The Trouble With Europe

“For of course, there’s no such thing as the New Economy. It’s strictly a Wall Street conceit, enthusiastically and, as always, thoughtlessly propagated by our fellow wretches in the media.”

Alan Abelson “The Trouble With Europe Is…” begins the editorial in the International Herald Tribune.

You can fill in your own predicate. For some reason, the blessings of the New Economy have not been showered on the Old World. Maybe it is because of the way the E.U. is structured…bureaucratic inertia…institutional rigidity, high taxes, labor restrictions, the welfare state, the cheese, the aging population, vestiges of the Holy Roman Empire, Cartesianism, socialism – you name it. Once it is widely accepted that there is something wrong with Europe, the next question – ‘what? – arises without begging. And answers present themselves like candidates for federal election – usually shallow, self-serving and stupid.

Mass thinking produces mass ideas – simple-minded slogans which, when deconstructed, turn out to be accretions of wobbly facts, empty abstractions, miscalculations, misinterpretations, and balderdash.

And yet, on such mass thinking, huge financial bets are placed. Currently, for example, people are betting that the dollar will remain triumphant, for now…and perhaps forever. Because, Japan is finished…and there is something wrong with Europe…

Mr. DesHais, my gardener-philosopher agrees. “There is something wrong in France,” he told me, as I chauffered him to the store to get more canning jars, “it is not the way it used to be. People don’t want to plant gardens… they have forgotten how to do things.”

What people have forgotten how to do are things like how to can your own ratatouille…or make your own alcoholic drinks. Or follow the phases of the moon to plant a garden.

Mr. DesHais sees Europe from a different vantage point. In America, we think of Europe as hopelessly conservative. There is no credit card industry. And people are reluctant to move, or take up new careers. They are stuck in the past. Or, as Doug Casey puts it, “Europe is a living museum.”

But Mr. DesHais doesn’t think so. “Things are changing so fast,” he laments. “I can hardly keep up with it.”

Things are changing fast in Europe. Mr. DesHais’s own son, Benoit, reads books on the Internet and has his own dot.com business idea he’s trying to get started. More and more, people in France are becoming entrepreneurial. There is even an area of Paris where cyber start-ups are concentrated.

London is booming too. And Berlin. And dozens of other European cities.

But Europe is profoundly conservative too. People still save money. And they’re less eager to take up popular sensations – whether it is running shoes or Big Tech stocks. Europe suffered much more than America from the popular sensations of the 20th century. Perhaps it is now less vulnerable to them.

Beyond the impressions of a casual observer, the case for the dollar over, say, the euro is largely statistical. Even digital. The digits representing productivity, growth, and employment are higher in the U.S. than in Europe.

But so are the digits representing debt, current account deficits, and inflation.

The trouble with digits, if I may borrow from the IHT headline, is that they are like all facts – that is, nothing without their nuances.

And no numbers are quite as nuanced as the U.S. digits for productivity, economic growth and inflation. The more carefully you look – the more wobbly the facts become.

“The appalling divergence between America and Europe,” writes Dr. Kurt Richebacher, “…derives overwhelmingly from the existing gross difference in their statistical measurement.”

Europe keeps its figures the way Mr. DesHais keeps the garden – in the old fashioned way. American number crunchers have found a more modern way.

The simplest of their innovations was merely to report the numbers on an annualized basis. U.S. GDP growth is thus reported to be 5.3% – taking the 2nd quarter and multiplying by 4. In Euroland, the quarterly number is reported without annualizing. Most recently, the number was 0.9%, which sounded pathetic next to 5.3%. But the difference is really not much. The actual quarterly number in the U.S. was only 1.3% – and even that, was mostly a statistical fiction and an accounting fluke.

As I have reported before, U.S. statisticians use ‘hedonic’ prices to measure GDP, productivity and inflation measures. Hedonic measures take into account the computational power of a computer, not just its price. No other nation does so – and certainly not Europe.

Between the last quarter of 1998 and the 2nd quarter of 2000, for example, Americans spent an additional $28 billion on information technology. The statisticians then applied the ‘hedonic’ miracle grow…and presto, they stretched the $28 billion to $127 billion…which was then added to GDP. To make a long, complicated and nauseatingly complex story short, this extra GDP was achieved without people working any longer or harder (why should they…they weren’t really making more computers, just more powerful ones). So, it looks as though the U.S. economy was getting a lot more productivity per unit of labor. And consumers were getting a lot more computing power for their money – so inflation went down too.

The quants showed computer prices falling by 30-40% annually…even though people were actually spending about the same amount of money. (They were getting more for their money, supposedly.) And it all depended – like a Rumanian weightlifter – on the artificial stimulant of ‘hedonic’ price measures.

Meanwhile, on this side of the Atlantic – that is to say, in Europe – the numbers are more reliable. While they do not show economic growth at fantastical levels, they show impressive improvement. Employment rose in 1998 by 1.4%. In 1999, it moved up another 1.5%. Inflation of around 2% compares favorably to inflation in the U.S., officially 3.5% – but probably more like 5%.

Instead of showing the prices of computers falling by 30 or 40% per year, as is the wobbly, hedonic measure in the U.S., computer prices have fallen only by 20% over the entire period from 1991 to 2000. (Based on German statistics.) This divergence, not the many reasons given why Europe is a laggard, is the real source of most of the statistical difference between the two economies. Europe counts actual dollars spent. In the U.S. they count digits of computational power.

“The great digital divide between America and Europe,” concludes Dr. Richebacher, “is not in the economies. It is in vast differences in statistical measurement and in the propaganda.”

“U.S. economic growth, deprived of the hedonic deflator,” he continues, “is anything but illustrious. Not only that. It’s obvious propellant was the consumer borrowing and spending binge… Credit excesses have many parallels in history, but those in the U.S. are of such extreme magnitude that they suggest a form of collective, manic euphoria.” A popular sensation, in other words.

Your European correspondent,

Bill Bonner

Paris, France September 18, 2000

PS: Another wobbly feature of the U.S. economic miracle is the logic behind it. Europe is portrayed in the media and the popular imagination as having much more rigid and expensive labor. That is the reason commonly given for the failure of Europe to benefit from the greater productivity of the Internet age. And yet, the only real attraction of information technology is that it reduces labor costs. Europe, with its higher per-unit labor costs, should be benefiting more from the new technology than America.

*** The Big Techs are still alive – but trapped in a Kursk of sinking prices. None will escape.

*** Friday, Oracle was torpedoed after announcing earnings that beat its forecast, but still weren’t good enough. The stock fell 8%. But what could you expect? Oracle is selling for 100 times earnings. This implies a spectacular growth rate. The company should be doubling revenues every year. But guess how much Oracle’s revenues went up? Just 14%.

*** Microsoft is struggling to stay above $60 (down from $119). Cisco, too, is battling around the $60 mark (down from $81.) Intel, Micron, Broadcom – you name it, practically all the Big Techs are taking on water.

*** And these were the ‘must own’ stocks of the New Economy? Don’t believe it. There is no such thing as a ‘must own’ stock. And any company that gets a ‘must own’ reputation is a sell candidate, not a buy.

*** The Nasdaq fell 78 points on Friday. That takes it down to a 5.75% loss for the year.

*** Naturally, many of the companies that hoped to launch themselves in the public markets this fall are having second thoughts. Many are being withdrawn. These IPOs… all ready to go…act as a ceiling on the techs. As soon as demand increases and prospects improve, these new IPOs will swamp the market again.

*** The Dow fell sharply on Friday too. I warned that Mr. Bear may be getting ready to do some more serious damage. Friday he was warming up. Still, we saw a little preview of what he can do. The Dow fell 160 points, with substantially more declining stocks on the NYSE than advancing ones – 1748 to 1086.

*** This brings the Dow down to a nearly 5% loss for the year too.

*** The money supply is still rising twice as fast as the economy. This money has to go somewhere. But not necessarily into the stock market.

*** Much of it is probably going to pay for oil. Oil rose on Friday, hitting an intra-day high of nearly $37. It is now trading at $35.59 (Oct. light crude). It was only $27 a barrel at the beginning of August.

*** Still, the Bureau of much-Labored Statistics reported that energy costs DECLINED in August – by the largest amount since Feb. of ’91. Gasoline, for example, fell 6%, according to the BLS number magicians. And yet, every other measure of inflation is rising. Goldman’s commodity index rose 17.4%. CRB index rose 4.69%. The Journal of Commerce price index went up 3.7%. And anyone who drives a car knows that gasoline is more expensive than it was a few months ago.

*** The dollar index rose to another record on Friday. The euro fell to 85 cents. And gold, the dollar’s rumored competition, dropped another 20 cents to close at $275.

*** Asian markets do not like the sinking tech stocks on Wall Street…or the price of oil. “South Korean stocks caved in” this morning, reports Reuters. Stocks in South Korean lost 7%. Taiwan fell below 7,000. The Japanese index was down 204 points, or nearly below 16,000.

*** “Bad Times Ahead,” concluded the Reuters reporter… in a sentiment that might soon find its way to Wall Street, perhaps smuggled to Manhattan in a container shipment of running shoes. All of Asia’s 8 major equity markets are in the red for the year.

*** The Reuters piece covered a lot of ground. “Rising energy costs globally are bad for earnings,” remarked one wide-awake analyst. “Everybody is freaking out about oil,” said another, perhaps a road manager for the Stevie Wonder Band in a former career.

*** And then it gets interesting…speaking of oil: “This is a classic case of how the market under-reacts to emerging trends…And if they follow the usual course, once they realize something’s going on, they over-react.” Aha! Even the analysts are catching on. Analog Man… driven by passion, emotion and near-absolute ignorance rules the markets!

*** But what is true for the oil market might be even more true for the Big Techs and the rest of the market. Oil, like bread, has limited usefulness as a popular sensation. It is too common…and too closely connected with real economic activity…to be a subject of pure fantasy. The Big Techs and the dollar, on the other hand, like the dot.coms, offer plenty of elastic to the imagination. They can be worth a fantastic fortune. Or next to nothing at all. We have already been through the top part of this cycle. The bottom part should be at least as entertaining.

*** Readers of the international news may recall that the Jakarta Stock market experienced a boom last week – someone set off a bomb that killed 15 people. “Buy when there’s Blood in the Stock Exchange?” asks Steve Sjuggerud of the Oxford Club. Steve recommends an Indonesian telecommunications giant selling at a P/E of 4. Hey… pretty darned cheap. How can you go wrong?

*** Well, Lynn Carpenter explains how you can go wrong. I mentioned Fleetwood – maker of prefab housing and mobile homes – in these messages a few months ago. The stock was ‘pretty darned cheap’ I said. Well, if you liked it then you’ll like it even more now.

*** “It’s down 40% since January,” Lynn tells me. “But it does pay a 6% dividend. It might go even lower yet, but it isn’t going to go away. Fleetwood just posted its worst quarterly earnings loss in 50 years. Things can start getting better now. Values are P/E 11.8, price- sales 0.13 (Yes, I typed that correctly), price-book 0.76, and PEG 0.6.

*** “Fortunately,” Lynn reminds me, she didn’t recommend Fleetwood. Her darned cheap builder, Centex, is up 28.8% since she picked it.

*** Nothing much happened at Ouzilly this weekend. The weather was spectacular – with crisp, cool mornings and a bright blue sky. The light in late summer is especially nice…I don’t know why.

*** I decided to take advantage of the good weather to paint some of the windows in the barn. The doctors ordered me to stay off of scaffolds and ladders, but they didn’t mention anything about hanging out of second-story windows. Thus was I engaged, painting one of the frames, when Dr. Besseau drove up. I felt a little sheepish about it…but he had a sense of humor.

“Well,” he said, as he handed me a bill “please call me again if you need me.”