The stock market is closed today, for Good Friday and Passover. Stockbrokers and day traders will get a little rest.
I have just opened an interesting book entitled “Lights Out.” The book’s premise is that artificial lighting and lack of sleep are to blame for many of the biggest health problems in the modern world.
In today’s letter, I will make my small contribution to better health. If you are having trouble sleeping, please keep reading.
The subject is numbers. More specifically, the numbers that are said to measure what is really going on in the American economy.
The government has released inflation, GDP and productivity numbers that seem to support the contention that the New Information Era is paying off. In the last quarter of 1999, for example, real growth in GDP exceeded 7%. Not only was this an extraordinary performance, it was almost miraculous. As James Grant put it, the figures “may give the impression that the second millenium ended with a bang.”
Yet, as our own Dr. Kurt Richebacher, whom I have mentioned often, and now Mr. Medoff and Mr. Harless, cited by Grant, have shown: a more accurate reconstruction of the numbers gives a very different picture. Again, paraphrasing Jim Grant: In the final judgement of history, it may turn out that the second millenium ended in a whimper.
Numbers are important in the modern world. The change in something as minor as a decimal point can make a big difference to, for example, your retirement lifestyle.
The Heisenberg Uncertainty principle tells U.S. that there is a limit to what numbers we can have. You can know the mass of an atom, but not its momentum. Likewise, you can know the price of a stock–but not what direction it is going. In the case of the GDP, inflation and productivity figures, however, it is hard to know either with any certainty.
Uncertainty is not the problem. When you enter a dark stairway, you feel around with your foot until you find the stairs. But what if the stairway appears well lit?
The last quarter of the last year of the 1900s produced an astonishingly strong burst of growth. Before the inflation adjustment, the U.S. economy grew at 9.4%. I have already described the way that number was elaborated– thanks to extravagant spending on Y2K on Information Technology…and a remarkable new convention among the number crunchers…granting to the IT sector, and it alone, output figures based on computer processing rather than actual spending.
So the economy did not really grow by 9.4%. It grew, in dollar terms, by an amount significantly more modest. Readers may recall that the Old Economy still makes up more than 95% of all economic activity in the U.S. Yet, “information processing equipment and software” according to Dr. Richebacher, accounted for 90% of the total increase in private fixed investment. This is not because of actual spending on computers. Actual spending increased $9.2 billion. The statisticians didn’t crunch this number as they did the others. They didn’t crunch it at all. They let is expand. Like an escapee from a fat farm, $9.2 billion became $66.3 billion. http://www.dailyreckoning.com/rich_report1
Dr. Richebacher also points out that half of the 4th quarter’s real GDP number came from increases in government spending and inventories. Without the increase in inventories and government spending– neither of which foretell robust economic times ahead–and deflating the IT sector to actual spending…the real GDP number is closer to 3% than 6%.
Real GDP is calculated by taking the gross figure and removing inflation. For the last quarter, for example, the statisticians knocked off 2.1% of the raw GDP number as an inflation “deflator.”
Here again, computers play a big role. Because you can get a lot more computing power for less money today than you could a few years ago. So, computers– while they have jumped up the GDP growth rate– have actually depressed the inflation rate.
“Whatever the correct inflation rate may be,” write Medoff and Harless, “one can be fairly certain it’s more than 2.1%.” The statisticians should have left their finger on the valve stem a bit longer, in other words, to get out all of the inflationary air.
Medoff and Harless, meanwhile, note that all this IT spending has produced no increase in productivity outside the IT sector itself. “From a productivity point of view, all the improvement in computer performance has not only been less than a panacea,” they opine, “it has been, thus far, worthless.”
“Thus,” they say, “it might be quite reasonable to calculate an inflation rate without averaging in those supposed declines in computer prices.” Investors are “hanging tough,” according to the Wall Street Journal. They are convinced that the economy is not only sound, but vigorous…They are sure that Greenspan is in command and will not permit any serious disruption of their plans to get rich. But as Schumpeter described the change in investor sentiment in late 1930: “People, for the most part, stood their ground firmly. But that ground itself was about to give way.”
My best wishes to you for the Easter weekend.
Baltimore, Maryland April 21, 2000
*** Not much to report from Wall Street. Yesterday’s session was slow. Volume was low as many people turned their attentions elsewhere.
*** A Reuters headline told the story: “Blue Chips Jump as Investors Leave Techs.”
*** Investors drove the Dow up 169 points. They simultaneously drove the Nasdaq down 62 points.
*** MSFT dropped 5%. PCs aren’t selling the way MSFT had hoped. Makes sense. Almost everyone who wants a PC has one. And though government statisticians are using computers to jack up growth and productivity rates, the truth is most of already have far more computing power than we will ever need.
*** Every day, the S&P futures open up. This has happened in 13 of the last 14 trading sessions. What it means is that investors expect the market to rise. They’re still bullish.
*** Investors Business Daily reports that bullishness among investment advisors has scarcely budged from its level at the market high of March. Only 2% of advisors have switched to bears since then.
*** What will it take to shake investors out of their bullishness? A bear market. What will it take to cause a bear market? Bearish investors. Hmmm…seems ridiculous., doesn’t it? But it’s the same logic that sustains bullish sentiment. Investors think the market can’t go down for long– because people believe the market goes up in the long run.
*** In fact, the market does what it wants…when it wants. The insight of contrarianism is that it does what people don’t want and don’t expect. Eventually. Somehow. Sort of…
*** Gold lost a dollar yesterday. Bonds went down. And Lumber fell below 300. This is interesting. I’ve mentioned several times the bargains you can find in the building sector. But the bargains are getting better all the time. Kauffman and Broad, the nation’s number one homebuilder, is selling below $20.
*** And the Euro hit a new low– below 94 cents. Readers may recall that before the euro there are only two types of currencies–those backed by gold or something valuable…or those backed by a sovereign’s power to squeeze blood out of its population of turnips.
The euro, though, was something new. It is not backed by anything except a few multi-lateral agreements. I have styled it the Esperanto Currency– after the ersatz language. Like Esperanto, its supporters hope to use it to erase national barriers and eliminate old animosities. And like Esperanto, it is an unnatural thing…the most abstract currency on the planet.
*** I am quite happy when it falls, though. The French franc is linked to the euro. So, my cost of living in France falls. If it goes down much more, I’ll join Elizabeth in wanting to take advantage of our strong dollar to buy an apartment. Or something.
*** Today is Good Friday, marking the day 2000 years ago, when Jesus of Nazareth was crucified by Roman soldiers upon the request of Jewish mobs. It is also thought to mark the beginning of a New Era, in which humans may have immortality. After dying on the cross, Jesus is reported to have done something no human being had ever done before– he arose from the dead.
*** Jules and Henry both went to the big sports stadium, Bercy, in Paris to celebrate Holy Week, on Wednesday. There were 16,000 people there, with 600 priests. Cardinal Lustiger presided. The boys seemed to enjoy the scale of it.
*** I have made fun of various New Era claims in this space. The claims of socialism and the promises of the New Information Age are absurd. But the promise of Christianity? I’ll just have to wait and find out.