Jose G. Perez
jgperez at SPAMfreepcmail.com
Tue Nov 2 22:05:41 MST 1999
I'm not an adherent of the "new paradigm" school insofar as I understand
it. I do not believe "digitalization" means that the economy has permanently
"jumped" to a higher level. What I believe is that the *introduction* of
this labor saving technology has *temporarily* boosted U.S. growth and
productivity increase rates. I believe this is clearly what has been
happening over the past 6 or 8 years, as the use of Internetworked computers
has spread throughout the economy, replacing older, less efficient methods
of getting things done.
In other words, I think the "boom" (compared to the 1970s and 1980s) is
due to one-time, so to speak, savings derived from the *change.* It do not
at all believe the higher growth rate and lower unemployment of recent years
is going to continue indefinitely.
My guess is that it is going to continue for several more years, and
the whole changeover "boom" would have lasted on the scale of 10, 15 or 20
years, a few business cycles.
On the stock market, there is clearly and unambiguously a "bubble" in
the Internet sector, and which extends somewhat also to the rest of the
computer sector. It is however not necessarily true that the very high
levels of the market as a whole represent a bubble. I've not looked
recently, but if the S&P 500 p/e ratio is still somewhere in the 20s, that
seems not entirely irrational, given the very positive economic
The Internet sector is a different story and there what is involved is
"fictitious capital." What I mean by that is that an Internet stock, let's
call it sucker.com, gets floated in the stock exchange. The "float" is, say,
5 million shares, with 95 million remaining in the hands of the company
founders, the venture capitalists, stock options and so on.
Those 5 million shares quickly get bid up to $100 each, and since there
are a total of 100,000,000 shares, that gives sucker-dot-com a total "market
cap" of 10 billion. That's all well and good until someone, like, say, the
founder of sucker tries to convert his shares into real money, and puts,
say, 10 million shares on the auction block. What will happen is NOT that
he'll get $1 billion, but that the stock price will collapse. The very high
valuation is a function of a relatively small float and of the number of
people in the market betting and speculating that someone else will pay $105
or $110 for a share of sucker in a few weeks.
See, nobody really believes sucker.com is worth 10 billion.
Some think it might, just might be the next Microsoft and someday will
be worth a trillion dollars and so they're willing to bet $100 a share on
the slim chance this might be the case. It's like playing the lottery,
everyone knows that, on average, the payout is less than half what you pay
for the ticket, but people are willing to pay a premium for the chance of a
truly life-altering windfall.
The rest of the sucker-dot-com stockholders in the market aren't betting
that one day one share will be worth a million dollars or something. They're
just betting that there's going to be someone willing to pay $110 in a few
days or even hours. This is the dominant element. The second sucker.com
starts to go down, they'll cut their losses by flooding the marker with sell
orders, leading the price to collapse to the teens or even single digits.
That's not true of established companies. If you have a big stake of an
IBM or some other company, you can often get a PREMIUM for your shares. Thus
when Ted Turner and the other investors in Turner Broadcasting (mostly cable
companies) sold out to Time Warner, Time Warner paid more than $30 a share
for a company that was trading at a little more than $20/share. Moreover,
Time Warner paid with its own stock, which savvy investors knew was
significantly undervalued then in the high 30s/share.
In the case of dot-com takeovers, nobody is willing to pay full price
for the stock, save other dot com companies whose own paper is just as
insanely overvalued as that of the outfit being acquired.
It is quite possible to unwind these insane dot-com stock market
valuations without affecting the real economy. The main condition for this
to happen is that the stock in the hands of insiders not be the guarantees
for a bunch of loans, i.e., that not too much of this fictitious capital has
gotten inextricably intertwined with the real capital of banks, brokerage
houses and so on through a process of leveraging.
As for the rest of the market, the truth is that the financial TV
gasbags and stockjobbing talking heads every few months work themselves up
into a frenzy of speculative buying or maniacal selling. Every time they do,
they seem to be able to drive the market up or down nearly 20%. Then they
turn around and do the same thing in the opposite direction.
The important thing to remember about all these people is that they make
their money on commissions. It is not nearly as important to them whether
stocks go up or down provided they have some story to tell their clients to
convince them to buy or sell. The truth is quite a few academic statistical
studies have been done showing throwing darts at the financial pages to pick
a few dozen stocks is going to give you, over a period of several years, a
much better return than 99% of these jokers, PROVIDED you don't constantly
buy and sell. You will very rarely hear that mentioned among all the
"analysts" and "experts" because it would leave them all on the street
looking for a real job.
From: Doyle Saylor <djsaylor at primenet.com>
To: Marxism List <marxism at lists.panix.com>
Date: Tuesday, November 02, 1999 12:12 AM
Subject: Re: New Metropoles
> I was reading Alan Abelson in Barrons magazine (page 5, Nov. 1, 1999
>edition). Abelson has a chart (called Awesome!) of the current stock
>levels of capitalization compared to 1929. By any measure, this is the
>precipitous bourse bubble in world history. The current level of
>capitalization is to quote one and one half the GDP of the U.S. Of course
>there are a lot of people like Jose who feel this is a new paradigm. That
>is the way of these sorts of economic miracles where people "feel" things
>have changed, before the sudden transition comes along and down goes the
>curtain on the first act. I'm not saying Jose "feels" anything, he was
>using stats to back his claims, but on a large scale lots of people have
>stopped thinking this market could possibly go down. It just can't happen.
>Every 10% gyration that goes back up immediately just teaches everyone the
>same lesson, it can't go down, the economy is way too strong. It will grow
>and grow until the end of time. Sustainable growth based upon the use of
>computers to enhance low inflation growth. Just growing and growing, not
>ever dying, not ever turning into the bad old days. That is only for
>Russians and others besides the good ole USA.
>..."Not the least of them (possible troubling skeletons for investors to
>contemplate) is that the beanstalk rises of the past couple of days might
>just as easily be one of those devilishly deceptive bear-market rallies as
>the start of something big. Hard to tell, since both can begin with
>eye-popping, perpendicular launches.
> "What's more, we think the notion, formulated above, of a reanimated
>bull market soaring toward new peaks and, in the process, further
>a very energetic economy is a plausible one. The Fed, for the moment, may
>have decided to ignore the bubble, but if the bubble expands again in
>earnest, the guys will have to ditch the jabber and actually do something.
> "And since the Street is now firmly convinced that there's no immediate
>danger of decisive Fed action, the markets obviously are much more
>vulnerable than they have been to a surprise hike, even a modest one. Or,
>for that matter, to a shocker of an employment report.
> "The bubble makes the Fed much more gingerly in its approach to any
>perceived stirrings of inflation, much more reluctant to aggressively and
>preemptively raise interest rates. But the bubble also means that if, for
>whatever reason, the Fed does move aggressively on rates, the effects could
>be, in a word, ugly...."
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