d,
My reply is a shorten copy of a post by Alex of one month ago.
To anyone wondering "his reply to what?"
it is not important, as its the same stuff,
here today & gone tomorrow
those gold prices and bubbles.
To: PaulM
From: Alex
Mar 25, 2000
Technology and history - why this boom must end
By Peter Hartcher
David Hale, global economist at the Zurich Group.
We have a whole subculture feeding on itself.
It's the bell-hop syndrome.
... men's business suit with flecks of real gold stitched into it
... echoes the Tokyo bubble of a decade ago
... the shavings of gold atop the sushi
The rally has also swept up some of the poorest Americans.
One New York entrepreneur set up a stock investment fund
specially for low-income ... and welfare recipients.
... goes door to door scouring ghettos for investors.....
The market's great boom has proved so strong and so durable
that it seems almost invincible.
... the last ones to arrive are the most wildly bullish.
... investors who'd been in the market for 20 years
expected annual stockmarket returns of 13 per cent.
People who arrived in the past five years ... 23 per cent
It is a case of "monkey see, monkey do,"
Charles Kindleberger, professor emeritus at MIT
... in his classic work - Manias, Panics and Crashes
... a one liner that always gets a nervous laugh:
"There is nothing so disturbing to one's well-being
and judgement as to see a friend get rich."
... the sceptics have been on the losing side of the market.
The billionaire speculator George Soros spent 1998
and most of 1999 punting that the most overvalued stocks,
those of internet companies, were headed for a fall.
He shorted the market and waited for the inevitable crash
to deliver him big profits. It didn't arrive.
Last October Soros abandoned his judgement
and started buying internet shares.
He ended the year with a 40 per cent gain.
The Chinese have an old saying for this:
When all around me are going mad,
how can I alone remain sane?
... perhaps it is not madness.
Maybe the mob has it right.
... surely this is utterly unlike
the great episodes of speculative madness of the past?
The Dutch tulip craze of the 17th century,
the South Sea Bubble of the 18th,
and the Tokyo land mania of the 20th
were based on a simple scramble for a commodity.
The only reason the commodity had value was that it was in short supply.
This time, there is a technological revolution
which is transforming the world's biggest economy, right?
Not so fast.
The promoters of Wall Street's latest frenzy
depend on four big stories to sell their wares.
All are only partly true, or completely phoney.
None will prevent this vast boom,
like every one that has ever preceded it,
from ending.
Claim number one:
============
There is a new economy which is based on new technologies
that have allowed productivity to accelerate in the US economy.
This allows the economy to raise its safe speed limit,
growing faster without hitting the customary speed bumps of inflation.
This, in turn, should keep the economy booming.
... productivity growth has accelerated.
After two decades of 1.1 per cent
... since 1995 to 2.1 per cent a year
The magazine Business Week lauded this as a "productivity revolution".
Robert Gordon, a productivity expert at Northwestern University
... presented his conclusion to a Federal Reserve conference in Chicago
... the improvement, he said, was concentrated in just one,
small slice of US industry - the computer hardware industry,
which accounts for only 1 per cent of the US economy.
... been no productivity growth acceleration in the 99 per cent
of the economy located outside the sector
... A final conclusion is that every observer of the economy,
from Business Week to Alan Greenspan,
has been misled about the economy's performance.
Could this be true?
The board of governors of the Federal Reserve
put one of its own economists,
Karl Whelan, onto the job.
In a paper published last month,
Whelan decided that Gordon was right:
"We did not find any evidence that [productivity] growth has picked up"
outside the computer hardware industry, he wrote.
So much for the productivity revolution
and the new economy it was supposed to sustain.
Claim number two:
==============
Technology companies can turn in stellar performances,
even if the overall economy does not.
This can be quite true, but it is not the whole story.
When you buy a share in a company,
you are buying into two separate phenomena.
One is the company.
You also buying into a pattern of stockmarket behaviour.
However, even if the company and its technology
turn out to be brilliantly successful,
its price is set by the financial markets,
and the financial markets move with their own rhythm.
What does this say about the future of US tech stocks,
which account for a third of the total value of the US stockmarket?
Jeremy Siegel,
Professor of the Wharton School at the University of Pennsylvania,
is famous in the US as a strong and consistent advocate
of the stockmarket as a good long-term investment.
His 1994 book, Stocks for the Long Run,
became the Bible of the professional stock promoter and salesman.
Last week he issued a warning.
Right now, he says, Wall Street
"has been driven to an extreme not justified by any history".
His evidence?
History has shown.....
if a share is trading at a price
50 to 60 times the earnings that it generates,
its price to earnings ratio or P/E,
no matter how great the company,
... buyer beware.
How do today's stock prices compare with this benchmark?
The 100 biggest companies listed on the Nasdaq
were trading during the week at an average P/E ratio
of about 100 times.
Many darlings of today's Wall Street fashions
are trading with P/Es of several hundred.
Last year, America Online traded at a P/E of more than 700.
Siegel pointed out in The Wall Street Journal
that in the history of the US market,
whenever a stock has traded at anything like this ratio,
it has subsequently underperformed the overall market
for a quarter of a century or more.
He cites two examples of world-class companies from the late 1960s,
Polaroid, which boasted a P/E of 95, and IBM, with a ratio of 50.
These companies were dominant and extremely profitable.
But Polaroid rewarded investors with a negative return
over the next 30 years,
and despite its recent recovery,
IBM made less than half the market average
in the years since that peak.
Claim number three:
===============
... this is based on optimism, not analysis. "The Tinkerbell approach"
Buffett says it would have been smarter
to short the market for horses
than to invest in cars.
Claim number four:
============
Even if interest rates continue to go up,
it won't hurt technology stocks.
The basis for this claim?
Traditional companies hold debt.
They suffer when the interest rate on that debt rises.
But new technology companies have mainly equity,
which is unaffected by rate rises.
"Anyone who says that doesn't know their economics,"
says Jim Walker chief economist
at Credit Lyonnais Securities Asia
and twice voted the best economist in Asia.
The technology company might not borrow,
but the people who do borrow are their customers.
And so the rising rates will hurt their customers.
... what has been pushing share prices so high for so long?
Kindleberger points out that a mania almost always begins
in a time of low interest rates and easy money.
And indeed it has been the gusher of liquidity that has created the boom.
Kindleberger points out that rising interest rates,
a tightening of the liquidity tap,
are usually the death knell for such booms.
Mark Twain probably had it right
when he remarked
that history may not repeat,
but it rhymes. |
