THE EMPEROR HAS NO CLOTHES
...But then, traditional valuations have nothing to do with the price of Amazon.com either, so maybe the market can keep going higher...
This kind of talk seems so unprofessional, and yet I hear it from every corner. Professional market watchers and commentators are willing to point out that the current stock market valuations, especially of Internet stocks, have completely left behind standard expectations -- but no one is willing to actually say it in the right way --
The Emperor has no clothes!
The stock market is dangerously overvalued -- I say dangerous because when it does return to its normal levels, a lot of people are going to lose a lot of money. And this is going to severely hurt confidence. That combination could actually trigger a cycle of decline, perhaps deflation and recession.
Remember "soft landings?" We used to talk about the economy making a soft landing -- a decline or slowdown that was not cataclysmic, did not create a panic, did not fundamentally alter the way we think about the world, and therefore act in the world. Our leaders right now, however, seem to be careening down a path toward a very hard landing.
We are walking through a dangerous minefield. There are real structural problems out there -- in Asia, in Europe, in South America, in the former Soviet Union... virtually everywhere. Even in the US we calmly talk about growth "slowing" in 1999. Yet everyone wants the party to go on so badly that there is an enormous incentive to shrug our collective shoulders and say "gee, I don't know why valuations have gone crazy, but isn't it nice?" Where are the critical thinkers? Where are the responsible elder statesman? Who is going to stand up and speak truth to power?
I would have expected Greenspan to be more proactive in calming the current speculative fever. A little two or three word comment from him might send stocks back down. It seems to me that this has to happen sooner or later -- wouldn't it be better for the economy if it happened in a gentle and gradual way?
The Wall Street Journal ran a great article last Friday, November 20th, entitled "Early Warnings: How to tell where the global economy may be headed next." This is one of the more responsible pieces of journalism I have seen, as it admits that there are really causes for concern out in the global marketplace. This kind of admission seems oddly missing from most press, analyst, and industry discussion today.
I was talking to an Internet industry analyst at one of the major banks today and he told me that they had raised their target price for one of the Internet companies they follow. What was the reason? They decided that the right formula was 15 times 1999 projected revenue as the value today. On what basis, I asked. What is the rational for making it 15 times vs. 50 times? The only reason is that this is where similar stocks are trading. The analysts are following the market trend and being apologists for it -- not leading the market and helping us UNDERSTAND something about where it will go.
The emperor has no clothes.
What a beautiful suit it is. |
