The Majesty and Villainy of Sicily

Written by Paul Siluch
June 7th, 2023

Sicily is an island 80% the size of our own Vancouver Island but with 5 million people versus our 800,000. It experienced several golden eras that resulted in majestic Greek temples and stunning Byzantine mosaics preserved inside Norman cathedrals. Both are spectacular.

My wife Sue and I recently travelled to Sicily to visit the cathedrals and ruins of several ancient empires. As one person we met commented, “Sicily has great rubble.”

When you think of Italy, it is hard not to think of Rome. The Roman Empire ruled the world for over 2,000 years, first from Rome and then from modern-day Istanbul. Roman legacy is everywhere, from crumbling walls and stadiums scattered throughout Europe to the Justinian code of law that still forms the bedrock of European civil law.

Not all parts of Italy were fully Roman, however. And therein lies the charm and tragedy of Sicily.

Four hundred years before Alexander the Great was crowned in 336 BC, Greece began expanding westward (source: Wikipedia). The first of these explorers (around 735 BC), colonized a large island they called Sikelia (modern-day Sicily), just off the ‘toe of the boot’ that is mainland Italy.

Sicily had an eastern side blessed with fertile soil, courtesy of Mt. Etna, a volcano that is still active today.

The Greeks settled Sicily and gradually conquered the whole island by 480 BC (source: Wikipedia).

The cities of Siracusa in the east and Agrigento in the west built the largest temples in the Greek world.

The two cities rivalled Athens in power for a century. Temples were built larger and larger to demonstrate power to Athens, with the largest towering over the town at ten stories high and lasting 2,000 years. The Atlas statues from the Temple of Zeus stand 8 metres tall and held the roof up. They can be seen in the rendering to the right.

Just one survives out of 38.

This was Sicily’s golden period. Many Greek temples remain today and the island itself, from its cuisine to its dialect, has echoes of its Grecian roots.

Sicily - and subsequently all of Greece - fell to the Romans around 200 BC. Rome had grander ambitions than Sicily, however, due to its being a bit of a backwater. At least as far as Rome was concerned. Rome’s emperors were more interested in pushing further west to Gaul and Britannia, and east through modern Turkey. With its poor soil outside of the volcanic apron near Mt. Etna, Sicily became increasingly ignored.

If you were ambitious, you left for bigger things. If you wanted to hide or were fleeing a chequered past, Sicily was the place for you. Sicily’s reputation for criminals is something that sticks to this very day.

When the French royals fell, groups of local strongmen rose up to protect the locals in the ensuing power vacuum. ‘Protection’ took on a new meaning as this new group - the ‘mafia’, which means “swagger” or “bully” - was born. Instead of helping the vulnerable population of Sicily, it preyed on them.

Over the next century, waves of Sicilian emigrants left the island and headed to America to flee the mafia, but “the mob” travelled with them and cemented its footprint in the new world.

The Godfather - a movie about the Sicilian mafia Corleone family - remains a cultural icon in the island.

“Leave the gun, take the cannoli.”

• The Godfather

The Favoured Few

The banquet of the Mosse family, by Anton von Werner

And so we return to the markets of today. While combing through cathedrals in Palermo and Siracuse, I couldn’t help but watch the markets. With modern wireless services, you can’t escape, these days.

Fewer and fewer stocks are rising, which is an unhealthy condition for markets. Like in ancient courts, most of the wealth went to a very few people.

In 1999, I was fired by a client for not owning Cisco shares. Cisco was one of the leading “dot.com” stocks powering the internet bubble. Investors were paying about 30x sales (most stocks trade for single digits) that day, before the peak of 35x sales in June of 2000. Cisco shares cost about $53 when my client left, on their way to $78. So, guilty as charged. I should have owned them.

However, after the peak at $78 in April 2000, Cisco shares tumbled all the way down to $10 in 2002 for a loss of about 87%. Valuation may not matter in the short term, but it most certainly does in the long term.

It has been over two decades since then. Cisco shares - $50 today - have never regained their April 2000 price.

One of the key characteristics of the dot.com mania was how staggeringly narrow the market was. A “Favoured Few” tech and telecom stocks rose and lifted the market indexes, giving the illusion that everything was booming when the opposite was true. It was a golden age for a handful, but not for most.

In 336 B.C., Alexander became king of Macedonia at age 20. He went on to unify all the city states of Greece, then marched east to conquer Egypt, Persia, and even part of modern-day India. At its peak, the Greek empire was one of the largest in history. He left his mark by spreading the Greek language and Hellenistic culture across Asia – both which survived over 2,000 years - and even founded a city: Alexandria.

Alexander the Great never lost a battle (he died from tainted water or poison at age 32), and he fearlessly led his armies, at the head of his troops. No military commander in history has ever won a battle by himself, of course, but Alexander knew his troops were fanatically loyal and always followed. The army that fights as one, wins as one.

“Remember upon the conduct of each depends the fate of all.”

• Alexander the Great

We are the 99%

• Occupy Wall Street slogan

An old market adage says markets are weakest when the generals lead but the troops don’t follow. This is exactly the situation today. A few giant stocks are lifting the market while the rest – “the 99%” - lag behind. It can be the sign of a weak market.

The tech giants have led the market for most of 2023 – the Big 7 of the S&P 500 index have risen +53% for the year versus about 0% for the remaining 493 stocks:

In mid-May, the trend accelerated when AI (artificial intelligence) stocks exploded.

Nvidia, whose top chips now sell for up to $40,000 each (source: eBay) projected booming sales for the year ahead. Thanks to its dominance in AI chips, its share price rocketed higher. Nvidia carried a handful of other AI-related stocks with it, sending market commentators into a frenzy over the potential of the coming “machine intelligence.”

The problem is, AI is still just a concept. It is a new - and possibly better - way to search for information. So far, though, it is simply a better mousetrap than the search engines we already have.

And it is expensive. A ChatGPT query costs about seven times what a standard search does (as per Microsoft data) and it will cost Alphabet, Microsoft, and Amazon billions to upgrade to the new Nvidia AI chips. Another key limitation of AI is the amount of heat generated by these massive chips, which are stacked by the thousands in racks of servers.

Experts compare today’s AI with bird learning, which uses a similar brute-force form of trial and error. Professor Ed Wasserman, from the University of Iowa says AI can “beat the pants off people playing chess, or at any video game, for that matter. How does it do it? Is it smart? No, it's using the same system or an equivalent system to what the pigeon is using here."

A pigeon brain runs with just 5 watts compared to one H100 Nvidia chip needing 700 watts. The heat problem will be a major hurdle going forward, which means

AI cannot progress much further until chipmakers can find a way to go faster without melting down.

And pigeons haven’t taken over the world, just to calm the people who worry ChatGPT marks the end of human civilization.

We have seen this before. In 1929, a new invention called “radio” was all the rage. RCA - the Radio Corporation of America - was the clear leader. You had to own RCA to keep up with the market, and so everyone did. RCA shares rose from $11 in 1925 to $114 in September 1929 and reached a P/E of 72 (source: gold-eagle.com). It then fell from $114 to $3 by 1932. It took until the mid-1960s and leading a whole new technology called television for RCA stock to match its 1929 high.

In 1978, IBM was the supreme computer maker of the era, dominating mainframe computers and the new class of minicomputers. “You’ll never be fired for buying IBM” was their sales pitch. It worked because it was right. IBM made up 6.4% of the S&P 500 index then, a high-water mark for one stock that had never been reached at that time (source: Investors.com). IBM shares underperformed the market for 15 years and was the same price in 1995 that it was in 1978.

Cisco followed previous leaders RCA and IBM in the year 2000 when it became the titan of the Internet era. Its shares traded for 35x sales.

A study of past markets where less than 30% of stocks participated in the advance showed below-average market returns over the next year. This happened after RCA’s peak in 1929, the Nifty Fifty era of 1973, IBM’s dominance in 1978, and the dot.com era of 2000.

Nvidia stock today trades at the same valuation levels as Cisco did in 2000: 37x sales.

The good news? The stocks that are ignored – small companies, foreign stocks, and high-quality value stocks – outperform over the next year as the growth giants and indexes falter.

In conclusion, we are not giving up on stocks. One way the market can improve is for the “generals” to weaken while the “troops” catch up.

Our heavier bets, then, are on the broader market and not on technology today. AI – Artificial Intelligence - is a great new industry. The stocks are expensive, though, and future returns are likely to be limited.