Pilate Error

Bill Bonner
The Daily Reckoning
Apr 17, 2006

The Daily Reckoning PRESENTS: "Past performance is no guide to future performance," is the idiom heard throughout our nation... but how true is that? Don't we learn from our mistakes of the past? Apparently not...

"I have but one lamp by which my feet are guided, and that is the lamp of experience. I know no way of judging of the future but by the past." - Edward Gibbon

As a member of parliament, Gibbon was an ignominious failure, but as a historian of the Roman Empire, he told the story so vividly that generations of readers have taken it for gospel, even though it was full of the author's prejudices, half-truths, and misapprehensions. What history isn't?

Today, our office is silent because of something that happened under imperial Rome. A Jew was brought before the Roman governor of Judaea, accused of disturbing the peace. Upon looking into the matter, the governor concluded that the accusers erred. The accused had made an admission in public: "To this end was I born, and for this cause came I into the world, that I should bear witness unto the world." But, so what? The Roman, Pontius Pilate, saw nothing in what Jesus was saying that posed a threat to the empire, or even to Roman rule in Judea.

"I find no fault in him at all," he concluded.

That wasn't good enough for the local authorities. Jesus may have been no menace to Rome, but he was a troublemaker in the Levant. The elders wanted to get rid of him. The mob wanted his blood.

"Crucify him. Crucify him," they yelled.

So be it, said Pilate, but the blood won't be on my hands. "Take ye him and crucify him, for I find no fault in him."

This history has been retold every year for the last two millennia. Like any history, we have no way of knowing what part of it is humbug and what part is true, but like the Jesting Pilate, whom Francis Bacon invented, when the question is posed, we don't wait for an answer. Whether history or not, the story itself is a masterpiece.

We pay attention to it as we pay attention to all masterpieces - to all art, tradition, and culture. We pay attention to everything that comes to us bearing the solemn freight of history.

We fear that if we do not, we might miss learning something... even if we are not quite sure what.

But the financial authorities in England and America have a different idea. "Past performance is no guide to future performance," they say.

You can argue about the meaning, relevance or accuracy of this pronouncement. On both sides of the Atlantic, such a statement is required by law, usually affixed to an ad for a mutual fund, partnership, or - in England - even an investment analysis. What you can't do is argue with those who pronounce it - the financial regulators themselves. The regulators won't give an inch; the past is not indicative of the future, they say, no matter what.

This Good Friday, we pose the question to ourselves. Is history indeed useful? Does it bear on the present? We want to know. Or, is it simply a legal dead letter that says nothing about future performance? You, on the other hand, may want to know if this perambulation is worth reading. Where does it lead? We will tell you right now - it tells us that the regulators are Pharisees.

Of course, the bureaucrats, regulators, world-improvers and Pilates think they are doing the public a favor. They are delivering us from evil. The SEC, for example, believes investors need reminding that the future is a chancy and perfidious thing. Even though a mutual fund registered 20 solid years of above-market gains, this doesn't mean it will do it in the 21st year. Maybe it just got lucky.

It is also true that history can be deceptive, misleading and coy. So can life, but the average investor - like the average voter - is much more likely to be deceived by too little history than by too much.

What does history show? It shows that things don't stand still. They go up and down... back and forth. What goes around, comes around. There are short cycles and long ones - circadian and imperial. Rome rose for 500 and fell for 500. As near as we can guess, property prices rose in central Baltimore from its founding in the 18th century until 1929. Then, they went down at least until the end of the century. They seem to be rising now... we won't know until later if this is a genuine interruption of the trend. Farmland in Western Kansas experienced a real bubble in the 1880s. One hundred and twenty-five years later, it is still not as expensive as it was then But, who looks that far back?

Major cycles in the stock market seem to last about 30 to 40 years, peak to peak or trough to trough. Stocks hit a high point in 1929 and then collapsed - bouncing around for a while but not recovering until the 1950s, in nominal terms. Stocks hit a new high in the late '60s, then it was down for another spell, until 1975 or 1982, depending on how you look at it, until a new bull market took over - bringing prices to another cyclical high in 2000... 34 years after the last one.

If history is not helpful, then we are completely lost. The only events we have any knowledge of are those in the past. Those in the future are as unfamiliar, unknowable and unsavory to us as local cheese.

"Those who do not study history are doomed to repeat it," say earnest history teachers and terminal optimists. But, it's not that easy. Studying history is a little like learning a foreign language; until you really get the hang of it, there are likely to be some misunderstandings. They come, as you might expect, in the compound tenses and subtle, subjunctive moods. The casual reader understands the major verbs, but misses the veiled meaning. He is like a Hudson River hustler trying to do business in Hyderabad - or a man trying to reason with his wife. The words will be deceptively familiar; but he'll miss the real sense of the conversation completely.

On the other hand, cut off from history, the lumpeninvestor is encouraged to not even try. He's supposed to believe that every new day is as detached from the last as Mars is from Jupiter. He is not supposed to notice that they both revolve around the same star, and repeat the same cycles over and over until the crack of doom. Taking the regulators at their word, he sees the planets in heaven and has no reason to think they will ever be anywhere other than where they are right now.

The lumpeninvestor looks at the prices on Wall Street, or those of houses in his neighborhood. Those too must be permanent, he reckons. He has no frame of reference, no theory to tell him otherwise, and no way to make a reasonable guess about where they will be tomorrow. He is as misled as a voter, but he's not the complete moron the authorities make him out to be. Warning an investor not to trust history is like a warning sailor not to go near brothels when he is on shore leave. He'll probably end up there anyway.

Today, the typical stock market investor probably feels as old as Metushélach. He entered the market in the mid-90s. He thinks he's seen it all. The market went up and then went down, didn't it? It should be ready to go up again. He can't help but notice that stock prices have gone up in the last five years, but he's discouraged by the authorities from looking any further. It's not worth the trouble, they tell him. Past performance is no indication of future performance. The past doesn't count. Forget it.

The little bit of recent history he picks up without trying, cheats him. It is as though he had noticed Mars zipping through space, without realizing it is merely retracing its steps from millions of years ago. He hasn't enough history. He has never heard of Copernicus. He thinks Pontius Pilate led a peasant revolt in Mexico. And so, he draws conclusions that are both erroneous and preposterous. Whatever he sees, he can only imagine that nothing like it has ever happened before. History has come to a dead stop. This really is a New Era on Wall Street. He sees Mars heading out into space. And, he imagines himself going where no man has ever gone before... when, actually, he never left home.

-Bill Bonner
email: DR@dailyreckoning.com
website: The Daily Reckoning

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