The Theory of Contrary Opinion

“When everybody thinks alike, everyone is likely to be wrong.”

That’s what Humphrey B. Neill wrote in his seminal contrary opinion book, The Art of Contrary Thinking, first published in 1954.

But Neill was only following in the footsteps of Gustave Le Bon, who in 1896 produced, The Crowd, A Study of the Popular Mind.

And Le Bon was only following in the footsteps of Charles MacKay, who in 1841 wrote, Extraordinary Popular Delusions and the Madness of Crowds.

Humphrey B. Neill

Humphrey Neill

Gustave Le Bon

Gustave LeBon

CharlesMacKay

Charles MacKay

 

 

 

 

 

Today, the topic of all three of these books might be called “crowd psychology.”

And the funny thing is that even though experts have been writing about crowds for a very long time, and trying to make us smarter about our behavior, the behavior of crowds hasn’t changed!

Individually, we may be brilliant, but as groups, we can be stupid as sheep.

Humphrey Neill was concerned in particular by the role of contrary opinion in the field of investing, and it’s through my investment advisory business that I was introduced to the concept.

So let’s look at an example of contrary opinion in action, using a company known to all investors—and probably all Americans—today, Apple.

AppleAs a computer company, Apple was never a great success; competition was tough, and Apple’s products were expensive. (I should know, I bought Cabot’s first Macintosh in 1987 and I’ve bought countless more since.)

Then in 2003, Apple introduced the iTunes Store, offering digital downloads for 99 cents, in the process providing the first practical alternative to the problem of illegal song sharing. (The first iPod had been introduced in 2001, but it was the iTunes Store that got the stock moving.)

That was followed, of course, by more iPods, and then iPhones and iPads, and with each new release, Apple gained more and more converts, and more and more investors. When the iTunes Store opened, Apple stock was trading in the low teens; virtually ignored by both institutional and individual investors. But in the decade that followed, more and more institutions climbed on board, and more and more individuals joined them, in the process turning Apple into the most valuable company in the world, valued at more than $660 billion.

And then, in September 2012, AAPL peaked! The top price was 705, a number that I expect to stand for a very long time. There was no sign of trouble at the time; in fact business was great, with revenues and earnings still growing at double-digit-rates. Everyone loved Apple, and there was no doubt that it would continue to grow for years to come.

Yet AAPL stopped going up! And it started going down! And before six months had passed, AAPL had lost more than 40% of its value! Fundamentally, there was no way to explain it. Apple was still growing revenues and earnings, and there even rumors of a great Apple TV product. But the stock wasn’t listening.

So why did AAPL top out? Because perception of Apple couldn’t get any better, and because every possible shareholder was already on board. And when some shareholders began to revise their opinions ever so slightly downward, as they perceived that growth was beginning to slow, there was no one to sell their stock to at that high price! All the possible buyers had bought!

So prices had to fall to enable existing shareholders to reduce their positions.

Most observers of Apple’s huge sell-off were dumfounded. There was no way to explain the decline fundamentally, and the broad market was strong. But practitioners of contrary opinion understood what was happening perfectly. In fact, they saw it coming, knowing that as Apple became the most popular stock in the world, any downward change in perception could start a major-league decline. And it did.

Note: You can read two very relevant columns I wrote on AAPL, one from before the top , and one from shortly after.

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It Works at Bottoms, Too!

Contrary opinion is not only good for identifying dangerous tops, it’s also good for identifying opportunities at bottoms.

Consider 2008, after the sub-prime mortgage industry collapsed, and the dominos fell, damaging the entire mortgage industry, the entire housing sector, the entire stock market and a large part of the U.S. economy. It got so bad that by early 2009, people were taking money out of banks and stockpiling it at home, in case banks began to fail.

Well, that was the time to buy, exactly when optimism was the most contrary opinion in the world.

In fact, on March 23, 2009 (just 17 days after what would prove to be the bottom), I wrote in Cabot Wealth Advisory, “Today the market’s big downtrend appears finished, and a new uptrend is trying to establish itself… we now have seven consecutive days in which the number of stocks hitting new lows on the NYSE has been fewer than 40. We also have numerous major indexes whose intermediate-term trends are poised to turn from negative to positive. Coming off a bottom that’s brought the lowest consumer confidence numbers in history, this uptrend has the potential to be a big one … precisely because no one expects it.”

Now, I do want to point out that there’s more to the successful practice of contrary opinion than just being contrary; the world is full of cranks who’ll argue with you because they enjoy conflict. It seldom gets them anywhere.

Real success comes not from simply being contrary, but from first considering the contrary point of view, to see if it might have merit. If the answer is yes, the next task is attempting to identify the point at which public opinion reaches an extreme, because you don’t want to be too early.

In the case of Apple, contrary thinkers were well aware that the stock’s growing popularity would eventually turn into liability.

And as the stock market (and the economy) plummeted in late 2008, contrary thinkers were well aware that eventually, the indiscriminate selling would lead to a great buying opportunity.

But in both cases, acting too early in a contrary way might have been painful. In both cases, it was better to wait until the tide had definitely turned, and then, having anticipated the turn, act decisively.

In conclusion, contrary opinion is not always applicable. And it is decidedly not easy. It requires continued effort to calmly appraise the temperature of the public’s attitude. And it requires continued practice to think independently. But the rewards can be substantial, for the dedicated practitioner.

P.S. If you’d like to pursue it further, the books of the gentlemen at the top of the page are a good starting point.

Eight Stupid Rules that are a Drag on the U.S. Economy

by Timothy Lutts

I originally wrote this list of eight stupid rules in September 2012, and the good news is that there has been some progress since then. The Federal government looks like it will finally make progress on immigration reform, and numerous states keep making progress on marijuana. (April 2013)

toomanylawyers#1. The American Rule 
Americans litigate far more often than the residents of other countries. In fact, the share of our economy spent on litigation is at least twice that of Germany, France, England and Northern Ireland, respectively. Why? Because our system of risks and rewards is screwed up. In every other country in the world, the loser pays at least part of the other party’s legal fees; this rule not only inhibits the filing of nuisance suits with little merit, it helps encourage law-abiding behavior. In the U.S., however, the American Rule encourages the filing of nuisance suits that clog the court system, rewarding above all the lawyers. That’s one reason the U.S. has more lawyers per capita than any other country; there’s a lawyer for every 265 Americans. And because the people who “run” the country in Washington are generally lawyers, there’s little incentive to change.

#2 The Continuing Federal Prohibition of Marijuana
Nearly a century ago, we learned that prohibiting the production, trade and consumption of goods that the public wanted diverted public money to a vast criminal black market that supplied that want—and gave us the likes of Al Capone, Machine Gun Kelly and Dutch Schultz (real name Arthur Flegenheimer). Today we have the same situation with marijuana. Polls show that 56% of Americans support legalizing and regulating cannabis (the tax revenue would be substantial) and 80% support medical marijuana. Yet an estimated $30 billion a year continues to go to law enforcement to fight the drug war, in the process perpetuating lawlessness on both sides of our Mexican border.

#3 The U.S. Postal Service Monopoly
Thanks to the Internet, the U.S. Postal Service has become a slow-motion train wreck. In response, the U.S.P.S. is cutting costs—by reducing service to its customers!—but doing nothing to address the main problem. And Congress just kicks the can down the road. The radical solution is to free the U.S.P.S. from its outdated mission and to allow free-market competition so we all get better service.

#4 Taxi Medallions
The conceit that city fathers know best how many cabs is the right number ignores the wisdom of the free market and perpetuates a market that makes medallions so expensive only professional companies can afford them … which raises costs for customers.

#5 Liquor Licenses
Ditto.

#6 Immigration Laws
Forget about the problems at the Mexican border. Ignore the Miami/Cuba issue. The real tragedy of our immigration laws is that we continue to force visitors who graduate from our excellent colleges to return to their home countries! This brain drain—particularly in math and science—weakens American competitiveness while strengthening other countries. Even Bill Gates couldn’t get Washington to act, though signs are that change will be achieved eventually.

#7 Ethanol and CAFE laws
The requirement that ethanol be added to gasoline has made corn—and everything made from corn—more expensive, while contributing to the global food crisis. And the labyrinthine Corporate Average Fuel Economy (CAFE) requirements have us forced us to drive smaller, lighter, less safe cars or trucks and SUVs (which remain exempt) rather than giving us the choice of keeping safer heavy cars and driving less. If these laws were repealed, and replaced by a simple national gas tax, we’d have cleaner air, cheaper food and more choices!

#8 The Farm Bill
Born as a helping hand for struggling small farmers, it now rewards the largest professional agricultural companies like Butterball, Tyson, Sunkist, Cargill and Monsanto. It encourages the production of junk food—through subsidies for sugar, corn and high-fructose corn syrup—thus contributing to the epidemic of obesity and diabetes in the U.S. And it includes the Supplemental Nutrition Assistance Program (formerly known as food stamps), which is a nice idea but poorly implemented; I recently stood in line behind a woman who used hers to buy a jug of wine. (It was made by Gallo, one of those large agricultural companies that know how to play the game in Washington.)

Now here’s a question for you.

Which of these eight “Stupid Rules” bothers you the most?

Which do you disagree on?

Net Neutrality

GUEST POST

by Chloe Lutts

This article on Net Neutrality was written by my daughter Chloe Lutts in August 2010. As a child of the digital age, she summarized the issue far better than I did when I once tackled the subject, and her conclusions remain relevant today. (April 2013)

net neutrality, Internet routing paths

An Opte Project visualization of routing paths through a portion of the Internet

Keeping the Internet equally accessible to all, especially small content producers, is key to ensuring tomorrow’s inventors and entrepreneurs have the same opportunity to succeed as their predecessors. To me, that means passing a law to protect net neutrality, the principle that all Internet traffic should be treated equally, regardless of content or origin.

We have net neutrality now—Internet traffic isn’t sped up or slowed down, or blocked, based on what it is or where it came from. If you own a small business, your website loads at the same speed as your larger competitors’. This has allowed small and non-profit websites to stay competitive with those backed by giant companies, even as the Internet matured. And it has allowed for the rise of user-driven sites like Wikipedia and CouchSurfing, not to mention millions of blogs. However, net neutrality is not protected by law, and any one of the companies that control Internet traffic could abandon it at any time.

A recent “policy proposal” put forward by Google and Verizon is the first step toward an Internet where all traffic is not created equal. Though their proposal would only change things for mobile Internet service at this time, it confirms that the Internet’s gatekeepers are thinking about these issues, and that the time to act is now. The gatekeepers I refer to are Internet Service Providers, or ISPs, of which Verizon is one of the largest. ISPs are the companies that own the Internet cables coming into your house.

When you type a web address into your computer, or click on a link on a website, that request gets sent through your ISP’s cables, to the provider of the content you have requested, and the content gets sent back through the cables to your computer. Right now, that content travels through those cables at the same speed regardless of where it is coming from. Content from Amazon.com will travel through the cables at the same speed as content from your sister’s blog. However, ISPs currently have the very real option of treating some content differently from others.

One possibility is that ISPs could strike deals with content providers, like Google, to give their content preferential treatment, by delivering it faster than other content. That might not seem so bad: Verizon giving YouTube videos priority over other content probably wouldn’t affect how quickly you could load other sites, even if Verizon is your ISP. It would make YouTube videos load a little faster. However, that almost certainly would not be the end of it.

What happens when Vimeo, a YouTube competitor, realizes that YouTube’s videos are loading faster than its own? If they’re smart, they’re going to strike a similar agreement with Verizon and other ISPs, to give their own content the same preferential treatment as YouTube’s.  So now there’s two companies’ content being given preferential treatment, but other sites probably still load at just about the same speed.

Until 500 other companies come along, and say, hey, maybe we can get an edge on our competition by making our sites load faster. At this point, there are essentially two tiers of Internet traffic: There’s content from big companies, with lots of money, who can pay ISPs for preferential treatment. And then there’s content from individuals, like you, and non-corporate or non-profit entities, like Wikipedia and The Pirate Bay and universities, and just plain small websites that don’t have the money to pay ISPs for top-tier service.

This would be a tragedy, not just for users of those small and non-profit sites, but for everyone who ever had a dream of starting his own business on the Internet. As the founders of Google have said themselves, net neutrality is key to ensuring that the next two kids in a garage with an idea have their own chance at success.

Furthermore, prioritizing content from certain companies isn’t the only thing ISPs could do once they abandon net neutrality. They could also slow down or block some content entirely. That could be for pay, as with prioritizing YouTube content. For example, CNN.com could pay Verizon to speed up its content, and delay content from NBC.com. Or it could be for the ISP’s own benefit—Comcast, one of the largest ISPs, has a division called Comcast Interactive Media. Comcast Interactive Media owns movie ticket site Fandango.com, a social network called Plaxo, and a TV streaming site called FanCast.com that is similar to Hulu.

Comcast could easily deliver content from its own sites—Plaxo and Fandango and FanCast—faster than content from others. But the company could just as easily throttle, or even block, traffic from competing sites, like Hulu. Or, Comcast could just charge users extra for access to competing sites, while including its own sites in base-rate services. Not a member of Plaxo? How does an extra $10 a month for access to Facebook, MySpace and Linked In—let’s call it the “Social Networking” package—sound?

Finally, though profit incentives are the most likely reason for ISPs to take such steps, they might not be the only ones. Ideologically-motivated discrimination would be just as easy. If the New York Times publishes a story critical of Comcast, the ISP could easily block access to the story or slow down traffic to the site. An ISP with conservative management could just as easily block NYTimes.com altogether, or a liberal one could block Fox News.

The obvious argument against ISPs taking such steps is that they’d lose their customers. And that would certainly be true in some places. But in many other places, people have no or little choice of ISP. My last two apartments were served by Time Warner alone, and only in the last year have I had a choice: between Verizon and Time Warner. But many entire cities are served by a single ISP. And introducing competition isn’t easy, when it means installing new Internet cables under streets and in buildings.

More on this topic

The Economics of Legal Marijuana

by Timothy Lutts

I originally wrote this in October 2009. Many U.S. states have come a long way since then but even more have done nothing. And the Federal government, sadly, remains deaf to the desires of its citizens, even though 52% of Americans now favor legalizing marijuana and 72% believe that government efforts to enforce marijuana laws cost more than they are worth. (April 2013)

On Saturday, Sunday and Monday, one week ago, here’s what happened.

On Saturday, the New York Times ran a story on the drug wars in Mexico, describing how the power of the criminal gangs often outweighs the power of the law enforcers.

It’s a big problem, and the violence has increased since President Felipe Calderon launched an army-led assault on the cartels soon after taking office in late 2006.  More than 14,000 people have died in drug-related violence in Mexico since.

Cannabis sativa, economics of legal marijuanaThe Mexican gangs, of course, are just trying to make a living by serving the demands of a market … in this case the market for marijuana and other illegal drugs in the U.S.

Recognizing this, the U.S. attempts to help.  It’s currently giving $1.4 billion to Mexico to provide training and equipment to security forces.  And last week it conducted a massive sting operation that netted more than 300 arrests in 19 states.  But none of the arrested were upper-echelon figures, and U.S. Attorney General Eric Holder admits the gangs are too entrenched within the political and economic fabric of Mexico for the arrests to deal a deathblow to the gangs.

On Sunday, the Boston Globe noted that it was the 78th anniversary of Al Capone’s conviction on tax evasion charges, for which he received an 11-year federal prison sentence.

Alphonse Gabriel Capone, of course, became rich by satisfying the public’s thirst for alcohol during Prohibition, the 14-year period in which the sale of alcohol was illegal in the U.S.

While meeting the demands of this market, Capone, like the Mexican drug cartels, became very powerful, stymied law enforcement, and killed people.  Today, we generally recognize the folly of prohibiting the sale of alcohol during that period.  Even though one-third of Americans choose not to drink today, we know that instead of trying to outlaw it, it’s better to regulate it and tax it.  Today, the U.S. government collects more than $9 billion per year from alcohol taxes; individual states collect even more.

Then on Monday, President Barack Obama instructed federal attorneys that they should no longer prosecute marijuana users in the 14 states that allow it for medical reasons, but should defer to state laws instead.

Can you connect the dots?

The plain truth is that the War on Drugs (a term first used by President Richard Nixon in 1969) has been a failure.  In fact, the term is no longer used by the Obama administration, which prefers treatment to incarceration.

Yet the U.S. (federal and states) will spend about $47 billion this year on drug enforcement, clogging our court systems and overcrowding our prisons, in many cases dooming young men to a life in the underclass.

In fact, the United States has a higher proportion of its population incarcerated than any other country in the world … and roughly 25% of our inmates are in there for drug offenses, usually possession.

So who benefits from this War on Drugs?

Organized crime, certainly.  According to the United Nations, drug trafficking is a $400 billion per year industry, equaling 8% of the world’s trade.

Also benefiting are arms manufacturers, the law enforcement industry, the prison industry and the legal industry.

And I don’t think we’re getting a good value for our $47 billion.  In fact, I think our efforts may be counterproductive, and that we should explore a more sensible route, the same one we use for alcohol and tobacco.

In short, legalize it, regulate it and tax it.

Legalization would quickly shrink that $47 billion annual cost of law enforcement to a small fraction of its present level.  In its place, we’d have federal quality control inspectors to keep tabs on the legal producers (thus reducing poisonings and overdoses).  Entrepreneurs would spring up out of the woodwork to become producers, and with the increased supply prices would fall to more reasonable levels.  Profits would drop.  And organized crime would soon be out of the business.

We’d have a more efficient legal system, and a more efficient prison system.  And we’d have a ready supply of legal marijuana for medicinal purposes (two-thirds of Americans are in favor of medical marijuana now).

And then we’d be able to tax it!  Every state in the country now taxes alcohol and cigarettes, and I think marijuana should be no different.  And how much would we collect from those taxes?

A 2008 study by Harvard economist Jeffrey A. Miron estimated that legalizing drugs would inject $76.8 billion a year into the U.S. economy–$44.1 billion from law enforcement savings, and at least $32.7 billion in tax revenue ($6.7 billion from marijuana, $22.5 billion from cocaine and heroin, the remainder from other drugs).  I’m not ready to argue for legalizing those harder drugs, but I do think a country as deep in debt as ours should stop giving money away on unproductive projects and start looking for positive cash flows.

Leading the way already is our country’s lifestyle pioneer, California.  This past July, 80% of Oakland, California voters chose to impose a tax of 1.8% on medical marijuana sales, which could bring the cash-strapped city nearly $300,000 next year.

And California Assemblyman Tom Ammiano, a Democrat from San Francisco, introduced legislation that if approved by the California Legislature, would put pot on the same legal footing as alcohol–legalizing its sale and having the state tax it.  Ammiano called it “simply nonsensical” to keep marijuana, the state’s top cash crop, unregulated and untaxed in light of the state’s massive financial problems.

The value of California’s marijuana crop is estimated at $14 billion annually. That’s almost twice the combined value of vegetables and grapes, the state’s second and third most-valuable crops.  Ammiano estimated passage of his pot legalization proposal could generate more than $1.3 billion for state coffers.

Finally, turning to our neighbor Canada, I found this:

“In a recent study for the Fraser Institute, Economist Stephen T. Easton attempted to calculate how much tax revenue the Canadian government could gain by legalizing marijuana.

The study estimates that the average price of 0.5 grams (a unit) of marijuana was $8.60 on the street, while its cost of production was only $1.70. In a free market, a $6.90 profit for a unit of marijuana would not last for long. Entrepreneurs noticing the great profits to be made in the marijuana market would start their own growing operations, increasing the supply of marijuana on the street, which would cause the street price of the drug to fall to a level much closer to the cost of production. Of course, this doesn’t happen because the product is illegal; the prospect of jail time deters many entrepreneurs and the occasional drug bust ensures that the supply stays relatively low. We can consider much of this $6.90 per unit of marijuana profit a risk premium for participating in the underground economy. Unfortunately, this risk premium is making a lot of criminals, many of them with ties to organized crime, very wealthy.

Stephen T. Easton argues that if marijuana were legalized, we could transfer these excess profits caused by the risk premium from these growing operations to the government:

“If we substitute a tax on marijuana cigarettes equal to the difference between the local production cost and the street price people currently pay–that is, transfer the revenue from the current producers and marketers (many of whom work with organized crime) to the government, leaving all other marketing and transportation issues aside we would have revenue of (say) $7 per [unit]. If you could collect on every cigarette and ignore the transportation, marketing, and advertising costs, this comes to over $2 billion on Canadian sales and substantially more from an export tax, and you forego the costs of enforcement and deploy your policing assets elsewhere.”

One interesting thing to note from such a scheme is that the street price of marijuana stays exactly the same, so the quantity demanded should remain the same, as the price is unchanged. However, it’s quite likely that the demand for marijuana would change from legalization. We saw that there was a risk in selling marijuana, but since drug laws often target both the buyer and the seller, there is also a risk (albeit smaller) to the consumer interested in buying marijuana. Legalization would eliminate this risk, causing the demand to rise. This is a mixed bag from a public policy standpoint: Increased marijuana use can have ill effects on the health of the population but the increased sales bring in more revenue for the government. However, if legalized, governments can control how much marijuana is consumed by increasing or decreasing the taxes on the product. There is a limit to this, however, as setting taxes too high will cause marijuana growers to sell on the black market to avoid excessive taxation.

When considering legalizing marijuana, there are many economic, health, and social issues we must analyze. One economic study will not be the basis of Canada’s public policy decisions, but Easton’s research does conclusively show that there are economic benefits in the legalization of marijuana. With governments scrambling to find new sources of revenue to pay for important social objectives such as health care and education expect to see the idea raised in Parliament sooner rather than later.”

Economically, I think legalization and taxation is a no-brainer.  The less easily defeated arguments come from people who argue that all drug use is bad (the old Puritan argument that drove Prohibition) or that marijuana is a stepping-stone drug.  In any event, Obama’s directive to stop prosecuting marijuana users in states that approve medical marijuana use is one small step on the road that should ultimately lead to legalization and taxation.  I have no doubt that it’s a very long road.  But the journey has begun.

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The Great Credit Shrinkage

by Timothy Lutts

I originally wrote about the great credit shrinkage in December 2008, and it still seems sensible. In the four years since the financial crisis of the time, individual and corporations have reduced their debt loads substantially. Now we need to get our governments to do the same. (April 2013)
Credit Shrinkage

Back on September 11, 2008 a few days after the U.S. government took over Fannie Mae and Freddie Mac, I looked into my crystal ball and wrote the following.

“I think the housing industry peaked in 2006 and that it will be a VERY long time before that peak is exceeded.

In my mind, just as the failure of the sub-prime market triggered the collapse of the housing industry, the collapse of the housing industry will trigger the deflation of our debt bubble. Eventually, if all goes well, the end result will be a smaller debt load for the U.S. and a smaller debt load for American consumers as well…which in my mind means living in houses we can afford.

Now, I admit that I’m going out on a limb here, but I know that in the stock market when trends run to extremes, the ensuing corrective actions persist far longer and further than anyone anticipates. So why not in the credit market as well? Why shouldn’t our debt bubble shrink as we restore our balance sheets—both personal and federal—to more sane levels?

And as our debt bubble shrinks, a process that in my mind should go on for decades, I ask what the American financial landscape might look like in the decades ahead.

Imagine if there were a national consensus that shrinking debt would help save America.

Our representatives in Washington would cut spending and raise revenues, through higher taxes and perhaps even asset sales. Individual Americans too, would cut spending. Health care costs would stop their steep ascent. Savings rates would grow, and there would once again be more focus on earning interest than paying it.

Borrowing rates would fall, and the remaining lenders would compete hard for a share of the shrinking pie by lowering interest rates.

Unfortunately, all that reduced spending might mean that GNP would fall, too…and we’ve been taught that recessions are bad. But in a new reality where reducing debt is paramount, might that perception shift?

If we can all agree that living within one’s means is better for the average American, then why not for America as a whole? Why can’t improving our national balance sheet, and getting control of our finances, be as important as growing? With creditors like China and Japan, we may have no option.”

Three months after writing that, I see nothing I want to change in it. The trends have continued as expected, and the future as I envisioned it still seems likely. Of course, I wasn’t smart enough to advise selling short back in September 2008; at that time, the market was already about 25% off its high, and I’ve learned over the decades that it’s best to short when the market is high, not low.

But we weren’t so foolish as to advise investing against the market’s main trend. Our growth-oriented advisories have continued to advise holding cash…and that’s been good advice.

So, looking at the big picture again, here’s what’s new in the past three months.

The U.S. government has been cranking up the printing presses, printing billion-dollar bills and handing them out left and right to big troubled entities whose failure would bring “unreasonable” pain. If you’ve a little company and you’re in pain, tough luck.

Adjustable rate mortgages continue to roll over into less affordable fixed-rate mortgages. At the end of the third quarter, 7% of mortgages were delinquent, and the number is no doubt higher today.

The unemployment rate is now 6.7%, the highest level in 15 years.

November automobile sales plummeted 37% from the year before, to the lowest level since 1982. The guys from Detroit went to Washington begging for money.

The brightest guys in the room, the managers of Harvard University’s endowment, lost $8 billion—or 22% of their assets—in four months. Department heads at the school have been asked to reduce their budgets 15-20% in the year ahead.

Oh, and the National Bureau of Economic Research finally figured out that the recession started in the third quarter of 2007. That information plus $1.25 will get you a paper cup of coffee at Starbucks.

A recession is not really such a big deal. Usually they’re half over before you even know they’ve started. I’ve lived through eight in my lifetime.

A depression is worse. I haven’t been in one of those, and in fact there is no precise definition of a depression. Previous depressions include the five-year period that followed the Panic of 1837; the 23-year period that ran from 1873 to 1896, now known as the Long Depression, and, of course, the Great Depression, which ran from late 1929 to early 1933. At less than four years, that was the shortest.

We may well be in a depression now…or headed for one.

But in my mind, the future is likely to bring something new to America, and for lack of a better term, I’m going to call it the Great Shrinkage.

In this Great Shrinkage, as I ventured before, credit will shrink and equity will increase.

The stocks of MasterCard (MA) and Visa (V), by the way, show no signs of strength. If my crystal ball is correct, both companies came public near the end of the long buildup in credit. Competitor American Express, meanwhile, is going to become a bank holding company.  Does someone at American Express see the writing on the wall?

In this Great Shrinkage, the number of colleges will shrink, as fewer parents choose to borrow the big bucks required. Demand will soar at state colleges and private, for-profit educators that provide career-oriented educations but have no football teams.

States and municipalities will cut non-essential services, and find new ways to charge for services that were previously free. Pensions and disability payments will be carefully scrutinized for fraud and waste.

Savings rates will climb…but with demand so high, returns from savings will stay extremely low.

Speaking of credit, I recently was given a report written in 1965 by Jim Fraser, a money manager from Burlington, Vermont who hosted the annual Contrary Opinion Forum for decades. The focus of the report: “Crises and Panics.” Jim studied nineteen financial crises going back as far as 1745, describing the climate at the time and the event that in every case broke the camel’s back. What I took away from the report was Jim’s simple observation that every crash, without exception, began when credit that had been extended was not returned as expected. Today’s situation, therefore, is unusual only in degree…and perhaps in the extent that our government has chosen to step into the breach, in an attempt to halt the natural fall of the dominoes by injecting government money into the system.

Human Evolution and Music, Music, Music

by Timothy Lutts

Originally written in May 2009, this column helped me answer a question I’d wondered about for decades: why had humans evolved to appreciate and create music? What was the advantage? It’s slightly dated, but still one of my favorites. (April 2013)

human evolution and musicThe seed for this column was inadvertently planted two weeks ago by Paul Goodwin, who is known publicly as the editor of Cabot China & Emerging Markets Report, but in his private life is an accomplished tenor with a serious appetite for classical music.

It started when Paul forwarded to me a copy of a welcome address delivered in February to the parents of incoming freshmen at Boston Conservatory by Dr. Karl Paulnack, pianist and Director at the school.

Boston Conservatory is a “serious” music institution; it works to perpetuate and cultivate the values of classical music, chamber music, opera, conducting, etc.

Famous recording artists Teresa Brewer, Cherilyn Sarkisian and Katy Perry didn’t have the benefit of the institute’s instruction and we’ll get to them later. (If you can identify all three of those women, congratulations!)

But we’ll start with the highlights of Dr. Paulnack’s speech, skipping the usual introductory remarks.

“The first people to understand how music really works were the ancient Greeks … the Greeks said that music and astronomy were two sides of the same coin. Astronomy was seen as the study of relationships between observable, permanent, external objects, and music was seen as the study
of relationships between invisible, internal, hidden objects. Music has a way of finding the big, invisible moving pieces inside our hearts and souls and helping us figure out the position of things.”

Paulnack then goes on to give two big examples of this:

The French composer Olivier Messiaen, who wrote “Quartet for the End of Time” while imprisoned in a concentration camp in 1940.

The way people in Paulnack’s Manhattan neighborhood who banded together after September 11, 2001 to sing “We Shall Overcome” and “America the Beautiful.”

From this, Paulnack concludes that music is “not of “arts and entertainment” as the newspaper section would have us believe. It’s not a luxury, a lavish thing that we fund from leftovers of our budgets, not a plaything or an amusement or a pastime. Music is a basic need of human survival. Music is one of the ways we make sense of our lives, one of the ways in which we express feelings when we have no words, a way for us to understand things with our hearts when we can’t with our minds.”

(Note those words, “one of the ways in which we express feelings when we have no words,” because I’ll come back to them.)

Paulnack goes on to mention Samuel Barber’s “Adagio for Strings,” well known as the background music in Oliver Stone’s movie “Platoon.”  He mentions weddings, which always have music, and notes, “predictably 30 or 40 percent of the people who are going to cry at a wedding cry a couple of moments after the music starts. Why? The Greeks. Music allows us to move around those big invisible pieces of ourselves and rearrange our insides so that we can express what we feel even when we can’t talk about it.”

Then, closing in on his big theme, he finishes:

“If we were a medical school, and you were here as a med student practicing appendectomies, you’d take your work very seriously because you would imagine that some night at two AM someone is going to waltz into your emergency room and you’re going to have to save their life. Well, my friends, someday at 8 PM someone is going to walk into your concert hall and bring you a mind that is confused, a heart that is overwhelmed, a soul that is weary. Whether they go out whole again will depend partly on how well you do your craft.

“You’re not here to become an entertainer, and you don’t have to sell yourself … You’re here to become a sort of therapist for the human soul, a spiritual version of a chiropractor, physical therapist, someone who works with our insides to see if they get things to line up, to see if we can come into harmony with ourselves and be healthy and happy and well.

“Frankly, ladies and gentlemen, I expect you not only to master music; I expect you to save the planet. If there is a future wave of wellness on this planet, of harmony, of peace, of an end to war, of mutual understanding, of equality, of fairness, I don’t expect it will come from a government, a military force or a corporation. I no longer even expect it to come from the religions of the world, which together seem to have brought us as much war as they have peace. If there is a future of peace for humankind, if there is to be an understanding of how these invisible, internal things should fit together, I expect it will come from the artists, because that’s what we do. As in the concentration camp and the evening of 9/11, the artists are the ones who might be able to help us with our internal, invisible lives.”

For the audience of parents, the speech was no doubt quite effective; it made them feel good, even noble, to spend money (tuition at Boston Conservatory is $30,400 a year) to send their offspring to the institution.  And the fact that the speech lives even now on the Internet, with universally positive commentary, attests to the power of its message. People–and professional musicians in particular, who are profoundly attuned to music–love the idea that music can bring peace to the planet.

But color me skeptical.  Sure, Paulnack made excellent use of examples as a tool of persuasion.  Lord knows we all recognize the power of music to pull our heartstrings in movies and at weddings.

But he was necessarily selective in his examples.  He refers, of course, to beautiful classical music composed under difficult circumstances, but ignores martial music, which has long accompanied men to war.  And he ignores the role of popular music totally, despite the fact that it’s enormously more prevalent and influential in our culture–and in every culture–than Boston Conservatory’s serious music.

More important, his speech was notably lacking in both logic and science. Paulnack refers to the Greeks as a wise culture, but then says, “Music has a way of finding the big, invisible moving pieces inside our hearts and souls and helping us figure out the position of things.”

What does that mean, scientifically?!  I don’t think Paulnack cares; most important to him is that it feels right.  But I care.  So I looked.  I found a very good explanation for why music is such a powerful force in our lives, and I want to share it with you.

But first I want to return to the three female recording artists mentioned earlier.

Teresa Brewer was born Theresa Breuer in Toledo, Ohio, in 1931.  She never took music lessons; she couldn’t even read music.  But she began singing as a child, and had a #1 hit in 1950 with “Music, Music, Music,” written by Stephen Weiss and Bernie Baum.  It sold over a million copies and became her signature song, and it goes like this:

Put another nickel in
In the nickelodeon
All I want is loving you and
Music, music music

I’d do anything for you
Anything you’d want me to
All I want is kissing you and
Music, music music

Closer, my dear come closer
The nicest part of any melody
Is when you’re dancing close to me

Put another nickel in
In the nickelodeon
All I want is loving you and
Music, music music

In her career, which lasted into the 1990s, Teresa recorded nearly 600 song titles. She recorded with jazz greats Count Basie, Duke Ellington, Dizzy Gillespie and Bobby Hackett, and she died on October 17, 2007, at her home in New Rochelle, New York.

Cherilyn Sarkisian was born in El Centro, California, in 1946 and became famous in 1965 (at age 19) when “I Got You Babe,” recorded with Sonny Bono, became a #1 Billboard hit.  We know her as Cher.  She never finished high school, but she’s now 62 and in the midst of a three-year $60 million gig at Caesars Palace in Las Vegas.

And Katy Perry?  Born as Katheryn Elizabeth Hudson in 1984 in Santa Barbara, California, she’s hot today, thanks to songs like “I Kissed a Girl” and “Hot N Cold”; each has sold over three million copies.  She never finished high school, either.  Ask your kids or grandkids about her.

Then there’s me.  Both my parents are very musical; even now they play professionally as a duo, my father on clarinet and my mother on accordion. In their music room stands a refurbished orchestrion, a machine made by the Nelson-Wiggen Piano Company of Chicago in 1916 that plays when you drop a nickel in the slot … just like Teresa Brewer’s Nickelodeon.  Most recently, I heard it play “Petite Fleur,” a great jazz tune from the 1920s.

Basically, it’s a player piano, powered by electricity, and with additional components actuated by vacuum hoses.  It reads a perforated paper roll, and includes not just piano but three drums, cymbal, banjo, xylophone, wood block, triangle and castanets.  I think it’s pretty cool. It’s not amplified, but when it’s turned up loud (the way my father likes it) you can’t even hold a conversation in the room!

But I’m not a musician.  Sure, like my four siblings, I had years of piano lessons, starting at an early age.  I played clarinet through high school–and I still play it once a year, in the neighborhood Fourth of July parade where we play only three songs, “Avalon,” “Battle Hymn of the Republic” and “Chinatown.”

But no one would ever think of paying me to play.  And the truth is, I’d much rather listen to professionally played music–live or recorded.  I think Apple’s iTunes is one of the greatest inventions of the decade.

Now let’s get back to the real topic, the idea that music might save the world, and if not, the question of why music is such a powerful force in humans.

The title of this column is “Music, music, music.”  I made it up … simply by stating the topic three times.  But not really, because at the moment I conceived that three-word phrase (or perhaps before), my brain found a memory of a lyric, combined with a melody, and before you know it, I was singing (in my head) the lyrics to Teresa Brewer’s song, which had been implanted there many years before.

How did I save that memory … without even trying?  How have I saved memories of hundreds–thousands–of other songs, both serious and trivial? How is it possible that I can struggle to memorize the license plate on my wife’s car or a 10-digit phone number yet can easily remember a song after a couple of hearings … and retain that memory for many years?  And why does music affect us so emotionally … to the point where we can imagine it might be the force that saves the world?  Finally, what is the point?  Evolutionarily, why did we develop this capability to create and
respond to music?

I’ve been wondering idly about these questions for quite a few years and I think I’ve finally been presented with some answers, thanks to a wonderful book by Daniel J. Levitin titled, “This is Your Brain on Music.”

The book’s frontispiece says, “Daniel Levitin runs the Laboratory for Musical Perception, Cognition and Expertise at McGill University, where he holds the James McGill Chair and the Bell Chair in the Psychology of Electronic Communication.  Before becoming a neuroscientist, he worked as a session musician, sound engineer and record producer, working with artists such as Stevie Wonder and Blue Oyster Cult.  He has published extensively in scientific journals and music magazines such as Grammy and Billboard.”

In the book, Levitin begins by reviewing the concepts of pitch, rhythm, tempo, contour, timbre, loudness and reverberation, then moves on to cover meter, key, melody and harmony, all the while using examples like Handel’s “Messiah,” Don McLean’s “Vincent,” Busta Rhymes’s “What’s It Gonna Be?!,” Beethoven’s “Pathétique,” the Beach Boys’ “Barbara Ann” and “Twinkle, Twinkle Little Star.”

He covers octaves and scales, noting the variety of scales used both around the world and in different types of western music.  He covers chords.  And he covers transposition, noting that all of us, without any musical training can sing “Happy Birthday” in any key, because we’re so familiar with the relationships between the notes … but that most of us will always sing songs for which there is one definitive version, like Norman Greenbaum’s “Spirit in the Sky” or Neil Diamond’s “Sweet Caroline,” in exactly the “proper” key.

And then he digs deeper into the brain’s function, discussing the frontal lobe, the temporal lobe, the parietal lobe, the occipital lobe and the cerebellum.

None of these lobes is individually responsible for music processing; it’s a group effort.  But it’s notable that, “The emotions we experience in response to music involve structures deep in the primitive, reptilian regions of the cerebellum vermis, and the amygdala–the heart of emotional processing in the cortex.”

This is not to say that all music simply presses our “primitive” buttons. The most enjoyable music that we listen to engages our frontal lobes to a large degree, as we intellectually embrace the music while working to predict what will come next, based on several factors.

“What has already come before in the piece of music we’re hearing;

“What we remember will come next if the music is familiar;

“What we expect will come next if the genre or style is familiar, based on previous exposure to this style of music.”

In fact, the most enjoyable music is at once both familiar and engaging.

Levitin writes, “The appreciation we have for music is intimately related to our ability to learn the underlying structure of the music we like – the equivalent to grammar in spoken or signed languages – and to be able to make predictions about what will come next.”

Tempo and rhythm are generally predictable in western music; foot-tapping – sometimes an involuntary activity–is evidence of the neural importance of that.

But he notes that we also like surprises in our music.  The Beatles’ “Yesterday,” for example, violates the western convention of four-measure or eight-measure phrasing by placing the main melodic phrase in seven measures; the construction intrigues us, though we may not know why.

Within the space of just two pages, Levitin refers to The Beatles’ “For No One,” Steely Dan’s “Chain Lightning,” Aretha Franklin’s “Chain of Fools,” The Carpenters’ “Please Mr. Postman,” The Rolling Stones’ “As Tears Go By,” Stevie Ray Vaughan’s “Pride and Joy,” Elvis Presley’s “Hound Dog,” The Allman Brothers’ “One Way Out,” and Creedence Clearwater Revival’s “Lookin’ Out My Back Door.”

But it’s not all pop and rock.  Levitin is equally at home describing Miles Davis and John Coltrane, jazz artists who ask a little more from their listeners, and give a little more in return.

Along the way, he notes that children’s brains develop from birth to understand and appreciate the music around them.  That the popular conception that the left brain is analytical and the right brain artistic has some merit but is oversimplified.  And that hemispheric specialization does increase as we age.

He discusses “ear worms,” the song fragments that get stuck in our heads, telling us that professional musicians get these more commonly than non-musicians, and that people with obsessive-compulsive disorder are more likely to report them, too.

Digging into the connections among various brain centers and analyzing the order and amplitude of stimulation and activity, he concludes, “far more than language, music taps into primitive brain structures involved with motivation, reward and emotion.”

Going on, he writes, “The story of your brain on music is the story of an exquisite orchestra of brain regions, involving both the oldest and newest parts of the human brain, and regions as far apart as the cerebellum in the back of the head and the frontal lobes behind your eyes.  It involves a precision choreography of neurochemical release and uptake between logical prediction systems and emotional reward systems.  When we love a piece of music, it reminds us of other music we have heard, and it activates memory traces of emotional times in our lives.”

He also addresses the myth that some people have an innate talent for music.  What’s required, he says, is practice.  In any field, roughly 10,000 hours of practice is required to become an expert.

That’s three hours a day, seven days a week for nine years.  And with music, the earlier you start, the better, because those neurons become less amenable to programming as you age.  For Cher and Katy Perry, dropping out of high school to focus on music was a smart career move.

In his last chapter, Levitin gets to my biggest question.  Why music? What evolutionary advantage was or is conferred by music-making and music-enjoying?

And the answer is this.  Recognizing that humans evolved musical capabilities long before speech capabilities, imagine the simplest drum-beating and rhythmic grunting combined with primitive dance movements.  Prowess in these musical activities, just like a peacock’s tail, signaled to members of the opposite sex that the practitioner was so healthy that he or she could afford to “waste” time and energy developing a purely unnecessary attribute.  In short, the most impressive musicians and dancers got the most sex.  Look at “American Idol” and “Dancing With the Stars”–two programs I’ve never watched–and tell me what’s changed. Music is what helps you get the girl (or the girl get you)!

Levitin didn’t write this first.  Charles Darwin wrote it in “The Descent of Man” in 1871.  “I conclude that musical notes and rhythm were first acquired by the male or female progenitors of mankind for the sake of charming the opposite sex.”

There are still doubters.  No less an authority than Steven Pinker, professor of psychology at Harvard, wrote, “As far as biological cause and effect are concerned, music is useless.  It shows no signs of design for attaining a goal such as long life, grandchildren, or accurate perception and prediction of the world.  Compared with language, vision, social reasoning, and physical know-how, music could vanish from our species and the rest of our lifestyle would be virtually unchanged.”

Levitin counters, “The genes that exist in you today (with the exception of a small number that may have mutated) are those that reproduced successfully in the past.  Each of us is a victor in the genetic arms race; many genes that failed to reproduce successfully died out, leaving no descendants.  Everyone alive today is composed of genes that won a long-lasting large-scale genetic competition.”

“In contemporary society, interest in music peaks in adolescence, bolstering the sexual-selection aspect of music. Far more 19-year-olds are starting bands and trying to get their hands on new music than are 40-year-olds.”

Of course, music has evolved as humans have evolved.  At many levels it has become elevated beyond its sexual, evolution-advantaging roots.  The students at Boston Conservatory studying Chamber Music and String Pedagogy are giving their frontal lobes more of a workout than did our ancestors who beat on hollow logs while dancing around the fire.  And pianists who master Bach’s “Goldberg Variations” are unlikely to have groupies in the front row of concerts tossing underwear at them.  The educated people in their audiences are focused on achieving pleasures of a “higher” level.

But those well-established neural circuits in the primary regions of our brains, which govern pleasure and emotion, and which developed over millennia, are still extremely powerful.  Because of them, it’s relatively easy for us to memorize songs–and to recognize people’s voices–while it’s still hard for us to memorize license plates and phone numbers; numbers just haven’t been around long enough for our brains to become proficient with them.

In short, the past thousand years of civilization, in which we’ve made a tremendous amount of progress, thanks to our frontal lobes, have done little to diminish the powers of the primal regions of our brains … especially in young men and women.

One of the highlights of my week was a video (currently circulating on the Internet) of four young men in Ukraine, dressed in suits and ties, playing acoustic guitar, string bass, accordion, marching bass drum and tambourine … and playing Katy Perry’s “Hot N Cold.”  Their performance is a bit rough, but they’re having fun, and I’m betting the 18-year-old girls waiting backstage don’t care if these young men have been to music school!

So, Dr. Paulnack was right when he said that music is “one of the ways in which we express feelings when we have no words.”  Music predates speech in the human evolutionary chain, so its messages frequently need no words.

But can it save the world?  Well, it’s a nice thought.  But recognizing the link between human evolution and music, and the role of music’s roots, and music’s continuing grip on our senses, I’m skeptical.

If we REALLY want world peace–more than we want economic growth, land, food, shelter and clothing–the best course might be to recognize that half the population of the earth has a genetic disposition toward peace … and put them in charge!  I’m talking of course, about women, but
that’s a whole new topic.

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