Senior Clairvoyant Needed
Even the roads of heaven have their speed bumps, potholes and maybe even radar traps.
Clarence Barron, the progenitor of the weekly financial paper that bears his name, reported a common complaint among stockbrokers in the paradise of 1928 — they couldn’t find household help.
The servants were buying General Motors stock and getting rich.
Today, one out of every four of Microsoft’s employees are millionaires. They got rich by owning the GM of the 1990s — the stock of their employer. And like the servants of six decades earlier, it is hard to keep them on the job. MSFT is losing its workers. It claims to have an attrition rate, at 79.4%, lower than the industry average, but even high-level people are leaving. Some are turning to Eastern religions, art or fly-fishing no doubt. But most are just looking for the next big opportunity. The next start-up. The next IPO. The really big payoff.
Employment prospects have never been brighter. So I was particularly grateful to the employees at our 21st annual office Christmas party on Friday evening. They had not quit. At least, not yet. (I will have more to say about our party when the Ghost of Christmas Past visits later this week.)
The newspapers are full of help-wanted ads. Practically every company web site offers employment. "The Economist" includes an ad, perhaps fanciful, perhaps not, for a "Senior Clairvoyant" for, what else, a web- based financial service.
A clairvoyant is exactly what investors need. Because the common predictive models generally fail to pick up the most important changes. They are like military radar that can pick up weather balloons, but not enemy aircraft.
Two years after Clarence registered the stockbrokers’ complaint, the employment picture had changed completely. The stock market had crashed, and GM stockbrokers were more likely to be seeking employment than leaving it. But even then, only clairvoyants were able to see the trouble that lay ahead. Divine law may not punish every boom with a depression, but it exacts its compensations nonetheless.
The stock market crash had wiped the obvious excesses out of the system. Stocks went from being overpriced and the objects of affection of so many, to being underpriced and the objects of scorn to practically everyone. Stockbrokers, newly sober and now cooking their own eggs, could see that the cycle had turned. No one could miss it. But they could not imagine that the cycle that had taken prosperity to such a height would now take it to such depths.
The current issue of Grant’s recalls an article from "Business Week," January issue, 1930. The article, according to Jim Grant, "spared no sarcasm concerning the excesses of the glorious preceding upswing," but did not anticipate how the financial excesses would affect the real economy of the 1930s. Even after the crash, in other words, the non-clairvoyant seers of 1930 were unable to anticipate what the New Era would produce. The editors cited breakthroughs in technology, widespread stock ownership, more credit facilities, transportation and social progress.
"The boom was over," writes Jim Grant, "the magazine seemed to know for a fact — but the material and intellectual advances were ineradicable."
What the Internet is to today’s analysts, the automobile was to the BW thinkers 60 years ago: ".We are not likely to see any more real new eras born until some new industry comes along to play the part that the automobile has played in the past 10 years."
And Jim Grant’s comment: "The automobile decade had shown the ‘unlimited possibilities’ of mass production, mechanical efficiency, marketing, distribution and — not least — personal credit. Moreover, it had planted the seed of the thought that prosperity is a permanent blessing, not a windfall."
The permanent blessing of the automobile decade seemed to have skidded off the road in the decade that followed. Autos were still manufactured. They performed better and better. But fewer people had the money to buy them. And the household servants who bought GM stock in 1928 — probably the best of the automakers — had to wait a generation to recover their money.
But that was then. This is now. The blessings of the Internet are thought to be permanent, too. Today’s stockbrokers admit to the possibility of a correction in stock prices — maybe even a 10% correction. But they cannot imagine a world where the Internet is not a boon to business and investors.
Perhaps such a world will never exist. Only the clairvoyants can tell us.
December 20, 1999
P.S. I refer to Jim Grant’s newsletter so often, you would be forgiven if you thought that I published it. But I have only met Jim one time. And I have no business relationship with him at all. The newsletter is excellent, if rather expensive. www.grantspub.com
In Today’s Daily Reckoning:
*** A key reversal day on Wall Street?
*** The Big Mac Parity Index
*** U.S. Economy in Danger of Credit Bust
*** Was it a "key reversal day" on Friday? That’s what traders call it when a market reverses course dramatically during the day…especially on high volume.
*** Volume was huge on Friday…1.3 billion shares. So was the turnaround, with prices steaming ahead in the morning to a new high…and then backing up in the afternoon. When all was said and done, the Dow was 12 points higher than when it began.
*** The week, overall, saw 180 stocks hitting new highs, and 1,116 hitting new lows. Richard Russell calculates that nearly one-third of all the issues traded last week hit new lows.
*** This despite the fact that the Dow was up fractionally for the week. And the Nasdaq rose nearly 5%. The gap between the leading sector — techs & Nets — and the rest of the market is unprecedented.
*** The S&P is now trading at 32 times earnings. And investors are predicting a "melt up" in January. Could be. But stocks could also melt in the traditional way.
*** The euro has fallen to the level of the dollar. But "The Economist" reports that the Big Mac Parity Index — comparing prices of Big Macs in different currencies — says the Euro is still too high. It ought to be about 95 cents.
*** The Fed is expanding its asset base at an annual rate of 14%. The price of oil is twice what it was last year. Commercial bank credit is growing at 19.9% annually.
*** Retail spending for Christmas is said to be up 9%. Mortgage applications are up 11%.
*** Pearl Harbor update: Bill King reports that a recently discovered memo from Lt. Cmdr. Arthur H. McCollum, chief of Naval Intelligence prior to WWII, outlined a plan to force Japan to attack the United States. The plan was followed…though we can not be sure why.
*** The U.S. joined China on Standard & Poor’s list of financial systems "vulnerable to a credit bust." The rating agency cited a rise in non-performing loans and an increase in domestic lending.
*** "A sharp correction in the stock market could lead to a hard landing for the economy and thus, for the banks’ portfolios," said S&P. Exactly.
*** The Japanese market reversed five days of falling prices on Friday. The Nikkei was up a bit.
*** Vladimir the Terrible…that’s what the European papers are calling Russia’s president. And his popularity increases as he crushes Chechnya.