Wayne: That is another way of putting it. The point is that the stock market, Keynes to the contrary not withstanding, is not merely a beauty contest.
It does interact intimately with the real economy, with the market being the prime information source about what industries (if any) are ripe for real investment, and which liquidation and disinvestment.
Despite all the blather about people consuming too much and not investing enough, I think that the cause of the troubles I see ahead is the opposite - that the high stock prices and ease of raising money from IPOs and additional stock offerings have caused an overinvestment in capacity. We have trouble recognizing it because, since this is a post-industrial economy, we don't see a rash of factories going up, as was the case when there was overinvestment 100 years ago.
Yet the capacity is every bit as much there now as it was then, only not as obvious. The fact that product and service inflation is so low despite the booming economy is a hint of the underlying overcapacity. If I am right, when the market becomes a serious bear and the economy starts turning down, deflation will rear its ugly head for the first time since the depression, as companies desperately cut prices to try to attract demand.
It won't be pretty. Nevertheless, the market will be sending the correct message: We have enough capacity everywhere, don't invest any more please.
In your terms, it will state that message clearly by pricing stocks below their replacement values. |
