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On the days that I don't publish, like today, you receive
Bill Bonner's DAILY RECKONING. This will help you to keep
pace with the changes in the markets. Bonner and I agree
on most things in the field of economics, so the two letters
reinforce each other.
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Full Of Holes
THE DAILY RECKONING
PARIS, FRANCE
FRIDAY, 25 JANUARY 2002
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*** Happy, happy thoughts from Baron von Greenback,
the Wayne Newton of the Fed...
*** Block parties on Broad Street...rather, the lack
thereof... just a nine iron away from here...
*** Pitfalls of the "dollar cost averager"... and,
without a doubt, more...
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"Greenspan Less Dismal Today," said a CNN
headline.
The world's most successful central banker says
things are looking up. Eric has more details:
******
Eric Fry in New York...
- Alan Greenspan doled out happy thoughts to his
Congressional audience yesterday, but Wall Street was
listening in.
- "There have been signs recently," said he, "that some
of the forces that have been restraining the economy
over the past year are starting to diminish and that
activity is beginning to firm."
- Investors responded to the Chairman's hopeful forecast
as if it were inside information. The Dow climbed 65
points 9,796 while the Nasdaq rose 20.20 to 1942.
- While some investors were busy buying stocks, a few
were also selling bonds. That's the standard "recovering
economy" trade - buy stocks and sell bonds. The yield on
the 10-year Treasury jumped back above 5% to 5.02%.
- But no matter what Greenspan says, the boom is over
and it might not be coming back for a while. Even if a
few hapless tech stock investors remain in denial, the
boom is over. The evidence is inescapable.
- Exhibit A: "Block parties" on Broad Street are
virtually extinct. Block parties are (were) those
ostentatious, pointless events that public companies
used to sponsor as a way of promoting a new listing on
the NYSE. For example, when Krispy Kreme moved from
Nasdaq to the NYSE, the company set up a block-long tent
along Broad Street from which a small army of Krispy
Kreme employees dispensed free donuts and coffee to all
passers-by.
- Throughout 1999 and 2000, these parties became an
almost-daily affair. Many would be as extravagant as
Krispy Kreme's. Others would consist of little more than
handing out free logo-emblazoned baseball caps or mouse
pads. But even these more modest of affairs have become
extremely rare. For one thing, since September 11th,
milling about on Broad Street is prohibited. You need to
present a photo ID to pass by the exchange, and that
takes the wind right out of that old party spirit. More
to the point however, frivolity and falling share prices
don't mix...somewhat like a Salsa band at a funeral.
- Exhibit B: I heard a rumor yesterday that a couple of
prominent Wall Street firms have put an end to "Casual
Friday." The rumor included the following anecdote: The
CEO of a major brokerage firm steps onto an elevator
with two very casually attired men. The two were dressed
in khakis and polo shirts, as if headed to a friend's
house to watch football and drink Budweiser; NOT as if
headed into the company conference room to hammer down a
$1 billion investment banking deal. The CEO asks
gruffly, "Hey, where do you guys work?" The men stammer,
"F-F-For you." The CEO says, "Then get the [expletive
deleted] out of here. Go home, take off that [expletive
deleted] you're wearing and put on a proper business
suit!"
- But even as Casual Fridays fade into history, vestiges
of the boom remain. I ate lunch yesterday at a new
restaurant in Downtown Manhattan called "Les Halles."
The name of this Parisian-style brasserie - as the gang
in the Paris office will note instantly - refers to the
commercial district about a 9-iron away from where Bill
pens the Daily Reckoning every morning.
- The restaurant was very nice, although I have no doubt
that a visiting French tourist would have no trouble
finding some off-putting deficiency with the quality of
the restaurant's food, or its decor, or its American
patrons, or all three. But my "Moules Poulette" were
superb.
- Anyway, my friend and I showed up about 12:15 to a
half-empty restaurant and were told, "Desole‚ Messieurs,
we are completely booked. You may eat at the bar if you
wish."
- We chuckled to ourselves, knowing that no restaurant
in Lower Manhattan is "completely booked" for lunch. But
we sat at the bar anyway, to placate the hopelessly
naive hostess. Within 15 minutes, every table was full.
Within 20 minutes, people were hovering around the bar
waiting for a table. Within 25 minutes, more people
arrived and had to wait outside. And for those few
magical minutes, it felt like January 2000, rather than
January 2002.
- Upon returning to the office, the time warp lingered.
Greenspan had just finished telling Congress about how
our economy was poised for growth, and stocks were
racing ahead. Let's see how long the dream lasts.
- Listening to Greenspan yesterday, investors seemed to
be heartened as much by what Greenspan didn't say
yesterday as by what he did say. For example, he did not
repeat the troubling sentence he uttered two weeks ago
in San Francisco, "I would emphasize that we continue to
face significant risks in the near term."
- Rather, he "excised" this remark, as Northern Trust
economist Paul Kasriel astutely observed, and chose
instead to "accentuate the positive."
- Who are we to quarrel with the Chairman? Go economy!
Go stocks!
******
Back in Paris...
*** We don't know where stocks are going. But we know
where they ought to go - down! As you know, Abby Cohen
lowered her estimate for corporate earnings next year -
from $47 to $34. Of course, Abby has no more of a clue
than Alan. They simply look at the headlines and expect
more of the same.
But even if Abby's estimate were right by accident, it
would still leave the S&P priced at 33 times earnings.
What kind of market is priced at 33 times earnings, we
ask ourselves?
One that hasn't yet had a real bear market, comes the
answer.
*** "Dollar cost averaging" means buying the same dollar
amount of stock each month. Say you decide to invest
$500 per month. Rather than worry about when is a good
time to buy stocks, or whether stocks are expensive or
cheap, you just invest your 500 bucks each month. When
stocks are cheap you get a lot for your money; when
they're expensive, you get a little. But, since stocks
'always go up over the long run,' you end up rich. At
least, that notion was popular with the
lumpeninvestoriat, the same people who once saw nothing
wrong with a Nasdaq over 5,000.
Well, how have the dollar cost averagers actually done
over the last few years? Alan Newman, editor of
CrossCurrents reports, in Barron's, that $500 invested
each month since the beginning of 1997 until the end of
2001...that is to say, through the biggest stock market
boom of all time...would have produced a profit of
$1,243.89, including dividends. That works out to an
annual rate of return of 0.82% on the $30,000 invested.
*** Strange, isn't it? Stocks are near all-time highs.
And yet, a person who bought an equal dollar amount of
them each month for the last five years has made no
profit.
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FULL OF HOLES
by Bill Bonner
There are a lot of different ways a man might get rich.
He might buy a winning lottery ticket, get lucky in the
stock market or hold up a bank. We don't recommend any
of these paths to wealth. Not that they wouldn't work.
But what would be the point? For the wealth would not
really be his, but - like a portrait of someone else's
ancestor - merely in his possession.
If a beautiful woman comes up to you on the street and
gives you a kiss, mistaking you for someone else, that
would be fun for a moment too. But imagine the
disappointment, after the thrill is soon gone, and the
longing remains.
And if that is not the way it really is; that is how it
should be.
Money can be gotten in many different ways. Some quick
and easy. Some sordid. But real wealth has to be earned,
by hard work, taking chances and forbearance. I bring
this up to introduce today's topic of discussion:
productivity.
Real wealth is the ability to produce goods and
services. A man who has to dig in the dirt with his bare
hands is a poor man, because he can produce little. A
man with a shovel is richer. And one with a backhoe is
richer still. The man with a backhoe can dig more holes
faster. He is, generally, more productive.
Is it necessary to point out that the real wealth of a
society is measured by the number of backhoes and other
productive machines it owns, not the number of stock
certificates or dollar bills it has? I hope not. So, I
will not.
In today's world, computers can be as productive as
backhoes, or so it is believed. So, it seems appropriate
to measure the wealth of the society in the number and
capacity of the computers it turns out. This then is the
key to understanding the 'productivity miracle' of the
late 90s. As computer technology advanced, you could get
a lot more computer for your money.
"There is no world so deflationary as the IT world,"
says Grant's Interest Rate Observer.
Many times have we discussed the curious logic of the
Labor Department. Its 'hedonic' toting system meant that
an increase in computing power was counted as though the
amount of money spent on computers had gone up - even
though actual spending may have actually declined.
Counting the fictional dollars spent on the new
machinery as though it represented additional output,
back in the '90s, the statisticians reported big boosts
in productivity.
We have explained 'hedonics' often enough to bore and
confuse Daily Reckoning readers. We promise, we won't
make that same mistake today. Instead, we will make an
entirely new mistake. And only because we have been
provoked by Alan Greenspan himself. The Wayne Newton of
the Fed has been singing the praises of IT-induced
productivity increases for so long he doesn't seem to
know when to stop.
"As we have witnessed so clearly in recent years," said
the Fed chairman as recently as two weeks ago, "advances
in technology have enhanced the growth of productivity,
which, in turn, has been essential to lifting our
standards of living."
Is that so?
First, we will point out - even in the flattering light
of the government's 'hedonic' scoreboard - that
continued high rates of productivity growth depend on
continued drops in the price of computing power. Will IT
technology keep dropping in price? Not likely, we would
guess.
Second, we add a, shall we say, deeper problem. An
economy that can dig holes cheaply can also dig big
holes for itself cheaply. Only the holes that serve a
useful, productive purpose - in the long run - add to
real wealth. The Labor Department has no way of knowing,
of course. To statisticians, a hole in the ground is a
hole in the ground.
Several studies have failed to find evidence that the
holes dug by IT technology did anybody much good. So
what if computers are more powerful? So what if American
businessmen have more information at their fingertips
than ever before? A McKinsey study found the
relationship between IT investments and productivity
"murky."
IT technology was widely believed to have almost
mystical productivity properties. The "network effect"
was supposed to make your business more productive
thanks to the increase in IT spending by your
competitors!
But a new study, by economists from Harvard and the Fed,
found no proof of a 'network effect.'
And third, the drop in the price of computer technology
may say little about U.S. productivity anyway. Gert von
der Linde, a Wall Street economist, paraphrased in Grant's:
"A little noted fact of the information age... is that the
U.S. is a sizable net importer of IT equipment.
"If the principal source of productivity growth is
computer and related hardware, and if the balance of
this hardware is imported, can the resulting growth in
output per hour of labor be fairly characterized as
'American'?"
We will ask the question another way. If American
'productivity' depends on buying more and more goods
from overseas...at lower and lower prices....will
increases in productivity be a good thing or a bad
thing?
Until Monday,
Bill Bonner
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