Dave: Sorry for the delayed response. You ask, if the Glassman theory isn't correct, what explains the hot market in the 1990's?
I don't think it is just one thing, but a convergence of a whole bunch of things, some of which you named, like productivity and economic expansion, and many other items as well, such as the spread of capitalism and the relatively benign investment climate in the US versus other parts of the world. Toss in low inflation and interest rates as being big pluses this decade.
The thing to remember about processes at work in the social sphere, which includes the economy and stock market, is that some have feedback mechanisms that act as a governor, causing reversion to the mean, while others have mechanisms that push them even further in whatever direction they are heading. In the '90's it has been the latter that are the dominant trends.
One such loop, for example, is strengthening business activity which causes high profits which causes high stock prices which lets more companies raise more money, causing those companies to spend that money, which causes strong business activity, and around again to a higher level. In the investment world, you see more stock buying causing higher prices causing people to put even more money into stocks, causing higher prices, etc. In that environment it is rational to leverage oneself up, and borrow to invest more, and that is what people have done.
All these upward spirals eventually do hit limits, and I think we are getting close to that point now, but hey, I thought so a few years ago too. Maybe it will go on for a few more years, I don't know. But the same processes that moved stocks up, once they start in reverse, whenever that may be, will create a bear market whose depths and impact on the real economy will seem like an inconceivable nightmare to most people in the market today.
The various new paradigm arguments about why we will have accelerating growth for years (decades?) to come all sound plausible, if you take them at face value and forget about the social feedback. For example, the growth of productivity and the switch to a service/information economy in theory ought to free us from the manufacturing inventory cycle that have caused most of the booms and busts in the past. But just as many people in cars with ABS brakes and airbags drive more dangerously than those who don't have those safety devices (what the car insurance industry refers to as conservation of risk), so companies and individuals are more willing to go out on a financial limb because they don't feel the need to include the effects of a severe recession or a drying up of financing sources in their plans. That results in a level of economic risk every bit as much as it was pre new paradigm, only people are complacent now because they know how well computers control inventories these days. |
