Mr. Dipy:
I went back and reviewed your posts from 1998 as well, and if one looks at the long=term picture from then to now, it is obvious that your advice to Addi, and for that matter Jock was great advice. And Jock would even have to admit that he waa far too bullish on the tech market, despite the fact that he sold off his largest holding two days before Naz hit 5000. He gambled and won, but over time, I believe that we would have given back about half of what he had made.
But the issue is where the market is at right now. And if one discounts the idea of deflation, then the market is seriously underpriced, and it represents a great value as measured by historical price to book value ratios.
And the concerns that I have about deflation are the following:
1. Productivity. It is very possible that the much hearlded increase in productivity during the bubble years could also account for a deflationary environment, since businesses will be able to do things cheaper with the same amount of expenditures. This means twice the problem, since it also means less business investment, and the two together (less investment and more bang for the buck) could combine for a deflationary spiral. And while this might mean businesses are able to go out and compete for more business, the problem is where do you go for business, when others are cutting back. This in turn means lower margins, which in turn means more deflation.
2. While China will bring billions of consumers to the market, the likelihood is of much more competition rather than consumption, so the more immediate effect will be a deflationary environment, particularly coming from a country that may not honor patents and other business arrangements that are necessary to maintaining margins. (After all this is still a Communists regime, and I can tell you from first hand experience, that Communists will rationalize their failure to adhere to patent agreements is done on behalf of the workers whom they represent.
3. Deflationary cycles are very difficult to break--more than inflationary cycles--see Japan
4. Worldwide cycles are more difficult to break than country wide cycles, and we have never had a world wide recession/depression that resulted in deflation NOT result in a World War.
5. The US instituted tariff restrictions on steel imports last year. That seems a lot like Smoot Hawley, which was a major contributor to the depression of the 1930s. If this trend continues, we could have another world wide depression, which has in the past brought about deflation.
6. The terrorist attack of 9/11 was a very minor event in terms of actual damage. (try rebuilding an entire downtown as the Poles did after world War II). But the effect on business travel was huge. Imagine what a large scale terrorist attack would do to the international business global community. In the event of a major terrorist strike against the US, the world economy could go on shutdown for a two or three year period.
Thus, as you suggest, the possibility for a world wide depression and or deflation is very real.
Lady JH.
"In the end, it's all about fundamentals. The technical crap is just that, crap"--JH |
