"This boom was supposed to be different"

Louis Proyect lnp3 at SPAMpanix.com
Thu Dec 21 07:17:58 MST 2000

NY Times, December 21, 2000

Market Paying Price for Valuing New-Economy Hope Over Profits


This boom was supposed to be different.

Even after the stocks of money losing Internet retailers like Amazon.com
collapsed last spring, investors kept faith in the limitless potential of
companies that were building the Internet itself. From giants like AT&T to
no-names like the optical equipment maker Corvis, which briefly this summer
was worth more than G.M., technology and telecommunications companies
raised $330 billion from American investors and venture capitalists this
year, about $1,200 for every American.

But since September, the boom has turned into the deepest bear market for
technology stocks in a generation, as investors worry about the prospects
for continued growth. Intel is down 58 percent from its high. Cisco Systems
has fallen 55 percent. Lucent Technologies has dropped 80 percent.
Yesterday, stocks skidded again, with the technology-heavy Nasdaq composite
index falling 178.93 points, to 2,332.78, and the Dow Jones industrial
average losing 265.44 points, to 10,318.93. [Page C1.] The Nasdaq has now
fallen more than half from its high set in March and, after a summer rally,
almost 45 percent since Sept. 1.

When the dot-com bubble burst in the spring, a roaring economy hardly
noticed. The broad crash in technology stocks this fall has swept over more
investors and bigger companies by far, erasing more than $3 trillion in
stock market value - enough to destroy the portfolios of investors who
moved into technology stocks late, though long-term investors remain ahead.
Today, it is a major factor in the slowdown in the American economy.

Analysts, economists and business executives now worry that the binge may
take years to cure. Blinded by the potential for vast new markets, they
say, companies and investors alike fell into bad habits that Wall Street
only encouraged.

Corporate managers came to value sales growth over profitability, adding
employees and building factories in expectation of limitless demand.
Putting too much trust in the executives' rosy predictions, Wall Street
analysts failed to independently investigate the prospects of the companies
they covered. In turn, investors, as they had with the dot- coms, forgot
the most basic rule of valuing stocks - that profits ultimately dictate
share prices.

Full article at: http://www.nytimes.com/2000/12/21/business/21MARK.html


[posted to the Marxism list in June 1999]

Peter Camejo's Long Wave

I don't know how many people have been following the various commentaries
on Robert Brenner's NLR article "The Economics of Global Turbulence", which
have appeared in Against the Current. John Bellamy Foster and David McNally
have articles on Brenner in the latest Monthly Review. I recommend that
everybody try to read as much of this material as possible, including a
piece by Peter Camejo in the latest ATC. Camejo's article unfortunately is
not on their webpage (http://www.labornet.org/solidarity/), where a shorter
version of the NLR article and various commentaries can be found. It is an
extraordinary contribution to say the least. Camejo's position, which is
the dialectical opposite of Brenner's pessimism, is that there currently is
no stock market "bubble" and that, if anything, stocks are a reasonable
investment and no risk at all.

Against the Current identifies Camejo as an "independent Marxist living in
San Francisco," so one might conclude that his confidence in the stock
market was arrived at after immersing himself in the Grundrisse for a year
or so. It is unfortunate that ATC neglected to mention that Camejo is the
founder and CEO of Progressive Assets Management, a brokerage house
targeted to the wealthy liberal market. It is in his material interest for
the stock market to do well, since his livelihood depends on it. This is
not to say that he cynically patched together a bunch of apologetics, but
rather that his economic situation almost inevitably would determine his
political analysis despite his best intentions.

Having said that, we should now turn to some of his eye-opening arguments.

To begin with, he states that something is qualitatively different about
this period of capitalist expansion, which maps to the bull market we have
seen since the early 1980s. Namely, the silicon revolution has dramatically
increased the productivity of labor. He writes, "We are living during the
greatest technological revolution of all time, based on the microchip and
other advanced technologies, and that will continue into the foreseeable
future." This is just another way of stating that we are in a "long wave"
based on computer technology. Many reputable Marxists, including Ernest
Mandel, believe in such phenomenon. Speaking as somebody regarded by many
as a disreputable Marxist, I view long waves as one step above astrology.

The problem with this theory is that it tends to abstract out more
fundamental questions such as the ability of firms that depend on such
technologies in their totality to stay viable as more and more workers are
displaced by machines. It appears puzzling that an "independent Marxist"
can let this classic contradiction in Marxist terms float by him without a

As Harry Shutt points out in "The Trouble with Capitalism," a conspicuous
feature of industrialised economies from the early 1980s has been "the
tendency of established companies, in the service sector as well as
manufacturing, to regard the application of cost-cutting new technology to
their existing operations (without necessarily expanding capacity) as one
of the most profitable ways reinvest their accumulating profits. This has
effectively turned on its head one of the most sacred assumptions of
post-war political economy, namely that increased investment has a positive
impact on employment (a still cherished shibboleth of the British Labour
Party and trade unions). At the same time the resulting process of
corporate 'downsizing' reinforced a gathering tendency on the part of
governments quietly to abandon their commitment to full employment as an
overriding goal of public policy."

"The upshot of these tendencies has been a further increase in joblessness
since the early 1980s, giving rise (particularly in Europe) to the
phenomenon of 'jobless growth'. This has meant that, taking the 1974-1994
period as a whole, there has been negligible growth in the numbers of
employed people in the countries of the European Union at a time when the
level of economic activity (GDP) has expanded significantly, albeit at a
much slower rate than in the 1950s and 1960s. Indeed in the most extreme
case, that of Spain, employment actually fell by over 8 per cent over the
period as a whole, at a time when the economy virtually doubled in size."

Since Camejo practically identifies the term crisis with yesterday's the
performance of closing prices on the S&P 500, the unemployment rate hardly
puts a damper on his breathless enthusiasm for the Great Technological Leap

Turning to another key question, Camejo describes the term "bubble" as
inappropriate for the American stock market. One key indicator, the P/E
ratio, appears consistent with the earnings expectations of American
corporations. His methodology on this matter somewhat eludes me, so I will
let him explain it himself:

"The rule of thumb on Wall Street is to multiply U.S. government interest
rates by .76, invert the number and multiply by 100 to get a
price-to-earnings ratio. If we do that with interest rates at 5% we get a
26 P/E. Estimates for 1999 earnings on Wall Street for the S&P 500 are over
$50, which at a 26 P/E gives us an S&P of at least 1300, whereas the S&P
500, or about a 25% drop. A drop to 920 would only put us back to where the
market dropped on October 8, 1998."

(If this makes your eyes glaze over, you should go through the experience
of a Camejo sales pitch on indexed options, which I heard on a regular
basis in the mid 1980s. "Louis, there's no way you can lose...")

The problem with something like a P/E ratio is that it is based on future
earnings expectations. How in the world can one predict what that will look
like in a year or two? It is odd that Camejo is so enamored of this rather
dicey ratio, when he faults Brenner for predicting capitalist downturn. In
either case, you are simply speculating. Perhaps a more reliable figure is
dividend yield, the old-fashioned income generated by safe, conservative
equities such as utility companies. They are favored in Personal Trusts and
other white-shoe investment plans. As it turns out, dividend yields are at
an all-time low and Microsoft, everybody's favorite stock, pays none. Those
who want to put a positive go-go spin on all this claim that dividend
yields--like pensions and social security--are a thing of the past.

Another interesting contrarian position found in Camejo's article is that
Americans do save a lot, despite all reports to the contrary. He bases this
on home ownership and designates a mortgage payment as a form of savings. A
house is not a home in Camejo's world, but an investment. Based on this
approach, "The fact is that U.S. citizens on the average have a larger
'savings' account than those of any other country, almost 40% higher than
supersaver Japan. Somehow this does not square with my understanding of the
post-WWII situation, when most American workers not only owned a house, but
had a savings account as well. Beyond this, most employees of Fortune 500
companies also could look forward to cashing in on a company pension plan,
which guaranteed a fixed income based on longevity. The fact that most
Americans today own nothing but their house, and owe a greater percentage
of income to consumer debts--a fact neglected by Camejo--seems expressive
of a general downturn, despite the number of laptop computers seen in
Starbucks or the number of people walking down the street with a cell phone
glued to their ear.

Finally, Camejo believes that American companies can not be judged simply
by book value, which is at an all-time low. Book value is the sum of the
assets of a company, like buildings, machinery, land, cash on hand minus
liabilities. Camejo has discovered a new asset that has never been
considered before, namely the amount of labor time required to qualify an
individual for employment. Microsoft, which has a very small book value
compared to old-line manufacturing firms like GM, should have a much higher
book value by this definition since it takes so long to train a computer
programmer. The problem with this analysis is that it fails to take into
account the highly speculative character of most high technology firms. The
amount of training required for an average employee of some of the highly
speculative Internet companies should also give them a very high book
value, when in fact all they usually are is an office space with desks,
telephones, personal computers, rubber trees, a water cooler and a coffee
machine. Expresso in the more leading-edge companies, but that's about it.

I am not sure about Brenner's basic thesis and plan to read Foster and
McNally this weekend. I generally have relied on Harry Shutt's excellent
book from Zed Press and once again urge others to read it to get a handle
on what's going on.

Louis Proyect
Marxism mailing list: http://www.marxmail.org

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