Another persons view
Diary of a Fund Manager
Robert Loest, Ph.D., CFA
Portfolio Manager
"There is no teacher but the enemy. No one but the enemy will ever tell you what the enemy is going to do. No one but the enemy will ever teach you how to destroy and conquer. Only the enemy shows you where you are weak. Only the enemy tells you where he is strong. And the only rules of the game are what you can do to him and what you can stop him from doing to you. I am your enemy from now on. From now on, I am your teacher." -- Mazer Rackham to Ender Wiggin.
Orson Scott Card, Ender's Game
Earlier Diary Entries
February 27, 2001: Thoughts on the Economy. Both funds are sitting on a fair amount of cash. I still think it's too early to do more than nibble, which we will be doing as the opportunity arises. We invest, as you know, in the fastest-growing sectors of the economy. These sectors are also more immature than the economy in general (or they wouldn't be growing so fast - duh), much more volatile than the overall Nasdaq, and uncertanties about how the future will turn out are also the greatest for such sectors. This means that the value of these companies' stocks is heavily dependent on estimates of conditions and large cash flows several years out, not moderate cash flows today. These cash flows are discounted back to the present. If a cash flow is years out, a change in our discount rate for that cash flow has a much greater effect on its present value than if it is nearer in time. As a result, small changes in The Market's evaluation of the future have a leveraged, or magnified effect on the present values of the least mature sectors and companies.
As an analogy, let's say you put a sum of money in the bank at 6% per year, and plan to leave it there for the next 10 years to draw out annual living expenses each year. If interest rates drop to 5%, it will affect your income and your decisions about how to live to a certain degree. On the other hand, if you put that money in the bank on the assumption you will get nothing now, but 12%/year over the last 5 years, and interest rates drop to 5% instead, your plans are affected much more drastically. This is analogous to the differences faced by mature sectors (autos, chemicals, retail, etc.) with moderate cash flows today, vs. immature sectors with large cash flows in the future (optical & data networking, telecom software).
If you watch too much CNBC like I do, you get the impression that the economy's welfare depends on Greenspan like the life of a POW depends on the goodwill and moods of his jailer. Everyone analyzes every little nuance of Greenspan's comments, waits anxiously for every appearance, and indulges in endless guessing games about what he will do next and what it means for the eocnomy. CNBC even devotes an entire, high-profile commentator to the subject on Squawk Box in the morning.
If a complex system like an economy actually does depend to this degree on the actions and thoughts of one single person, it's worse than unhealthy, it's dysfunctional. He isn't God, he's a human, who depends on an obsolete economic model and very sparse data, most of it with a huge time lag. It's simply impossible to steer even a simple economy that way, let alone something as complex and fast-changing as that of the U.S. economy. The old Soviet Union tried to run a much simpler economy this way, and it collapsed. They never did do anything right. And what's really scary, Greenspan uses the same model of the economy that they did.
Our economy does not, and should not, need to depend on what Greenspan does or thinks. If he is successful at what he does, no one will know he even exists. The economy is more open and less regulated than ever before, posseses virtually infinite numbers of feedback loops, and processes so much data so much more quickly than the Fed, it can adjust much faster and more effectively on its own. Unfortunately, the Fed and Greenspan have screwed things up very badly this time, by withdrawing far too much liquidity from the system.
It's because our government officials have come to depend on him to a far greater extent than in the past, and Greenspan has come to believe his own press. He is now taking actions that are completely outside the mission of the Fed. Adding huge sums of money to, and then withdrawing them from, the economy violates the most basic mission of the Fed, which is to maintain a stable money supply so that business has a predictable environment in which to operate. Clearly, Alan Greenspan, the Fed and our government have come to distrust the ability of a free market economy to adapt to changes on its own, and have come to believe that a single person knows more, and knows it sooner, than the markets do.
When you create a situation where something as complex as the economy depends to this extent to the decisions of one single person, whether he is right about something or not, it ought to be clear to the most dimwitted that this is not a healty situation, and creates a whole new level of uncertainties. Even corporate CEOs and the President of the U.S. do not have as much power as the press and government officials attribute to Greenspan. This dependence is exacerbating economic uncertainty, by adding uncertainty about what Greenspan will do next to uncertainties about the future for immature sectors and companies.
The economy will recover. The market will recover several months ahead of the economy. Nevertheless, as long as we allow the Fed chairman to violate the Fed's most basic mission, and tolerate a press that is spoon fed by government and Fed officials and unable to think for itself, we will have an economy with greater uncertainties and risks than it should have, and businesses will have a more difficult job of planning for the future than they should have. It is past time to replace Greenspan with a Fed Chairman who understands his job, and get on with the business of building our country's future with as little disruption and uncertainty as possible. |
