New Era, R.I.P., Exeunt Omnes... And All That

(First aired 5 May 2000)

What suitable last rites could we give the New Era? Should we gather at the grave and say a few words-like the young, organic farmer of my acquaintance who, upon burying a calf, admitted that he had failed to care for it properly? “I should have called the vet,” he said.

I have never taken much care of the New Era. But, then again, it seemed to need none of my attentions. Instead I spent my feeble efforts trying to convince other people that it did not exist. So, how then can I now bury it ? What last respects could be given to something to which no first ones were offered ?

And how could we bury it anyway-since most people think it is alive and well ? Putting it in the grave, or even calling it the mortuary, seems a bit overeager.

Nevertheless, you and I will be in on the secret. The New Era never existed. And to the extent it seems to live still, it is like El Cid, whose corpse was propped up on a horse to encourage the troops and lead them to victory over the Moors.

The troops…the TNT investors in the light-headed brigade…still believe the New Era lives. They still buy stocks. They act as if nothing has changed.

But the truth is out. Yesterday’s figures from the BLS showed that, for all the hype and hoopla, the New Era Has no pulse. Even with all the crunching done by the BLS geeks, the figures showed productivity rising in the first quarter of this year at only 2.4%. This was a disappointment. The expected figure was 3.7%.

The third and final quarters of last year, you may recall, produced some very healthy numbers for labor productivity. The BLS recorded the rate of increase at 5% in the third quarter and 6.4% in the fourth.

It was on the basis of these numbers that the historic shift of money from the Old Economy to the New one was justified and explained. The Old Economy was said to be growing sluggishly, while the new one seemed to be propelled forward at ever-faster speeds by the incredible productivity gains made possible by information technology.

“Incredible” is the operative word. Because when the productivity numbers from last year were deconstructed by Kurt Richebacher and by the Medoff-Harless duo, they looked less than credible, if not outright fraudulent. I will not rehearse the numbers or the statistical legerdemain that went into them. It was boring enough the first time.

But even with all the statistical hocus-pocus… the number for the first qurter came about at only 2.4%-hardly high enough to justify a New Era.

To put this number in perspective, labor productivity increased in the United States from 1945 to 1962 at an annual rate of about 3.1%. Then it declined. Between 1965 and ’72, labor productivity increased only at a 2% to 2.5% rate. It then collapsed to as low as 0.3%…and remained around 1% until 1995.

As Dr, Richebacher put it, “After three years of near-stagnation between 1992 and 1995, productivity growth all of a sudden began to spurt in [the last quarter of ’95]. What caused that?” 1/index.cfm

What caused it, Dr. Richebacher informs us, was that the BLS changed the way it calculated productivity. They began looking at what they called a “hedonic” price index-which took into account not just the price of computer equipment, but its computational power. On the surface, this makes some sense. If a dollar buys twice as much computational power one year as the next, it is as if the price of computing power has fallen in half.

The third quarter of ’95 was the first time this change took effect. It miraculously transformed 2.4 billion dollars in computer spending into 14 billion dollars of output…instantly boosting GDP by 20%, lowering inflation and increasing productivity (ouput per hour).

Wow. As more and more money was spent on information technology, and computation power continued to follow Moore’s law-doubling every 18 months-GDP and productivity numbers were greatly flattered to the point that they were, like a woman who has too many facelifts, unrecognizable. But it was not until the last quarter of 1999 that this hedonic measure really put the productvity numbers in their most flattering, even sycophantic, light. Info tech spending went wild in the last half of ’99-urged to excess by the Y2K threat. This activity was amplified by the BLS to such an extent that its message could be heard all over the world: Six percent productivity was a triumph…the New Era was paying off!

The number for the fourth quarter, to repeat, was spectacular. Incredible. It was revised later to an even more incredible 6.9%.

The only trouble was that it was not real. It was, like the New Era that supposedly made it possible, a fraud. More computational power is not the same as economic growth. And being able to turn out more computational power for each hour of labor input is not the same as an increase in labor productivity. Like the millions of lines of code and the millions of miles of fiber optic cable…computational power is only as valuable as the money that people are willing to spend to get it. And that is measured not by “hedonic” numbers, but by real dollars and cents.

What the actual rate of productivity increase is, I don’t know. Neither does anyone else who relies on BLS figures. More than likely, it is below 2.4%-but how far below, we don’t know.

Some day we will know. Just as someday, most people will know what we already know: The New Era is a counterfeit, a phony, a mountebank.

In the meantime, let’s get on with the obsequies. Raise a glass, blow a bugle or bang a drum. The New Era is dead. Long live the old one.

Bill Bonner Paris, France March 26, 2001

P.S. Add to Contrarian’s Glossary :

Unified Theory of Greed (UTG)-the insight that we’re all greedy SOBs, but the real SOB is the guy whose greed-whether for power, money, or love-is not held in check by his wife, the market, or the law.

*** The dream: “Europe is – by definition – the economic haven of the developed world and this has to be recognized by the financial markets sooner or later.”

– Pedro Solbes, the EU’s commissioner for monetary affairs, to a roomful of currency traders and money managers this weekend

*** Reality: “France, with German assistance, blocked an attempt to liberalize the EU’s protected fiefdoms in electricity and gas, refusing a target date of 2005.”

*** According to the International Herald Tribune, the European Union summit meeting this weekend in Stockholm ended just as it began – mired in hubris and politics. The euro dropped to 88 cents.

*** The dollar index closed at 116 on Friday, near its historic high. While Europe gets its act together, the world continues to ask “if not the dollar, then where?” Near capitulation in the US stock market…and a historic current account deficit – is having little effect.

*** In case you are curious, Bill has taken an early flight to Rome this morning… so the notes you are reading were written up by Addison. They are short…and you’ll find a DR classique below…New Era R.I.P. (It’s a good one).

*** But first let’s check in with Mr. Bear. It seems he took a breather from his grueling workout on Friday… the Dow rebounded 115 points to close at 9504. The rally put an end to two weeks of heavy losses, which totaled over 1200 points by the close of markets on Thursday. The Dow is down 12% for the year.

*** The Nasdaq and S&P 500 also closed higher on Friday… up 30 and 22 points respectively, but remain deep in bear territory. For the year the S&P is down over 13%.

*** The Nasdaq is off 34% since February 1st. The tech-heavy Nasdaq 100 is down 27.2% so far this year. “With over $4 trillion in market cap wiped out in the past 12 months,” says The Dismal Scientist, “or the equivalent of 40% of US GDP, caution is now the rule.”

*** In February, mutual funds saw the first net outflow in 10 quarters…since the 1998 Russian crisis.

*** Wall Street is feeling the heat. According to the Economist, “Wall Street’s investment banks have suffered from America’s economic malaise. Goldman Sachs announced that profits for the quarter to the end of February were down 13% to 768 million dollars compared with the same period a year earlier. Lehman Brothers said that profits for the last quarter were down 29% to 387 million dollars, and profits at Morgan Stanley fell 30% to 1 billion dollars over the same period. Conditions seem likely to get worse in the current quarter.”

*** Gold gained $3 to close at $261…oil dropped to $27.30…gas rose slightly to $5.27.

*** A French franc, loosely pegged to the euro, is only worth $.13…in Paris you can buy a bottle of decent table wine for about 8 of them.

*** “Dividend yields signal a longer bear market” sports a headline in CBS MarketWatch. “Admittedly the stock market’s dividend yield is hardly riveting cocktail chatter,” the article states… authored by non-other than Daily Reckoning contributor David Tice. “Yet it is only in the last half decade that dividends have been of little consequence…”

*** From 1802 to 1900, says Tice “stocks provided a return of 5.9%, with dividends accounting for 5.1% – or almost all – of the gains. Over time the rising price of stocks themselves increased in importance. Still, from 1900 to 1995, dividends chipped in 4.9% – almost half – of the market’s 9.8% return.” But “from 1995 through 1999 dividends contributed just 2.1% a year compared to the massive 26.3% total return over the period.”

*** Since 1995, Tice explains, the price of stocks has been so high that the role traditionally played by dividends has diminished. Elevated stock prices mean a lower yield. And as a result less money is available for reinvestment. Currently, stocks are yielding about 1.1%. “Today’s dividend yield,” even after the recent shakeout, says Tice, “is closer to a market top than a bottom. The paltry payouts may be telling investors who think the bear market is over to wait. And then wait some more.”

*** “What do we ALL know for sure?” asks Kevin Klombies…reflecting the ‘group think’ currently pervading the markets…”We know that both the U.S. and Japan, which together account for something like 42% of the world’s GDP, are headed into recession. We know that stock prices are imploding and that interest rates will continue to work lower through, at least the summer…

*** “…We know that the price Wall Street charges for its research (zero) accurately reflects its value.” More below…

*** Marital Deflation: According to the state-run Vietnamese newspaper Thanh Nien (Young People), a Vietnamese woman couldn’t convince her husband to dump his younger lover, so she sold him. The younger woman coughed up $516 to take the man off his angry ex-wife’s hands. I suppose that proves that even scoundrel husbands aren’t totally worthless… even in these deflationary times.