recovered quickly enough to waffle on about the wonders of the single market in general. The question was repeated, with some emphasis, and received a curt put-down in reply. The speaker had no need to feel embarrassed. The audience was clearly on his side, happy to dismiss anyone incapable of appreciating the 1992 concept in all its glory. When the crowd gets an idea into its head, dissidents can expect short shrift. Unfortunately, Euromania had serious consequences. All too many companies - and not just British companies - panicked heedlessly into Continental markets, making expensive acquisitions or setting up ambitious but ill-researched European operations. The most notorious case has to be America's Disney Corporation. Disney decided that it had to have direct access to this vast new trading area of 350m people - and swayed by fashionable Eurotheory, also decided that it had to site its new operation in the 'golden triangle' at the very heart of the single market. Eurodisney was duly built east of Paris at vast expense. It initially attracted great enthusiasm from both the City and private investors. In the event, of course, it's been a disastrous flop, as this

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lSgg 13881

..... 7 ....

5 ....

chart of their plummeting share price proves. No-one at Disney seems to have asked whether the French, with their acute ambivalence about all things American, were the ideal hosts for this standard-bearer of popular American culture. Or whether Disney could sparkle in the climate of Northern France, depressingly similar to our own. Or whether the Paris region, so popular with young lovers and culture-vultures, was an attractive holiday destination for Europeans with young children. Basically, Disney was carried away with the same fashionable abstractions which dazzled our printer friend and neglected to do its homework. Disney was certainly not alone. There was a rush of British companies making European acquisitions at the beginning of the decade. Most congratulated themselves that they were not only gearing up for 1992, but that they were escaping from the UK recession to participate in a Continental boom. Most investors seemed to agree. While the UK Stock Market was

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ignored, plenty of cash poured into new European-orientated unit trusts and investment trusts. In general, it was easier to get blood out of a stone than to extract finance from the banks or the Stock Market between 1989 and 1992. But there was always money available for European expansion. Unfortunately companies are now paying the (high) price of their rash Euro-enthusiasm. Make a hasty acquisition and you are more than likely to have bought a dud. Many companies did just this, and are now having to scale down radically, or even completely to abandon their new European operation. Even those who bought reasonably good Continental businesses found that their timing couldn't have been worse. They had bought just in time for the Continental slump. In fact, any reasonable management had already made its European acquisitions before 1992 became flavour of the month. Other companies Wisely bided their time, and waited for the European recession before moving quickly on to the Continent, to snap up bargains. These are the companies that willbenefit most from the inevitable European recovery. Those companies which listened - and gave into the media hype and panic-bought at the top of the '1992' market are now paying the price for rushing to join the crowd. So, unfortunately, are their shareholders. But one of the hallmarks of a true mania is the almost complete inability of the people involved to see the downside. Or even accept that one exists. Blind optimism is the order of the day. Anyone who disagrees and points out a few unwelcome facts - for example a contrarian - is dismissed as a crank, or condemned for being 'negative'. Considered out of step and out of fashion, the contrarian is tempted to give up his position and join the crowd. Few have the strength to resist. Our own Editor-in-Chief, Lord Rees-Mogg, was in this position when he was one of the leading opponents of

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Euromania. As he himself pointed out in 'The Times', far from even considering any criticisms of its European policy, "".the Government... (is) labelling all criticism of Maastricht as blinkered and out of date." Such is the wilful blindness of true mania. Another example of a recent mania was Lloyds. Lloyds membership used to be a luxury of the rich, those able (arguably) to afford the risks. Then in the late '60s, the requirements for entry as a Name at Lloyds were relaxed. It became affordable, not just for millionaires, but for the aspiring middle classes. Suddenly, it becameincreasingly popular, a craze, somethinggiven as a 21st birthday giftor a leaving present. Company executives even gave it to their secretaries. Soon being a Lloyds Name was an 80s status symbol, a way of saying you'd arrived, like a house in the country or a smart car. Thousands jumped on to this popular bandwagon. As in all manias, theydidn't stop to consider the downside - what would happen in a bad year, whether risk-free money for nothing was ever possible and, most of all, what the words 'unlimited liability' actually meant. THE FLEET STREET LETTER repeatedly warned its readers of the dangers of Lloyds. We told them clearly, backin 1988. "The prospects are not good". If your agents cannotget you onto the syndicates you want, on no account be content for secondbest." Even in April 1988, when the Lloyds results weregood and most of the media were uncritical, with our inside knowledge, we were still sceptical. We warned about "nasty stories of unexpected losses"." In]uly, we issuedanother warning: "Those thinking of joining Lloyds should be very cautious." What the average Lloyds Name jumping happily on the bandwagon did not count on was that the Lloyds mania would collide full-tilt with another mania - that of the American public for litigation. A huge litigation system has sprung up in the US, manipulated and increased by the lawyers who profit from it. As

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a result, America now spends five times as much per capita on personal injury actions as its major industrial competitors. In addition, Lloyds seriously under-estimated the new enthusiasm for "green" issues. Suddenly as a result of US Senate legislation, Lloyds faced billions of dollars in claims from US industry to cover the costs of cleaning up thousands of its toxic sites. Here again, the main beneficiaries were American lawyers. Indeed, the whole disasterrepresents a huge transfer of wealth from Britain's middle class to America's lawyers. This was predictable, but only if you understood the deeper realities on both sides of the Atlantic. Lloyds had failed to perceive either the new 'green' trend towards ecology or the new US mania for personal litigation. Manias also work in reverse. When the crowd, especially the media crowd, get into their heads that a situation is bleak, they go in for equally blind pessimism and anyone who dares to point out anything contradicting this is sneered at for being a pie-in-the-sky, unrealistic Pollyanna. Right now, there's another glaring instance of this sort of blind pessimism in the financial pages of your newspapers and magazines. I'll tell you about this new mania in Chapter7.

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Chapter 4:

WHY CONTRARIAN INVESTING WORKS "Follow the courseopposite to custom, and you will almostalwaysdo well. " (Iean-jacques Rousseau) In a well-known pyschology experiment, university students were told they were to test the effects of negative reinforcement on learning. To put it simply, they were to administer a small electric shock to a fellow student 'volunteer', when he failed to answer a question correctly. Then they were to increase the voltage to see whether the learning speed could be improved by a bigger jolt. Of course, the 'volunteer' was really an actor and there was no electric current flowing. But the students who took part were assured that this was a valid experiment and that the professor in charge took full responsibilty for it. These students would willingly increase the voltage, giving bigger and bigger shocks to the 'volunteers' to the point where it would have killed them. But here's the interesting thing: if one 'student', himself another actor, refused to go along with this, all the students would do likewise. That is, they would administer the shocks even to deadly levels - as long as everyone went along. Or, they would all refuse - together. The point is obvious: if the desire to conform is as great as this experiment suggests, is it any wonder investors all seem to move in step? Multi-billionaire J. Paul Getty divulged the simple secret of his phenomenal success in his autobiography, 'How to be Rich'

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"Buy when everyone else is selling, and hold until everyone else is buying. This is more than just a catchy slogan. It is the very essence of successful investment." In other words, "buy low, sell high." It made Getty billions. Sir John Templeton, who recently sold his company for $900 million, made his first million with contrary investing. At the beginning of World War Two, Templeton had no more money than most other investors. And the Stock Market was at a low, with most stocks still not having recovered from the Crash of '29. Most investors were at a loss (some literally) as to their next investment move. But Templeton recognised the time for what it was - a great profit opportunity. He borrowed money from his employer and bought 100 shares of every stock under $1 available on the AMEX and New York Stock Exchange. Most people thought he had lost his marbles and his money. As far as they could tell, Templeton had only bought a load of terrible prospects. At least a third of the companies were mired in bankruptcy proceedings. But just four years later, Templeton's stocks had actually quadrupled in value! History is full of contrary-investing success stories.... like the story of Nathan Rothschild and the Battle of Waterloo. In the early 1800s, Rothschild was the head of one of England's most prominentbanking families. The key to his success was contrary investing. He used a powerful information network to take advantage of the frenzy of the crowd. On 9 July 1815, Nathan Rothschild got advance word via carrier pigeon of the defeat of Napoleon by Wellington at Waterloo. He knew the rest of the country wouldn't find out about England's victory at Waterloo until a Royal messenger arrived the following afternoon. And his deeper understanding of how markets work told him that the news would cause the

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London Stock Market to skyrocket. The next morning, Rothschild sent his sons to the Stock Exchange. He told them to sell shares conspicuously. When the other investors saw that the Rothschilds were selling, they panicked. Surely, the Rothschilds knew something they didn't. Investors dumped shares left, right and centre, driving the value of stocks to rock-bottom. That's where Nathan Rothschild stepped in. Stock prices had hit rock-bottom and Rothschild bought everything he could get for bargain-basement prices. By noon, the news had arrived about the British victory at Waterloo. As Rothschild had expected, stock prices soared ... and Nathan Rothschild made a fortune. There's a simple, logical and nearly obvious reason why investing against the crowd is the only way to make money. One of the oldest rules of economics is that price is determined by the ratio of Supply vs. Demand. Where the supply is fixed, and demand rises, so does the price. This means that the more people who want something, whether it's gold bars or tulip bulbs, the higher the price is likely to be. When most people decide that they want to own bars of gold - that is, when the crowd psychology swings in favour of gold the way it did in the late '70s, the price will go up. And indeed the price of gold hit $850 an ounce in January 1980. Demand was at its peak, meaning it was the time when most people wanted to buy it and were so eager that they were willing to pay more than ever before. Of course, when more people than ever before are willing to pay more money than ever before, what is the likelihood that still more people will go on paying even higher prices in the future? Fairly low. Where will these new people come from? Where will their new money come from? There are physical limits. Trees do not grow to the sky, as they say.

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By definition and logic, when demand is at its peak, when something is most in fashion, when the great crowd all want it, then this is the time when a sober view of the future suggests that it will not continue to rise in favour, but fall. There are no more willing buyers. No more people who will jump on the bandwagon. No more money waiting to flow into the market and drive prices up even further. This is the time to sell - and sell quickly, At this point, it is only a matter of time before crowd psychology shifts, demand falls, and with it, prices. When French Impressionism began, the established art community didn't understand it, didn't like it, didn't want to know. One of the greatest Impressionists, Auguste Renoir, at first had trouble giving his paintings away, much less selling them. He ended up trading a lot of them to a local baker for bread. The baker did what he thought any decent Frenchman would do. He took Renoir's canvases, and gave him a few loaves of bread in exchange. As for the paintings, he stuffed them away in his attic and forgot about them. Almost a century later, a single one of these paintings sold at Sotheby's for £52.07m. Another great painter from these years, Cezanne, suffered a similar fate. He died penniless. But in May 1993, his 'Still Life with Apples' sold for £19.07m. Van Gogh also died poor. He only sold one painting in his lifetime, and that was to his brother, Theo. But almost 100 years later, at the height of a 1987 spending frenzy, Van Gogh's 'Blue Irises' sold for £34.87m to a Japanese investor. And in 1990, Van Gogh's portrait, 'Dr Gachet' sold at Christie's for £55m. That's an increase in value of £550,000 per year. I'm not saying you should necessarily go looking for starving artists to support. The point is that giving in to the conventional opinion almost always forces you to miss opportunities.

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When would you rather buy the Renoir? When you could get it for a loaf of bread? Or when you would have to pay £52.07m? Paradoxically, the Japanese businessman may have got more pleasure out of the painting than the baker. He might have felt more pride and satisfaction in it. But what is the likelihood that his investment will continue to go up at a rate of £550,000 a year? My instincts and my common sense tell me the chances are almost nil. That's why your common sense and your instincts are better guides to investment success than your emotions. Emotions can be easily swayed, particularly by peer pressure. Emotionally, most of us want to conform, to fit in, to buy the Van Gogh when it is most popular. Contrarians are not necessarily any brighter or more knowledgeable than other investors. But they recognise these simple truths about markets and human psychology and they put them to good use.

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Chapter 5:

THE FLEET STREET LETTER56 YEARS OF GOOD ADVICE "One cooljudgement is worth a thousandhastycouncils. Thethingto do is to supply light and not heat. " (Woodrow Wilson) In the fifty-six years since it was founded, THE FLEET STREET LETTER has seen a lot. We've survived the Second World War and the socialist government which followed it. We've seen Communism at its height - and in its collapse. We've watched the British Empire pass into history, America replace it as the dominant world power and Germany and Japan rise into economic super-power status from out of the ashes of the War. We've observed as Africa sinks into chaos and the Far East emerges as the world's economic power-house. We take modest pride in knowing we've helped steer our readers safely through innumerable economic cycles and trends, protecting them and enabling them to profit. As far as markets are concerned, we reckon we've seen everything - (well, perhaps not a tulip boom.) We've seen bull markets, bear markets, lulls, consolidations, booms and panics and we've watched them all being repeated, time and time again. We've watched the crowd succumb to euphoria, hysteria and despair. And we've watched it come back for more every time.

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THE FLEET STREET LETTER 'was founded in 1938, as Europe was plunging headlong into the folly of appeasement - and thus bringing war even nearer. Unlike most of the politicians and the other newspapers of the day, THE FLEET STREET LETTER wasn't fooled by Hitler, Mussolini or Stalin. We took an unfashionably tough line: "Until Great Britain and France take the boldest initiative, the schemes of Germany and Italy will proceed unchecked." Instead we supported another lone maverick, Winston Churchill. In February 1939 we told our readers that "Mr Chamberlain's days at No 10, Downing Street are already numbered... Churchill should be included in the government. Nor did THE FLEET STREET LETTER share the current popular hope that war could be averted. In December 1938, we gave our readers the straight facts that "German military preparations are not slackening. The Reich economy is being put on a war basis." Early in 1939, we refused to join the optimistic ostriches with their heads firmly buried in the sand. "It is not possible to put away the fear that there will be armed conflict," and we talked of "imminent war." "The crisis is still to come." And as early as 1938, we predicted that "the next drive is not to be eastwards, but against Britain ... supported by evidence of increased Nazi agitation in Denmark." THE FLEET STREET LETTER looked deeper, beyond the individual facts to perceive the underlying truths and trends. We realised that Hitler's great mistake, like Napoleon's, would be taking on Russia. "Behind the barrage at Munich, his one major risk is a war with Soviet Russia." It perceived the truth about Russia under Stalin at a time when most people's view was still rosy. (Reporters had stood over the White Sea canal, raving about the achievements of Socialism, while the slave labourers who dug the canal died by the thousands every week.) But THE FLEET STREET LETTER said, "Mr Stalin has long since forgotten II

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he is a Communist." And we saw the dangerous inroads that would be made by Russia and Communism towards the centre of Europe, commenting on "The tragedy of the march of Russia towards the hem of Europe." We exposed the ugly reality of what Nazi Germany was, with reports on the barbarities of concentration camps and we were almost alone in seriously considering if Hitler intended the 'extermination' of the Jews. At the time, almost everyone else refused to believe in the true horror of these camps and contemporary 'wisdom' held that, although Hitler had maltreated the Jews and seized all their property, the worst he intended for them was forced expatriation. Above all, THE FLEET STREET LETTER perceived the real struggle that was taking place behind the war between the Axis and the Allies, a war between democracy and totalitarianism: "Totalitarianism versus the rest has at last become a logical issue." THE FLEET STREET LETTER defied current wisdom to make amazingly accurate predictions. We foresaw that Hitler would lose and that Nazism would crumble - a brave thing to predict in 1939 when defeatists were everywhere. Germany looked all-powerful and as THE FLEET STREET LETTER itself said, "The Regular Army is known to lack sufficient modern weapons and the Territorials are known to be scarcely equipped at all." Yet we still said: "When Hitler makes war, he will destroy himself - and the Third Reich." Equally, when all the political and military pundits were foreseeing a speedy end to the war, THE FLEET STREET LETTER realised that "it will be a long business." In February 1939, we said that "Japan is ready to strike." We predicted the Hitler-Stalin pact. And as early as January 1939, we even guessed the correct date when war would begin: "Hitler would like to postpone a conflict for another six months or until September." In July, we again predicted September, because then the harvest would be gathered and economic conditions

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within Germany would be worsening. And THE FLEET STREET LETTER even used the help of a very unconventional source, which only Churchill also thought of using. Knowing Hitler followed the advice of astrologers, we even consulted his favourite astrologers to learn what advice they would give him! Thus we could accurately estimate when the Second World War would begin. This is just one example of our contrarian thinking - and how right it turned out to be - when it comes to politics. Now let's look at more recent events to see if this approach pays off financially. Let's start in 1973 when there was the biggest-ever slide in the Stock Market. The FT index slipped from its high of 550 in the summer of 1972 to a final low of 146 on 3 January 1975. In 1972,THE FLEET STREET LETTER bucked the prevailing market thinking (which was rosy) to warn, "Is there really no cloud anywhere on the horizon?....Everyone is too optimistic, too bullish." We went on to make the specific prediction, based upon a calculation of average market cycles, that the bull market "will last for about two years - until about March 1973." Most people, bar a wise few, ignored us. The rest stayed in too long and watched as the value of their shares plummeted. In 1973, we warned them again, right before the slide began. "Gathering clouds over the market... the index is unlikely to rise much longer ... the investment watchword must be caution." Events proved our contrarian view was right. On 3 January 1975, the market reached its final low - as we had warned. But even on 16January while most people were still reeling from the final slump, and newspapers were still prophesying doom and gloom, THE FLEET STREET LETTER had already sensed a new shift in the markets. Against the crowd, we turned bullish, already noticing the upsurge that was going to lead to the biggest bull market in history. By 23 January, we told our

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readers, "It is far too early yet to sayit is a bull market, but there is something of a bull market mood about - and it could easily translate into something more sustainable." The markets confirmed this diagnosis and THE FLEET STREET LETTER went on to tell its readers later in the year, "We are on our way. The bear market has been left behind." They were and it was, with THE FLEET STREET LETTER helping them to take immediate advantage of new developments in the market, without having to wait to see which way the conventional crowd was going to jump. On now to 1979, when Geoffrey Howe, then Chancellor of the Exchequer took off Exchange Control Regulations. THE FLEET STREET LElTER immediately seized on the extraordinary potential for British investors to make large profits overseas. "The world is their oyster. ...THE FLEET STREET LETTER considers that all investors should have a proportion of their funds, perhaps as much as 20% invested on Wall Street." We at once started to cover Wall Street and to advise overseas investment. Since then, theJapaneseStock Market jumped from 6,499.92 on the Nikkei Dow in 1979 to 20,150 in 1992, a gain compounded by the fact that the pound fell against the yen by 66% over the same period, effectively almost trebling your profits. At the same time, the German index rose from 715.7 in 1979 to 2,435 in 1994, while the pound fell 36% against the Deutcshmark, increasing yourgain to 276%. By 1985, Mrs Thatcher and the British economy were riding high together. But unlike most of the press, THE FLEET STREET LETIER was sceptical about the Lawson financial miracle. We saw through the politicians' hype to the financial truths behind it. "Just conquering inflation has not been enough to start a boom that will mop up unemployment." We saw the warning signs: "Alas with renewed prosperity, we are sucking in enormous amounts of manufactured goods far in excess of the

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increase in the value of our oil and other exports. In fact, we are heading for the same kind of balance of payments mess that we got so used to under successive Chancellors of the Exchequer in the Sixties and Seventies. As in fact, turned out to be the case. But at the time we were almost alone in asking where were the Emperor's new clothes. That's one of the advantages of having been studying and charting the financial markets since 1938. Most people in the City have memories no longer than the day before yesterday. They don't stop to ask questions, to study the emerging patterns; they don't even realise that such patterns exist. In the mid-Eighties, as market fever heightened, THE FLEET STREET LETTER was a lone voice of sanity. "The bull market cannot last forever." Good common sense, but who else was saying it at the time? We tried to sow the seeds of restraint and caution: "When jitters develop they could be very severe so be on your guard." And again, "Beware of the time when the music stops." We spelled out our thoughts, "Nothing it seems can hold back prices. There isn't a bear in sight. Yet interest rates are rising, sterling is falling, the Government is not covering its borrowing requirements, gilts are vulnerable and yet the market is rising. It is always possible that all former investment arithmetic has been invalidated as though by some magic act. Perhaps this is the occasion when logic has been thrown to the winds and trees will after all grow to the sky. Scarred from earlier occasions when gravity seemed to have been suspended... experienced investors ... must take their leave, yielding the ground to the youngsters who know better. On the other hand, they may turn out to be yet another group of fresh-faced young fund managers, ripe and ready for the scythe." As events proved, it was the sceptical old hands like THE FLEET STREET LETTER who knew best. By 1987 the Stock Market boom was even more frantic. So

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was the resulting feeding frenzy within the City. In Ianuary 1987, THE FLEET STREET LETTER said, "The music will stop, but not yet," and sure enough, like the band on the Titanic, it kept on playing for a while longer, But already we were telling our readers to protect themselves, "Every investor should now...make sure he has a substantial proportion of his assets in overseas stocks and companies," As the yearwent on and the FT index climbed even higher, we warned our readers: "Share prices are very high and it is dangerous to be committed at such levels." In the- summer, we noticed ominous signs in the market's volatility. By 25July, THE FLEET STREET LETTER was speaking of "the final acceleration to a climax," We clearly set out the dangers of group thinking and group hysteria, which can provoke a stampede to sell, when everyone rushes like lemmings over the cliffs: "It is extremely difficult to find reasons for being bearish except for the single one, namely that opinion seems so unanimous. When literally everybody has joinedin the bullishness, then everybody will have become vulnerable to a change of mood..." By September, we tried to get our readers to protect themselves. "Investors would be well advised to hold some cash and gold.... we are almost certainly about to see a period of significant correction," By 3 October, we said - and you couldn't say it more plainly - "Time to be out." If you'd followed our contrarian advice, you and your moneywould have been safe. You would have got out in time - and made a considerable profit. Because only two weeks later, the market crashed on 'Black Monday' in one of the most dramatic falls of Stock Market history, plunging 580 points over the course of two days. £1,500bn was Wiped off the value of world stock exchanges. After this crash, THE FLEET STREET LETTER faced the facts squarely whileothers were still trying to delude themselves with

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false optimism. We recognised that there was going to be a "coming recession" and pointed out, "We are still at the very early stage of the present crisis..." But we also warned readers against false pessimism as well as false optimism. We reassured our readers - and we were quite correct - that "there are no mammoth falls around the corner." We also alerted them to the profits and opportunities to be found in the turmoil after the crash, pointing out bargains and recommending the security of blue chip company stocks. We advised them to retain quality holdings. "Value is clearly to be found in leading shares." In 1989, THE FLEET STREET LETTER said, "My advice to investors in these troubled times is to stay put with quality companies." Looking back, that was good advice. In January 1988, we foresaw that higher interest rates were on the way. It was a warning which ifyou had acted on it meant you could have profited from these rises and kept your money safe from crippling borrowing and mortgage rates. Because over the next two years, Nigel Lawson and then John Major (we predicted as early as April 1988 that Major would be Lawson's successor as Chancellor) raised interest rates from 7.5% to 15% in an attempt to combat inflation. We said, "Optimists in the City say that the next move in base rates will be down. Do not believe them. It will be up."And it was. InJune 1988, we warned that the 7.5 baseinterestrate could not last, and that it wouldbe raised to 11%. In August we cautioned that "forinterest rates to be an effective brake on inflation they would have to soar to 15%." At the time, everyone thought we were mad to say that. Thatwould neverhappen! How could we be so pessimistic! But interest rates were raised to 11% and in October 1989 to 15%. To THE FLEET STREET LETIER it was only too clear that such high interest rates were destructive, and we said it time and time again. "There is a chanceof bringing the whole economy to its knees." It was not so clear to 11 Downing Street, and the

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Government stuck blindly to its course. But as we know only too well, what THE FLEET STREET LETTER predicted happened. Britain was plunged into its worst recession since the 1930s. We realised from the very beginning that a recession was starring. We knew it as early as 1988. "The concerns of everyday people are starting to become what they were in the Thirties and Forties: jobs and security.... the news has yet to get out that what is being dished out in the financial services field is shortly to become a universal set of problems." We warned our readers even then: "Recession if not depression is on its way." In 1988, we predicted that "The UK economy is about to turn downwards," and we were right. As far as property went, pm FLEET STREET LETTER scented the boom. In February 1988, we said, "The outlook for property companies is extremely good." If you'd followed our advice and invested then in these companies, as the housing boom was taking off, you would have raked in enormous profits as their shares rocketed. But THE FLEET STREET LETTER also sensed the bust following, and was quick to take a contrarian stand. By June we were wary. "The fact that so much borrowing is forcing the property market up higher is little cause for satisfaction. We have seen such a scenario before and it spells danger." We realised that "Lawson can only now control inflation by raising interest rates," and so we warned our readers to watch out: "Anyone about to buy a house on a big mortgage should think again." And in November 1988, we knew a downturn was on its way: "Do not expect to find prices much higher in three months' time." In September 1989, we predicted that house prices would fall and we warned our readers not to invest in property companies any longer. Guided and guarded by this advice, you could have made a considerable profit - and got out in time with it - before the property market collapsed from

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under you. Still on the subject of property, we told the truth about the massive new developments in the City and Docklands. Ata time when they were still extremely popular with unwary companies and investors alike, we pointed out that those already builtwere still three-quaners empty, yet still more were planned or being built. We spelled it out that there weren't nearly enough companies or office workers to fill all these new offices or enough City yuppies willing to live in Docklands to fill all the new residential projects. And that, as you know, turned out to be the case. Look at Canary Wharf.

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Chapter 6:

A MODERN MANIA - THE GREAT ERM DISASTER "Politics is too seriousa matter to be left to thepoliticians. " (Charles de Gaulle) We were pro-Britain joining the ERM initially. Of course, we're not always right. We didn't realise the extent to which Government obstinacy would convert it into a staggeringly expensive economic straightjacket for Britain. It is now widely accepted that between 1987 and 1992, the British economy was managed with breathtaking incompetence. As originally conceived, the ERM wasn't such a bad idea. Currencies which joined it weren't free-floating, but they were able to respond to market pressures through realignments within the grid. Essentially, the mechanism was a sophisticated price-smoothing operation. As we have seen, markets are far from perfect - price movements are often exaggerated, and this applies in spades to the neurotic world of foreign exchange. A mechanism which sought to eliminate the worst excesses (or at least smooth down short-term fluctuations) wasn't entirely such a bad idea. But unfortunately, the ERM changed into something very different. It became the forerunner to European Economic and Monetary Union. In the mid-to-late 1980s, with the momentum towards European integration at full throttle, Continental politicians believed (or made the right noises about believing) that EMU was attainable by the end of the century. The

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discipline thus imposedwould create 'economic convergence' in effect, turn other European economies into carbon copies of the German model. It turned out to be a straightjacket for the British economy. In our view, anyone who truly believes that countries as dissimilar as Germany and Spain can be forced into 'economic convergence' in the space of ten years is completely deluded. But politicians are strange creatures and those gathered together at Euro-summits regularly exhibit the worst characteristics of crowd behaviour. Whatever their private reservations, almost all feel obliged to pretend that EMU is an attainable goal and that any dissent is to be damned as heresy against the European ideal. This collective view is now enshrined in the Maastricht treaty - a diplomatic monument to the 'clap-trap of the age', if everthere was one. Britain, of course, stands partly alooffrom all this. But even here, some accommodation with the EMU fantasy was held to be necessary by a Euro-fixated governing class. By 1987, Nigel Lawson had concluded that monetary policy would be best served by targeting the exchange rate, and that joining the ERM Mark-1 would have economic advantages. As Mrs Thatcher wasn't having the ERM at any price, and as Lawson wasn't taking no for an answer, he started shadowing the Deutschmark informally - in effect, joining the mechanism by the back door. And that, of course, is when government economic policy started to fall to pieces. In 1987, the UK economy was growing rapidly, while Germany's was sluggish. To keep the pound down, Lawson was obliged to slash interest rates - and in the process fuelled a boom. The new fixation on exchange rates produced the most perverse and damaging economic policy imaginable. Unfortunately, it continued to do so for the next five years. Lawson was determined to get sterling into the ERM by hook or

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by crook. Geoffrey Howe, the strongly Europhile foreign secretary, swung the full weight of the Foreign Office behind him. Against the two most powerful government depanments, even the strongest of prime ministers can put up only a rearguard action. The Treasury and the FO may both have dismal records of failure, but their unquestioning minions in the City, industry and the media are legion. Flattered at being let in on the inside track, powerful establishment figures, let alone smaller fry, are always ready to have their judgment swayed by 'RollsRoyce minds' from Whitehall. At any event, a clamour was manufactured in favour of the ERM, which snowballed in true crowd-following style. The chattering classes, like the public at large, didn't really have a clue about the ERM - and given the technical nature of the beast, there's no reason why they should have done. But in the climate of the day, the mechanism became hugely important as a symbol. To be for the ERM was to be pro-European: progressive, cosmopolitan, open-minded and forward-looking. To be against it was to be insular, narrow-minded and generally old-fashioned. Anyone with any pretensions to style - media people for example - had no doubt which side they were on, even if they didn't know why. By early 1990, the argument over the ERM was reaching fever-pitch. Thatcher's basic argument that "you can control the interest rate, or you can control the exchange rate, but you can't control both", struck us as a simple statement of the obvious. By opinion-formers generally, it was considered simplistic, backward, outrageously negative. The ERM was endowed with magical, if contradictory, qualities. On the one hand, its discipline would transform the British economy into an island version of the German ideal. On the other hand, it would enable Britain to cut interest rates to its heart's content, while the Germans obligingly picked up the tab through the support of

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sterling. Sterling entered the ERM in October 1990. The media and the Stock Market held their victory celebrations and, within a month, John Major, the hero of the hour, was in 10 Downing Street. Here again, was a golden opportunity for those who troubled to figure out what was really going on. THE FLEET STREET LE1TER took a different viewpoint. It was apparent to us that Britain had joinedat an unrealistically high exchange rate for sterling. We said, "The pound will be kept too high." It seemed to us like asking for trouble. In October 1990, we spelled it out: "We are going to have to adjust our economy without the freedom to move the pound's exchange rate accordingly." The terrible result of joining the ERM is well known. Thanks to the inflationary boom caused by German reunification, German interest rates had to be raised sharply, and then held at very high levels for over two years. This was bad news for Germany's Continental neighbours, but at least their economic cycles were roughly in synch with Germany's. For the UK, now mired in recession and desperately in need of interest-rate cuts, it was catastrophic. Having suffered ultra-low interest rates at the top of a boom, we were then forced to maintain ultra-high rates at the bottom of a recession. In effect, British interest rates were beingdictated by the Bundesbank, even though the bank's policy was tailored to an economy at the opposite pole of the cycle. InJuly 1992, THE FLEET STREET LE1TER pointed out that, because Major was sticking so inflexibly to this impossibly high level for the pound, Britain was having to pay the price of German unification through the ERM. "TheUK is lumberedwith real interest rates designed to cure the German economy of inflation... the recession therefore grindson and on." The obvious solution - withdrawal from the ERM (or at the

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very least a unilateral sterling devaluation) was ruled out of court for political reasons. The loss of face would have been just too great. That left a co-operative solution, a general realignment within the ERM as in the old days. The German problem was clearly exceptional and such a move would have demonstrated that the feet of European leaders could still - in an emergency - touch the ground. But it was not to be. Fixed parities were the highway to EMU and nothing must be allowed to get in the way. If that meant avoidable economic hardship for the peoples of Europe, it was just tough luck. Or so the politicians thought. Major believed he had both a free hand and time on his side. Though, as 1992 progressed, it became increasingly obvious that the UK economy simply wasn't going to recover unless or until interest rates fell, Major and his Chancellor, Norman Lamont, nailed themselves to the mast - the ERM policy was set in concrete and they would continue to wait on the Bundesbank, no matter what the cost to the British economy - or to the average Briton. THE FLEET STREET LETTER disagreed with them. "If recovery doesn't come soon, we will be forced off the current ERM standard, willy-nilly.... devaluation in some shape or form is now inevitable." Unlike everybody else though, THE FLEET STREET LETI'ER wasn't swayed by misplaced patriotic pride or politicians' rhetoric into seeing this possibility as a humiliating disaster. Quite the contrary. We were almost alone in our outspoken views, but we grasped the real value to the British economy of leaving the ERM. In September, a month before its contrarian predictions came true, THE FLEET STREET LETTER realised that "If the ERM were to come apart... the impact on profits would undoubtedly be beneficial." By this time, the foreign exchange market had also decided that British government policy was unsustainable, and that it was time to take matters into its own hands. Selling pressure on

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sterling became irresistible during the autumn. On 'Black' Wednesday, 16 September 1992, sterling was thrown out of the ERM. This humiliation broke the back of the newly-elected Major government and it has remained a cripple ever since. Immediately Britain had been forced out, just as we had predicted, THE FLEET STREET LETIER ignored all the hysterical laments about this from politicians and press to see the reality: "The truth of the matter is that equities have been liberated .... we can all be grateful.... it beggars belief that ministers waited to be forced off the ERM standard." There were two great profit opportunities here. First, if you had bet against the ERM alongside George Soros, you could have made 25% profits on each pound you'd staked - that's a £2,500 gain per day for each £10,000 you'd put in. Secondly, if you'd listened to our advice, that coming out of the ERM would have liberated equities, you would also have profited. Shares jumped from 2370 on 16 September to 2847.8 at the end of the year, a rise and profit for you - of around 20% in three months. Here again was a golden opportunity for those who made the effort to figure out what was really happening behind the dramatic newspaper headlines - and what was going to happen. They too could have reaped enormous profits along with George Soros and other currency speculators who bet against the pound. What's more, there are even more ways to profit ahead. Because even though the ERM is now a dead issue, the forces that sunk the pound in 1992 are still very much in evidence today. This year the Government deficit is a staggering £49.5 billion. Inevitably, this puts huge pressures on the Bank of England, and virtuallyguarantees a long-term decline in sterling. There are easy ways to profit from this: investing in overseas markets or converting out of sterling into hard currency such as the Swiss franc or the Deutcshmark. (More about this in Chapter 8.)

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It wasn't just the government which had insisted on the ERM policy. So had Whitehall, most of industry and the Cityand the vast bulk of the media. Seldom in recent British history has so much political and intellectual capital been invested in such a mistake. Seldom, either, has there been so much self-serving and buck-passing by those most heavily implicated, such as Lamont and Lawson. Major blamed the Germans - as if the Bundesbank could be expected to throwaway forty years' credibility in order to rescue Major from his own folly. And everybody, of course, blamed the 'speculators', such as FLEET STREET LETTER readers, people who simply had the good sense to go with market forces, rather than believe the nonsense and lose out. It would be silly to claim that the ERM caused the UK recession. The recession has been a world-wide phenomenon, and the reaction to 1980s deregulation meant that its Britishversion was always going to be rough. But there can be no doubt that the ERM policy was responsible for turning it into the longest and most vicious slump since the 1930s. Had interest rates been raised in 1987 and then more sharply in 1988, the boom would not have ended in such a spectacular blow-out. Had they been cut rapidly as soon as the recession struck, the pain would have been much less severe. None of these things were possible because the government, aided and abetted by fashionable opinion, abdicated responsibility for economic management for the best part of five years. As a result, tens of thousands of people have lost their jobs, their homes and their businesses quite unnecessarily. Those people were unwilling victims of crowd hysteria within the British establishment. They were sacrificed on the altar of intellectual and political vanity. If the public feels betrayed, and if its contempt for its leaders is at an all-time high, it has just cause.

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Chapter z·

THE MEDIACROWD PULLERS "You cannot hopeto bribeor twist the BritishJournalist. But, seeingwhat the man willdo unbribed, there's no occasion to. " (Humbert Wolfe) We have already noted that the media have a crucial role to play in forming, and then reinforcing, crowd behaviour. Nowadays, this is probably even more true of TV than the press. The public has long since ceased to believe everything it reads in the papers, which it rightly suspects as partial. But so often with TVfor the majority of people, 'seeing is believing'. This is particularly dangerous when, as now, too many news and documentary producers have lost any sense of obligation to present an objective picture. Instead, they use the tricks of their trade to push a subjective and often prejudiced line. And this tendency to dress up opinion with all the trappings of objectivity is highly dangerous. By rights, all journalists ought to be trying to do two things to report the facts, so far as these are obtainable, and to explain the workings of the world in terms comprehensible to the layman. Many journalists do still try to do this as best they can. But media ethics, never pure as the driven snow, are slipping and too many journalists these days have other fish to fry. The tabloids have degenerated into adult comics. But even in the quality press and the broadcast media, objective reporting and commentary is on the wane. Instead, much reporting is motivated by:

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1) PoliticalPropaganda In any democratic society, a vital function of the media is to provide an outlet for different political viewpoints. It is silly, therefore, to complain - as some do - that almost all newspapers take a strong political line. So long as this is clearly apparent to readers and is confined to comment, it is entirely healthy. But it becomes thoroughly unhealthy when the barriers between reporting and commentary break down. Through selective reporting and the manipulation (even invention) of quotes, it is relatively easy for propaganda to masquerade as news. Taken off guard, the public can be fed a line without realising it. The most disgraceful example this century was provided by 'The Times' in the late 1930s. Deeply committed to appeasement, the paper resoned to suppressing hostile reports on Nazi Germany, even when these emanated from its own correspondents in the field. Another dramatic example of media manipulation of the facts was provided by the American media giant NBC, when it tried to provide visual evidence of how dangerous the 'side saddle' petrol tanks on General Motors lorries could be. On the news, viewers saw the lorry crash and the petrol tank explode. What they didn't see were the news-hungry journalists putting dynamite in the tank to get the effect they were after. The most notorious case in recent years was the BBC's initial TV news repon on the bombing of Libya. Remember how that bulletin opened? "Britain is braced tonight for a wave of terrorism after British bases were used by American bombers...". That may have been the universal opinion in the BBC canteen. It was politically-coloured speculation, not news. And, as events turned out, it was completely wrong. For a news organisation which prides itself on its objectivity, it was a sorry performance. Admittedly, the furore over that panicular report has since led to the BBC tightening up its act - at least in its main news

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bulletins. But it is clear that the manipulation of news elsewhere continues unabated. Documentaries and investigative reports usually claim to be objective. In fact, they are almost always 'scripted' in advance, and therefore reflect the prejudices of the programme makers. To viewers subjected to half-an-hour of planted quotes and heavily edited interviews, it may be far from obvious that they are being force-fed propaganda. Today, far too many media people 'know' the truth by the time they leave university - a sad commentary, perhaps, on falling educational standards. Many then devote their professional careers to proving what they know. The result has been a disastrous decline in the quality of information available to the public. 2) Sensationalism Everyone knows that the tabloids are sensationalist - and by those standards the quality press and broadcast media may seem models of decorum. In fact, they are far from immune to the same pressures. The days when the public was starved of news - when scarce bulletins from London were read to tatters in village pubs - are long gone. Nowadays, all the media are competing ferociously in conditions of over-supply. With the best will in the world, they have to dress up reports and tickle popular prejudices to attract attention. A casual glance at any quality paper will show this to be so. Sex sells. Royalty sells. "Human interest" sells. At one stage, even the BBC routinely ended its main news bulletins with a sick child and a talking duck. All of which might seem quite harmless, and often is. The problem is that serious newspapers feel the need to present this son of nonsense in a serious way. The tabloids will happily feed for weeks off the seamier elements of a political sex scandal. The broadsheets, covering the same story, will feel the need to invest it with false imponance. The fairly trivial affair

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of an unknown junior minister and his secretary will quickly be blown up into a moral crisis, a political crisis for the government, and a personal crisis for the Prime Minister. No-one - not the public, nor the politicians, nor the journalists themselves - really believe any of this. It is just a game people play. The same tendency to sensationalism is evident in many other fields. Global warming, the oil glut, the dangers of passive smoking - all are areas where very inconclusive scientific 'evidence' has been manipulated to build up a major story. Read the newspapers' letters column and you will occasionally find an eminent scientist complaining that contradictory evidence has been suppressed. Of course it has. The media know that their consumers enjoy believing that the world is coming to an end, or at the very least that they are being poisoned. Stories pandering to such desires are gold dust - and mere facts or academic rebuttal cannot be allowed to interfere. The medium is indeed the message. So public concerns are often manufactured by the media with more than a little help from those with a vested financial or political interest. Those endless "reports out today" are not ferreted out by investigative journalists. They are deliberately planted in the media to sway public opinion, and often have as much objectivity as a PR company's press releases. If they are repeated in the media unchallenged, it is out of cynicism as much as out of laziness. On dull news days, they are far too useful to be thrown away. Nor can journalists afford to lose important sources of information by rubbishing what they have to say. One weakness, however, is very definitely self-inflicted. 3) Pack-Hunting Journalists too like to go with the crowd. They hunt in packs. This is most obvious in the tabloids. But again, the quality press

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and the broadcast media are moving in the same direction. The media campaigns which sink ministers (or even army generals!) on 'moral' grounds, would have far less impact if the quality media did not feel obliged to muscle in on the action. When they do so, they reveal more interest in the naked exercise of power than in any sense of news values. The periodic lynching of public figures is the most blatant example of media pack-hunting. But the tendency of journalists to allow their colleagues to dictate the news reaches much further afield. An admired report or broadcast will inevitably attract copy-catting, followed by a series of spin-offs developing the story from a variety of different angles. In no time at all, a gigantic construction is created which bears almost no relation to events in the real world. It's news simply because it's news. We can think of several recent examples, hung on the flimsiest of pegs. At the end of the 1980s, the media decided collectively that a major watershed had been reached. The 1980s, we were told, represented individualism, money, power and ambition in their most virulent forms. In stark contrast, the 1990s were to be caring-sharing years characterised by community values, selflessness and compassion. If nothing else, all this guff filled up a great deal of airtime and column inches whenever the real world was quiet. When part of Windsor Castle burned down in 1993, the media decided to make it into a symbol for the House of Windsor. In no time, a huge fuss was manufactured on 'the decline and fall' of the monarchy. Conferences were organised, books and special supplements churned out, special reports filled the 1V screens. The public however wasn't buying, so this story had to be abruptly retired. Just like Herpes, when AIDS took over as the perennial sex disease. Or nuclear Winter, when global warming took over as the apocalypse story. The end of the world has its fashions too.

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But even apocalypse is not without its financial opportunities. Remember the oil story of the mid-70s? Everyone was convinced that the world was running out of oil. Politicians and media alike combined to contrive an 'oil shortage' and 'energy crisis.' Both of these were a complete myth. The media blew up the story to such extremes that financial experts were soon predicting that the price of oil would hit £70 a barrel within a couple of years. Oil companies soared in price. Banks lent billions to third world nations with oil potential. Billions more were invested in oil substitutes. And still more billions were invested in drilling new wells and developing new ways of pumping oil from marginal sources. This was the time that Japanese manufacturers of small cars got their first toehold in the big-carAmerican market It didn't take a genius - just a contrarian - to see that this pattern would soon reverse itself. Soon, all the frantic investment in new oil production would mean a glut of surplus oil on the world market. The price of oil would fall, not rise as predicted. Now the situation is reversed. The media have a new story this time it's global warming. And the idea that the world is awash with oil, that there's so much of it, no one wants it or cares about it. There is a feeling that it's not good to own it or invest in it. After all, oil is bad for the world environment. It produces greenhouse gases that trap heat and endanger the world's eco-system. Never mind that there's little scientific evidence for this. After all, it makes a decent news story for a slow day. And it gives a lot of people something to do. As usual here at THE FLEET STREET LETTER, we are sceptical. And we see what looks to us like a very interesting investment opportunity. Oil is cheap today. See our recommendations in chapter 9 for an investment that we believe will soar in value in the next oil crisis.

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Chapter 8:

INVESTORS AND THE DISTORTING MIRROR "Get thefacts, or thefacts willgetyou. And whenyou get them, get them right, or theywillgetyou wrong. " (Thomas Fuller)

At the end of the day, do the antics of the media matter very much? However confused we may be about the Bosnian situation, or worked up about global warming, these things remain peripheral to our lives. But there are two arenas where it does matter. The first is political. Weak leaders (with which the world is currently so richly endowed), have few clear ideas of their own - apart, of course, from the vital importance of maintaining themselves in power. As a result, they court popularity by swimming with the intellectual tide. And even when they wish to defy the tide, their lust for approval will often cause them to kow-tow to media preoccupations. A tragic case in point is Bosnia, where the limp desire to be seen to be 'doing something', while at the same time avoiding real engagement, has led to diplomatic bungling on an epic scale. Just how many lives this has destroyed will never be known. Still, if our politicians allow themselves to be unduly influenced by the media, there's nothing we can do about it. What we can do is ensure that we avoid the same trap in our personal affairs. And when it comes to investment matters,

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succumbing to media influence can be pure poison. The reason for this is simple. And it is worth stressing because it is the essential theme of this book:

The media follow and exaggerate trends. If your main concern is to develop a story, you must have a story to develop in the first place. If that story concerns economic or market trends, those trends must have been in force for some time already. It is essential for investors to focus on what will happen next, not on what happened before or what is happening now. The media do the exact opposite, because what happened before and what is happening now give them their story-lines. Cast your mind back to the 1980s. The first recession of the Thatcher government actually bottomed out in 1981, and the Stock Market started picking up on obvious signs of recovery from 1982 onwards. The media, however, continued to bang on about the 'recession' until well into 1983 - or in some cases, much later. It is always possible to do this, because the visible signs of economic activity lag far behind reality. Unemployment is a major case in point. Rapid falls in unemployment do not indicate that a recession is ending, but that a recovery has been well under way for some time (in which case, the markets will be ready to anticipate the next recession). The unemployment figures, in fact, are used by economists as a lagging indicator. In the late 1980s, the situation was reversed. As we have seen, the economy was already starting to spin out of control by 1987. But the media had now dropped the recession story for their new boom story, which they were playing for all it was worth - 'The Lawson miracle' they called it. Yuppiedom was the stuff of a thousand articles, soaring house prices were the talk of every London dinner table, the times had never been better. When the Stock Market crashed in 1987, anticipating the latest

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recession, silly businessmen were quickly dragged out of the woodwork to assure us that the City had gone mad. The public, generally deferential to business opinion and distrustful of markets, was only too keen to lap it up. By 1992, a new recession story was in full swing. So when sterling was ejected from the ERM - an event which made lower interest rates and economic recovery possible - this was taken as evidence of further disaster. 'Black Wednesday' it was called, and black indeed it was painted. The gloom was so intense, particularly in 1V news reports, that it caused a severe slump in consumer confidence for the next two months. Contrast this media-inspired response with that of the Stock Market. The FTSE index shot up by 113.9 points over two days from the 16 September - Black Wednesday - and had risen by almost 20% by the end of 1993. As we predicted, equities had been liberated. Even so, the media remained wedded to their recession story until the end of last year, a good twelve months after signs of recovery had become obvious. And from their own point of view, why not? Derelict factories, unemployment queues and repossessed families make wonderful television. Follow the media to get your line on the economy and you will follow the tardiest of lagging indicators. Investment stories are treated in the same way. The general news media are uninterested in the Stock Market unless it has dramatic events to report, But if they can latch onto a major bull market - as they did in the late 1980s - they will go to town. Yuppie stockbrokers dousing each other in champagne, expanding City sections, proliferating business programmes, even 1V share-tipping quizzes - you name it, we got it. As ever, the media were in the game of reinforcing a trend which was already past its sell-by date. And as ever, they succeeded in pulling thousands of new investors into the Stock Market at the

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worst possible moment. As any contrarian will tell you: when the Stock Market makes the front pages, it's time to sell. Having been caught in the Stock Market crash, the public was set up for the slump in the housing market. In 1988, the media were full of stories of fabulous gains by lucky householders, of broom cupboards in Knightsbridge sold for astronomical sums, of young couples forced to leave London if they wanted their own homes. Nothing could have been better calculated to cause a panic-buying blowout in the housing market, and it succeeded brilliantly. And by 1992-3, when mortgage costs were falling to a thirtyyear low and the market had clearly bottomed-out, what were the stories then? They were of negative equity, shattered dreams, despairing estate agents and people who needed to move but couldn't. It wasn't much encouragement to benefit from the best buyers' market since the 1950s, and few dared to take their opportunity. The moral is clear. The media concern themselves with perceived reality, which is partly or wholly of their own creation. If, like most people, you base your investment decisions on that perceived reality, you will fail- and possibly fail disastrously. To fight back, to get in touch with the true reality behind the media fluffyou need a reliable antidote. At THE FLEET STREET LETTER, we have been providing just that antidote for over fifty years. We are not interested in running stories, we are interested in giving accurate investment advice. We don't project current trends into the future, we look for them to change. We don't tell our readers what they want to hear, we tell them the truth as we see it. We've guided our readers through some momentous events - the Second World War, the decline of the Empire and the microchip revolution to name but a few. But we believe the end of the 20th Century will see some extremely fundamental

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changes in world order. All the old, familiar landmarks on the world political scene are already rapidly disappearing aroundus. So what do we see for the future, from our sceptical, realistic, contrarian viewpoint?

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CHAPTER 9

ELEVEN THINGS YOU SHOULD

KNOW ABOUT THE FUTURE, NOW "My interestis in thefuture because I am goingto spend the restofmy life there. " (Charles Kettering)

11 Major Predictions 1994.2010 1) The value of the pound will continue to decline until by 2010, it reaches parity with the Swiss franc. As a result of this, there will be increasing British investor diversification into 'hard' currencies such as the Swiss franc or the Deutschmark.

2) If the Conseroatioes lose in the next election - and THE FLEET STREET LETTER tip is that they will lose, by a narrow margin, to a Labour-Social Democrat alliance - then we will see this conversion from the pound to the Swiss franc and the Deutschmark intensify. We will also see a much greater diversification of British investment money into overseas companies, channelled through offshore accounts. Restrictions and taxes for British investors who want to invest overseas will be imposed. Investors will once again have to pay high taxes and premiums on overseas investments, leading to a rapid boom in overseas investments before these

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restrictions slam shut the gates. The newgovernment will increase the marginal rate of tax to 60% - with the inevitable result that once again, tax avoidance schemes will proliferate, and the Black Economy will flourish. 3) By 2010, the EC will have fallen apart under internal Pressures from its quarrelling member states and external indifference. The European monetary system will be formally abandoned, and fixed exchange rates will be no more than a distant (bad) memory. As a result of the removal of EC checks and restraints, British trade and the British economy will experience a boom. 4) By 2010, China, Indonesia, India and Thailand

will lead the world in manufacturing, with cheaper labour forces and special tax-free economic zones. Buta FLEET STREET LETTER word of caution, China will not turn out to be the bonanza that most investors and the financial media expect. We are deeply pessimistic about the developing political pressures building up in China. We foresee increasing political unrest and a resulting backlash of 'heavy' Government clampdowns, which will eventually lead to internal explosion. China is a golden opportunity for investment, but the gold is balanced on a tank of nitroglycerine. And when China explodes, it poses a major risk, not just to itself, but to all its close neighbours - to Hong Kong, Japan, Korea, Taiwan, even Thailand... As the Far East is the engine of prosperity and growth for the whole world, China's instability presents a very real threat to the entire world economic balance. Still the shift in manufacturing and heavy industry away from the First World to the Third World is real. Combined with the decline of middle management, it will mean there are going to be increasing numbers of permanently unemployed in Europe.

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5) Back in England, we predict tbat ordinary sbares will more tban double by tbe year 2000. As increasing numbers of the workforce workfrom home via fax and computer networks, the companies to watch out for will be in these growth areas of information and communication, particularly to and from the home. More and more activities such as shopping and personal banking will be conducted from home via computer, and the development of virtual reality will intensify this trend still further. Companies which capitalise on this trend will be the success stories of the years 2000 and.... For all the talk about revitalising our inner cities and investing money in inner city development, THE FLEET STREET LETIER believes that it simply won't work, can't work, because fundamental shifts in technology and social trends are against it. The inner city shopping centres will become increasingly deserted as more and more shoppers cut out the traffic jams and supermarket checkout queues and simply shop from home, ordering what they want via their computers. Inner cities in general will become even more empty as the need to be based near your office and the need to travel into work vanish. More and more people will move out of the large towns and cities - London's population is already shrinking. Companies catering for this shift in demographics will be another growth investmentarea to look out for.

6) It will be Increasingly fashionable to work from bome or from a blgb-teeb, rural o.fflce. Huge businesses will be organised as networks of such informal workers. Already only 1 in 3 of the UK workforce have a nine-to-five, five-days-aweek job, and in IBM, workers only come into the office for their time-share of office work. The nextdecadewill see the rise of innovative, initiative-taking Entrepreneurial Man to replace CorporateMan.

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7) Gills will continue to be a bad investment. But the introduction of a new market, the UnquotedCompanies Market, at the end of the year will provide real opportunities for the discovery of new investment gems. This market will reflect the new era of Entrepreneurial Man as small enterprises and companies flourish. 8) The improvement in the market in residential Properties, far from expanding as predicted by some surveys, will Peak within the next three years, and then resume its steady decline for the rest of the century- and beyond. We base this contrary forecast on straightforward demographic evidence. In 1914, 90% of the population rented. Now the figure for owner-occupiers is 65%. This shift from renting to owning has been responsible for the steadyupswing in the property market throughout the century, and the bulge in the population Britain's own Baby Boomers - buying property pushed it up higher. But the markethas topped out, particularly as the demographic bulge in the population has now shrunk. The market has already reached saturation point. With tax reliefon mortgages being gradually phased out and a liberalisation of landlord-tenant relationships on the cards, the market may well swing back in favour of renting, particularly as there is no longer the need for a work-force to stay fixed in one place, near their office or factory.

9) Gold will go to 1,000 dollars an ounce as post-election unrest develops in South Africa, and Russia, the world's other major gold producer, disintegrates still further. The Russian economy is in chaos, hardship is near-universal, and hyper-inflation is rampant. It is the country's democratic leadership, rather than the previous regime, which is taking the blame for this. Add to this, the humiliation felt by a highly nationalistic

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population at 'losing' the Cold War, and it is hardly surprising that Russians are now turning in droves to dangerous extremists like Zhirinovsky. There has been a lot of media panic about a possible resurgence of Fascism in Germany, but it is in Russia, not Germany, that we feel all the ingredients are in place for a dangerous resurgence of Fascism. Warring nationalist states and a resurgence of Islam in the South add to a potentially lethal cocktail, with the possibility of nationalist wars in the smaller states of the ex-USSR, on the scale of Bosnia or worse. 10) Despite wide-spread fears, popular support for bard-line Fascism in tbe rest of Europe will dwindle back to the minority of thugs and cranks who are its usual power-base. But what will happen is that elements of Fascism's appeal - nationalism, youth, energy and purpose - will be hijacked by democratic leaders in all the advanced democracies, to create a blend of demo-Fascism with potent popular appeal. In Italy, Berlusconi has already been elected on this demo-Fascist platform, with a part-Thatcherite, part-Libertarian, part-Fascist programme. In Peru, President Fujimora has also proven the power of this approach.

11) The resurgence offundamentalist religions will sweep tbe world. 'Born-again' Christianity will increase dramatically in the West, and militant Islam will dominate the Middle East and North Africa. Plus, a new idea is on the rise. It is thought to be based on rationality and science - but it is fundamentally irrational and unscientific. What's more, it is very dangerous. (More about this in an upcoming issue of the Fleet Street Letter.)

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The World Tumed Upside Down Nature abhors a vacuum, and new great powers can emerge with surprising speed. On the eve of the Second World War, the US was politically and militarily marginal - sunk in isolationism, and with an army smaller than the Dutch. Six years later, she had the world at her feet. Who can doubt that Japan and Germany already have the economic and industrial muscle to transform themselves into great powers if and when their vital interests dictate? Looking further forward, we can onlyboggle at the power China may be able to wield in one or two decades' time. These are just some of THE FLEET STREET LETTER's predictions for the future. We've shown you a few of the emerging trends and also given you some pointers as to how you can use them to your advantage. (In a moment, I'll tellyou about three shareswe thinkgive you an easy and profitable way to harness our predictions). All the old, familiar landmarks are rapidly disappearing. We believe that trend projection will never prove more useless than in the years to come and that complacent, steady-as-she-goes investment strategies will fail disastrously. To succeed, you need access to hard, independent advice prepared to challenge the conventional wisdom purveyed by politicians, economists, businessmen and the media.

THE FLEET STREET LEITER At THE FLEET STREET LETI'ER, we have been providing that hard, independent advice for a very long time. We are uniquely qualified to make the necessary connections between political developments, world trends and specific investment advice. And we can make contrarianism, the only investment philosophy which has everworked, workforyou too.

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THE FLEET STREET LETTER has been around for fifty-six years. It has the distinction of being one of the few financial advisory publications with a well-developed network of confidential sources all around the globe. Tokyo, New York, Paris, Hong Kong, Washington. This is a direct result of THE FLEET STREET LETTER's unique heritage. Our information network of UK and international correspondents is world-wide: it includes economists, renowned investment advisors, financiers, top bankers and industralists... even a few politicians. We have always been careful to employ people who are not only experts in their own fields, but who make up a balanced team - and who; above all, havecontrarianism in their bones.

So who are we? Our Editor-in-Chief is Lord Rees-Mogg. Lord Rees-Mogg was Editor of 'The Times' for fourteen years, after being Chief Leader Writer and Assistant Editor at 'The Financial Times' and City Editor of 'The Sunday Times.' He has also been ViceChairman of the board of governors at the BBC, Chairman of the Arts Council, and Chairman of the Broadcasting Standards Council. He writes a. twice-weekly column for 'The Times.' He has written two books with the leading American financial analyst, jarnes Dale Davidson, 'Blood in the Streets' and 'The Great Reckoning.' Together, they have correctly forecast such events as the collapse of the Berlin Wall, the break-up of the Soviet Union, the falls in the US and Tokyo Stock Markets and the world-wide real estate crisis. In the course of such an important and distinguished career, Lord Rees-Mogg has built up an international circle of political and financial contacts at the highest levels, contacts he uses to help us get the facts to you. Our Editor is John Campbell, one of Britain's leading investment journalists. For ten years, he was Mr Bearbull on 'Investors' Chronicle.' As such, he ran 'Investors' Chronicle'

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main share-tipping column, and also wrote numerous feature articles (often from a contrarian viewpoint) for them on all aspects of the investment and corporate worlds. He has written for 'The Financial Times' and 'Money Magazine' among many other financial publications. In 1986 he was nominated for the Harold Wincott Prize for financial journalism. He is currently alsowriting 'The Equity Investment Guide'- a definitive handbook on the Stock Market for private investors. In addition to the Editor in Chief Lord Rees-Mogg and Editor John Campbell, we frequently receive vital information from outside specialists - experts in their individual fields, be it taxplanning, or specific sectors and markets. All these people are tried and trusted contributors, who've proved their reliability and knowledge. We know we can trust them to give you the very best advice, regardless of what the party line might be.

Just what, though, is our scope? We monitor all the world's major markets likely to be of interest to British private investors. That said, we have a bias all else being equal - towards the UK. Within that brief, readers can expect us to cover (though not necessarily in every issue).

World Stock Markets: We monitor the UK market daily, and keep a sharp eye on the world's other stock markets for signs of developing bargains. We are not that interested in the markets making today's headline news because of their spectacular gains. We look out for the ones that will make tomorrow's headlines - our job is to put our readers ahead of the crowd, not jumping onto an over-subscribed bandwagon after it.

Managed Funds: As it is difficult and troublesome for UK private investors to

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buy foreign equities, we do not recommend specific foreign shares. But if we think a particular foreign market or sector shows investment promise or offers great opportunities, we will however analyse UK or UK offshore* unit and investment* trusts to identify the best buys. In true contrarian fashion, we very rarely cover the same stale 'flavour of the month' markets whichdominate the City pages of every other paper.

Tax Efficient Investments: Taxes are now rising and, with a change of government likely at the next election, we expect tax to re-emerge as a major concern for all investors. We give periodic advice on investment tax umbrellas (such as PEPs and Personal Pensions), and keep abreast of the latest tax-avoidance vehicles like the new enterprise-zone funds. And according to the political outlook we will, if necessary, extend thiscoverage in future. In addition, from time to time whenever it's particularly appropriate or profitable, we cover other markets and investment areas, such as gold, property, fixed-interest securities and currency funds, to name but a few. Whenever we do, we do not just give general advice, but will always make specific investment recommendations in order to help you make money.

UK Equities: Finding and recommending UK shares is one of THE FLEET STREET LETTER's specialist areas. We are particularly interested in finding profitable forgotten recovery stocks or overlooked growth companies - indeed any shares which we regard as unjustly neglected by the market and the rest of the financial press. In addition, we like companies which we know to be run on common sense contrarian principles, as well as small entrepreneurial enterprises which have yet to attract attention.

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We don't usually bother with 'glamour stocks', or companies whose managements are already the stuff of a hundred profiles in the City press, because their prices are already being driven high by investor interest, lowering your profit potential. We are acutely aware that every individual investor has different aspirations and tolerance of risk. All our share tips are therefore clearly labelled according to their level of risk and returns. And we don't just casually throw out recommendations and then forget about them, leaving you stranded. Once we have made a stock recommendation, we always follow it through until we advise a sale.

* Ifyou withdraw from these investments in the earlyyears, you maynot get back the full amountinvested.

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OUR TOP

THREE PICKS Here we offer three important share recommendations selected on contrarian principles. Note that all three companies are expected to be big winners from major long-term constructural changes - either in the economy, or in the international markets.

Fortune Oil The oil price is very depressed at present - which is hardly surprising given that the world economy is just emerging from a major recession. Most commentators are still focussing on shortterm bear factors, such as the inability of OPEC to agree to cuts in production. But we believe that the long-term outlook for oil from this point is good. Quite apart from economic recovery in the West, the new tiger economies of the Far East are developing a prodigious thirst for oil. Since they have little of their own, this will emerge as a major bull factor for the oil price. Before long, we suspect that the world oil market will switch from a situation of over-supply to shortage. Consider China. Before the economic boom got underway, China was just about self-sufficient in oil. Suddenly, she has turned into a major oil importer and her impact on the international oil market seems certain to grow dramatically over the next decade. Moreover, there is now a way for investors to participate directly in this prospect - and to do so through a company quoted on the London market. In late 1993, Hong Kong oil trader Kingsleigh Petroleum reversed into a tiny UK shell company called Blackland Oil.

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Blackland retains its interests in UK onshore oil exploration and the merged group (renamed Fortune Oil) says it intends to develop these further. But to all intents and purposes, Fortune is the old Kingsleigh - and its prospects in the Far East are now of vastly greaterimportance. Kingsleigh was founded in 1989 to import oil and petroleum products into the People's Republic of China - or more specifically into the special economic zones centred on Hong Kong's neighbouring Guandong Province. Oil importation is a new area for the Chinese and, in such circumstances, the use of Hong Kong middlemen is normal practice. The explosion in demand is reflected in Kingsleigh's sales figures - turnover tripling to $63.5m between 1990 and 1992. Further rapidgrowth looks assured over the medium-term. But for all the company's care to avoid risks (it matches buyers with sellers rather than taking stock onto its own book), it knows that profits from pure commodity trading will neverbe considered high quality. Recognising the problem, the company has already begun to diversify in Chinese infrastructure projects. In particular, it has invested £2.66m in a consortium building a £16.66m offshore mooring facility and related 15 kilometre pipeline off the coast of Guandong. The project is designed to allow supertankers too big for southern Chinese ports to offload up to 200,000 barrels of oil a day for the Maoming refinery, and is scheduled to come on streamat the end of 1994. Earlier this year, Fortune entered into another £5.3m joint venture to sell liquified petroleum gas (LPG) in Zhianjiang, a coastal city of 3 million inhabitants in Guandong. The contractis for the building and operation of six LPG storage tanks, in which Fortune will have a 27.5% interest and the opportunity to introduce its own brand name into the Chinese market. Yet these moves are only the beginning. The essential point about Fortune is that it represents a powerful alliance between

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the London capital market, Hong Kong business acumen and Chinese political clout. Nine Chinese businessmen are on the board - and the chairman, one Sun Zhaoqing, also heads the China National Aero-Technology Import and Export Corporation. Unsurprisingly, the company has ambitious plans - and wants to become involved in a whole range of energy infrastructure projects on a much grander scale. At present, it is discussing a huge £200m contract to supply a dozen Chinese airports with aircraft fuel storage facilities. Given the scale of this project, Fortune is on the look-out for a major foreign investor and hopes also to link up with Sinopec, the state petroleum corporation. In short, it aims to become a very powerful player in China's rapidly-growing economy. Yet very little of this prospect is reflected in the share price. We first tipped Fortune at 4.5p shortly after it reversed into Blackland. Since then, it has been volatile - reaching 8.25p earlier this year, but since subsiding to 5.5p as a result of weak oil prices, AngloChinese tensions and the recent loss of confidence by Hong Kong investors. But at that price, the company is valued at just £58m. Given that it is expected to make profits of £2.5m this year, and £4.25m in 1995 as the first benefits of the oil mooring facility come through, the future possibilities are in the price for nothing. We expect this to become very obvious as further deals are announced over the next couple of years. And with a secondary listing planned for the Hong Kong Stock Market in late 1994, there is currently everything to play for. As a 'red chip' investment offering direct exposure to China's burgeoning appetite for oil, Fortune looks impossible to beat.

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Ashanti Gold In recent years, all the emphasis has been on reducing inflation - to the point where some commentators even warn that a period of 1930s-style deflation is just around the corner. But while the headlines talk of inflation at record lows, we are convinced that it is ready to make a strong comeback as the world economic recovery gathers steam. Government deficits (particularly in countries like the us and Britain) cannot be supported without massive cuts in public spending or swingeing increases in taxation. Since public opinion will tolerate neither of these options, something else has to give - and that something, as always, will be the value of money itself. The recent slump in bond prices, beginning in the US and spreading rapidly throughout the world's markets, is the clearest possible indicator that investors' inflationary expectations are reviving fast. Gold has always been the classic hedge against inflation - at least over the longer term. Over the past decade, this has been disguised by the release of huge stocks from government gold reserves onto the market. But at least one major factor is now pulling the other way. In the Far East (as in the Middle East and elsewhere) gold is almost universally regarded as the ultimate store of wealth. And as the Far Eastern economies take off, so consumer demand for the yellow metal is increasing by leaps and bounds. We believe that after many years of stagnation, a major long-term bull market in gold has just begun. Political unrest in Russia and South Africa, which we've already talked about in Forecasts 1994-2010 earlier in this chapter, will add to gold's value. Most of the world's major gold mines are concentrated in South Africa and North America. But the former are high-cost mines, operating in an area of acute political uncertainty. And the latter, which don't suffer from

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these disadvantages, come mighty expensive. But early in 1994, however, investors were offered a major new opportunity with the international flotation of Ashanti Gold. Ashanti is based in Ghana, but its shares are now owned world-wide and are traded mainly on the London Stock Exchange. Ashanti is one of the biggest gold mines in the world, and has been producing for over a century (Ghana, remember, used to be known as the Gold Coast). But it suffered badly in the political instability which followed independence, and from chronic disputes between the Ghanaian government and Ashanti's major shareholder, Lonrho. In recent years, all that has changed. The government of ]erry Rawlings, which came to power in 1981, was converted to free-market economics in the mid-1980s. Since then, Ghana has been the favoured child of the World Bank in its desperate attempts to revive the economies of black Africa. Since exchange controls were abolished in 1986, Ashanti has been able to invest nearly $400m on re-equipment and expansion with dramatic results. In the seven years to September 1993, annual gold production more than tripled to 770,410ounces. In the current year, it is expected to rise further to 860,000 ounces. And from 1994-5 onwards, Ashanti will join the select few gold mines in the world producing over 1m ounces of gold a year. Higher production levels have helped reduce overheads, allowing the company to cut its basic extraction costs from $201 to $173 per ounce since 1990 - an exceptionally low figure by industry standards. Depreciation costs have naturally risen following the recent capital investment. But even if these are taken into account, the mine is still of extraordinary quality, with total production costs of $235 per ounce. Ashanti is assured of a long-term future, since it is already sitting on proven and probable reserves of 18m ounces of gold

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- worth nearly $7bn even at today's gold price of $380. Moreover, its reserves will grow very substantially over the next few years. Between now and 2002, Ashanti intends to invest a further $600m in exploration, development and expansion. Huge areas of the company's licence area have still not been surveyed and geologists believe that there is a very strong probability of major newdeposits awaiting discovery. So this is one of the world's great gold mines, still nowhere near developing its full potential. But with the shares at £14,50 (compared with a flotation price of $20/£13.35), Ashanti is valued at just half the price accorded major US and Australian producers and only 20% more than more developed, but much higher-cost - and politically higher-risk - mines in SouthAfrica. The reason for this, of course, is the 'political risk' attached to investment in sub-Saharan Africa. But we believe that these fears are excessive. The last coup in Ghana took place 13 years ago, the current regime is firmly wedded to free-market ideals, and West African governments have learned the hard way that nationalisation of foreign-owned assets does not pay. In that respect, they are more advanced in their economic thinking than many elements within South Africa's ruling ANC - indeed we regard Ghana as a much safer long-term bet. Ashanti is undervalued because most people, as usual, are looking to the past rather than the future. As a result, investors willing to buck the conventional wisdom are being offered a superb investment very cheaply.

Applied Distribution Stock Market weakness in the Spring of 1994 was bad news for new issues, with most forced to come to the market on low ratings and then attracting little interest in the after-market. But the glut also meant that excellent growth prospects suddenly became available at very reasonable prices - in marked,

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beneficial contrast to the situation when new issues arrive in an excitable and fast-moving bull market. One such bargain isApplied Distribution, a specialist in warehousing and contract distribution for retailers and the food manufacturing industry. The UK distribution market is currently valued at around £8.5bn, and one element of it - contract distribution - is growing very rapidly. In recent years, there has been a strong trend away from integrated operations as large corporations scale back to their core activities. The essential business of major retail chains like Sainsburys and Marks & Spencer, for example, is retailing. An obvious point. But in the past, such companies have also been heavily involved in subsidiary businesses like transport and distribution which are not really their field and at which they are not particularly efficient. Now they are hiving offsuch functions to independent specialists who can provide them at a muchlower cost. At present, onlya third of the distribution market is handled by out-house specialists like Applied. But that proportion is certain to continue expanding strongly over the next decade, making contract distribution a major growth industry. And although a number of quoted companies (such as NFC, Hays, Christian Salvesen and Tibbett & Britten) are heavily involved in the field, Applied is now the only one offering exclusive exposure. Following its arrival on the market in early 1994, Applied is in an excellent position to expand. Since the MBO, and despite the investment of £4.5m in new warehouse capacity, the company had already paid back £7m-worth of MBO debt from its cash flow. Thanks to fund-raising at the time of its Stock Market launch, it has since paid offthe remainder and has£3.5m cash in the bank. Given that expansion had previously been inhibited by funding constraints, progress nowlooks certain to accelerate. Applied is paid on a price-per-case basis on all existing

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contracts, leaving plenty of upside scope for turnover as economic activity picks up. Volumes on old contracts were rising steadily in the early months of 1994, and the company was also benefiting from additional business acquired in 1993. Even if it cannot win any additional contracts, profits this year are expected to soar to £4.2m, with earnings up by around 17% despite the big increase in equity. In fact, that target is likely to prove conservative. Several potential customers have already approached Applied since it gained its quote and it is highly likely that additional contracts will be won during the year. Even making no allowance for that, Applied is trading on a much lower valuation than comparable operations, which hardly does justice to a well-financed company with a good record and excellent growth prospects. At 135p, the shares value Applied at just£41m - which looks cheap on 1994 prospects alone. As the company takes maximum advantage of its growth potential in a recovering economy, we expect the current price to be left way behindin the years to come. Fimbra asks us to point out - as they do in the case of all share recommendations - that their value may go down as well as up, you may not get back the full amount you invested. It is also worth noting that FIMBRA do not regulate all investmentsfor example gold and property. This cautionary wording applies to all investments other than bank and building society deposits - but the lesson of history is that careful share investment has outperformed all other types of investment and has outdistanced the excessive effects of inflation. So there you have it. You can continue in the same old way, confused by the perennial chaos of markets and subjected to all the usual crowd pressures. You can go on following the trends and listening to the media pundits. And you can go on taking

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the consequences. Or you can subscribe to THE FLEET STREET LETTER. We can't promise to make you a millionaire overnight. But we can promise to try and turn you into a successful investor, like the other thousands we have helped before. And you can rest assured on one vitally important point. When the crowd next comes a cropper, you won't be part of it. You will already be ahead.

Other Subscription Benefits In addition, when you subscribe to the Fleet Street Letter, you'll receive some other benefits that are worth mentioning. For example, you'll be immediately enrolled in our Fleet Street Investment Club. This will entitle you to a special discount on share dealing costs, provided to our members by City Deal Services Ltd. This service allows you to buy and sell shares at a fraction of the commission you'd pay in a typical high street bank. It even saves you more than 50% off the typical 'low cost' stockbrokers' commission. Plus, you'll also receive a copy of our booklet, The Investor's Guide to Stockmarket Success. This publication is yours FREE. It will reveal to you more of the secrets to successful stock market investing. You'll discover several methods of investment along with the background information and technical features you need to implement them. Finally, you'll receive a free copy of the Sharecall Directory, another valuable publication to make your investments more convenient as well as more profitable. This handy reference provides you with a way to follow hundreds of different shares over the telephone. Plus, it shows you how to get valuable advice on penny shares, new issues, and our own Fleet Street Letter recommendations - all by phone. With these resources at your fingertips, you'll be able to put

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the insights and recommendations you read about in the Fleet Street Letter to work for you immediately. We look forward to welcoming you to our readership. You will note that you may subscribe entirely at our risk. The attached Free Trial Offer allows you to receive your first three issues of Fleet Street Letter with no obligation to continue. If the letter fails to meet your expectations, in any way for any reason, simply cancel and your subscription money will be returned in full.