MB, Earlie:
A sane bear finally capitulates to new era thinking (maybe the sign of top):
January's Global Column: "The View From Wall Street"
MR. GREENSPAN'S LOTTERY PRINCIPLE
Johnnie Ely, a 66-year old short-order cook from the South Bronx won $100
million in the New Year's Eve Millennium Millions Lottery, the biggest
jackpot in New York State history. He played often, and he played big,
spending as much as $100 a week to buy lots of lottery tickets.
In the US stock market, many investors have adopted the same strategy as Mr.
Ely. They've come to believe that investing in technology stocks is like
playing in a lottery with a huge payout. Investors increasingly seem to be
valuing tech companies within a portfolio of several tech stocks-as a group
rather than individually. They figure the tech lottery will continue to have
a huge payout. So they are willing to buy lots of tickets at inflated prices
to play the game. "You got to be in it to win it," is their mantra. Some
stocks may disappoint; some tickets will be worthless. But many should meet
expectations, and at least some are likely to surpass projections if the
tech sector continues to grow so rapidly.
Interestingly, Federal Reserve Chairman Alan Greenspan, a year ago in an
unprepared response to a question during Congressional testimony, explained
this "lottery principle." He observed that while some of the high-flying
tech stocks might deserve to move even higher, most would probably crash.
That's the way markets work sometimes, he said. Then he added, "There's
something else going on here, though, which is a fascinating thing to watch,
and it's, for want of a better term, the lottery principle. What lottery
managers have known for centuries is that you could get somebody to pay for
a one-in-a-million shot more than the value of that chance."
Is this a good thing or bad? History shows that too much money chasing too
few "tulips" can cause a speculative bubble. When it bursts, both the
speculators and many innocent bystanders suffer the adverse consequences. On
the other hand, entrepreneurship and innovation require easy access to
capital. Capitalists willing to take risk are essential to human progress.
Without them, finance becomes an insurmountable barrier for would-be
innovators.
On balance, Mr. Greenspan believes that notwithstanding the speculative
excesses, the exuberance for technology stocks is healthy. "Of course
there's some hype. There's hype in lots of things. But there is at root here
something far more fundamental, and indeed it does reflect something good
about the way our securities markets work." The markets allocate capital to
finance new ventures even before earnings actually materialize. "That's good
for our system. And that in fact, with all of its hype and craziness, is
something that at the end of the day probably is more plus than minus."
This is a radical idea, especially coming from a central banker. Of course,
Mr. Greenspan is not from the same mold as most conservative bankers. When
President Bill Clinton reappointed the Fed Chairman for another four-year
term at the start 2000, he was giving a vote of confidence to one of the
most successful pro-growth central bankers ever. Unlike many of his
colleagues, Mr. Greenspan has championed a monetary policy which has given
the US and global economies plenty of room to grow, despite the risks of
reviving inflationary pressures. His willingness to take this chance has
paid off big time for the US and global economies, and stock investors
around the world.
So far, he has been right to take a chance on noninflationary growth. During
the 1980s and 1990s, the US real GDP rose 3% per year, on average. Since
1997, the annual growth rate has been 4%, yet inflation fell to 1.4% last
year. Mr. Greenspan apparently believes, as do I, that the potential growth
of the US economy is now 4% per year, a full percentage point higher than in
the past. On the supply side, productivity growth increased from 1.4% per
year in the 1980s to 1.8% per year in the 1990s and to 2.1% during the
second half of the previous decade. It could grow 2.5% per year in the
decade ahead, in my opinion.
On the demand side, technology spending has been adding more than a full
percentage point to real GDP growth in the US since 1996. Technology-led
growth is inherently disinflationary, if not actually deflationary.
High-tech prices are always falling. The Internet has become the "killer"
application, and it is killing inflation. Consumer-to-business and
business-to-business Internet applications are already putting downward
pressures on prices and costs. More and more products and services are
likely to be priced in highly competitive auction markets that are growing
on the Internet. General Motors and Ford expect to significantly reduce
their costs by creating such markets for the parts and materials they
purchase.
What is happening in the United States is not unique. It is happening all
around the world. Technology is truly a global industry. It is the fastest
growing industry on Earth. As in the United States, this development
suggests that all economies have the potential to grow at a faster pace
without reviving inflation in the decade ahead.
In the past, economic policy makers usually boosted government spending to
stimulate growth and tightened monetary conditions to reduce inflation. In
the New Era, they are promoting more competition, which stimulates growth
while dampening inflation. In a competitive marketplace, businesses can't
raise prices. To succeed, they must cut costs and boost productivity. They
must also innovate. This can be very expensive. By deregulating capital
markets, policy makers are making finance more available to entrepreneurs.
The risk is that Mr. Greenspan's lottery might become a huge global
speculative bubble. Easy access to capital can do that. However, the
exuberant demand for technological innovation is not the same as an
irrational demand for tulips. All revolutions have excesses and many have
ended badly. The technology revolution, however, is likely to be a great
source of global prosperity in the coming decade. |
