"AG acted correctly in raising interest rates to prick the bubble."
If the goal was to restrain stock prices from going up beyond what their fundamentals would prescribe, then raising interest rates was NOT the right tool. They should have raised MARGIN REQUIREMENTS, not interest rates.
The real estate speculation in Japan was partially a product of unusual land use regulations that allow small farms to continue to grow rice (a food as well as a cultural staple), even when those farms are in urban areas and are no longer cost effective. This creates higher than desirable land prices.
In the U.S., one could argue a similar result has come from the huge number of mergers that have taken place, particularly in the last five years. When a company like Worldcom acquires MCI, for example, no additional intrinsic value is created, notwithstanding the "synergies" that you hear so much about when the merger is first announced. What is created is a lot of new debt, and that is not unlike what happens when people in Japan bid up the price of what little real estate remains to be developed in urban areas.
I think that, in the coming years, people will come to see that many of the mergers that received so much attention (MCI-Worldcom, AOL-Time Warner, the slew of regional Bell company mergers, AT&T-McCaw Cellular, AT&T-Viacom, etc.) amounted to nothing more than the inefficient allocation of scarce capital. As companies gained control of very large trade areas, whether it be cable TV, wireless franchises, long distance services, generation of electricity, the only real outcome that applies to all these phenomena of the last five to ten years is that potential return on investment went down, or consumer costs for a given service went up.
The lower return on investment explains, at least in part, why investors would turn away from former glamour stocks. There is simply less value in them. To confirm this hypothesis, one need only compare the ratio of stock price to book value, and how it increased over time. The unfortunate part of this scenario is that many analysts tend to lump every stock in a sector like telecommunications together, regardless of the strong points or weak points in each. There's plenty of value around, but not many analysts willing to look for it.
Art Bechhoefer |
