Theory And Experience
“The New Economy,” writes Jim Davidson, “is increasing productivity by more than conventional methods can analyze, resulting in structurally lower inflation, which should continue to surprise on the downside…”
Nasdaq Nation is a strange place. People seem to have almost unbounded confidence in things they will never see nor could ever understand. Theory trumps experience.
So great is their faith in these unseen powers that people are willing to subordinate the evidence of their own senses. They discount their own “erfahrung” – first- hand, direct knowledge – while putting a premium on “wissen” – abstract, collective knowledge…to use Nietzsche’s terms.
Take, for example, consumer prices.
“No matter how good the next report on consumer prices may be,” writes Jim Grant in the current issue of Grant’s Interest Rate Observer, “it will likely pale before the previous one, which featured the first monthly decline in the CPI in 14 years.”
According to the Bureau of Labor Statistics – the font of collective knowledge on inflation – prices fell, at least for one month. And the general rate of inflation is so low, according to the official number-keepers, that it is of no real concern to the market. Otherwise, writes Grant, “there would be no explaining the remarkably low yields attached to government securities in the past 20 years, below the nominal rate of GDP growth), or the high dollar exchange rate, or the low prices of gold and silver.”
Even the great inflation-fighter and former Fed chief, Paul Volcker said of the official CPI on public television: “I have the cynical view that maybe it’s understated.”
The first hand evidence is, of course, mixed. Many commodities are at very low levels – and seem to be falling in price. The charts I referred to yesterday, for example, show that gold, cocoa, nickel and even oil – until recently – have been in bear markets for decades.
But the ‘until recently’ qualifier may be an important one. Especially in the case of oil. Oil rose again yesterday. And while the capacity of the world’s oil producers to keep up with worldwide demand may or may not be in question – there is little doubt that the people at the Bureau of Printing and Engraving…the Federal Reserve system…Fanny Mae, Freddie Mac…and Wall Street brokerage houses…will be able to keep up with the demand for dollars and credit. They have even been known to work overtime on occasion…and to sometimes overshoot their stated production targets.
MZM – which measures cash – is rising at a rate of about 11% per year. This is at least twice as fast as the nominal rate of GDP growth…and probably at least 4 times the real rate of GDP growth.
Credit is growing fast too. In fact, according to the most recent report from Dr. Richebacher, it’s being added to the national ledgers at the rate of $4 for every $1 of extra GDP.
Anyone who buys a gallon of gas or a house – two things most people find indispensable – knows that the CPI numbers don’t seem to match his actual, first-hand experience.
That is why the CPI numbers are such a “surprise on the downside.” You don’t expect them…because prices do not seem to be falling, they seem to be going up.
Davidson’s point is that the falling cost of data- transmission makes possible an exponential growth in wealth. This he likens to the Industrial Revolution, which “made an anachronism out of Malthusian economics.”
Yet in the Industrial Revolution, the evidence of a major change was easy to see. Machines produced things more quickly and more cheaply than they could be made by hand. It was obvious that the prices of goods would fall – in real terms. You could see the prices falling and you could easily understand why. Wissen and erfahrung …theory and experience…converged.
One problem with measuring price increases today is that the measuring stick is itself one of the elastic variables. This was not true during the Industrial Revolution. The money system of the last century was less hospitable to manipulation. Gold still backed the world’s money. And gold, for all its faults, is not nearly as accommodating as Alan Greenspan.
October 11, 2000 Baltimore, Maryland
*** Poor Ms. Wu. You may remember, the Korean investor demanded that her government ‘do something’ to stop her tech stocks from falling. But again yesterday, the S.Korean stock index – led by the techs and telecoms – fell by 5.3%.
*** Of course, misery loves company and Ms. Wu at least has plenty of that. If you look at the Financial Times’ list of World Stock Markets you see a column on the left hand side that is nothing but red numbers – indicating the change from the last session. From New York to Tokyo, stocks are falling.
*** Tokyo hit an 18-mo. low this morning – down almost 2% to 15,513. The index, for the benefit of readers with a sense of history or a sense of humor, was near 40,000 in January of 1990.
*** Earlier this week, Japan was rocked by the biggest bankruptcy in Japanese history…perhaps in world history. Chiyoda Mutual Life went belly up owing an estimated $27 billion.
*** “US investors are pulling their money out of Japan,” speculates the Reuters article. If so, what are they doing with it?
*** The Nasdaq fell 3.4% yesterday…dropping down near the low of May 24th of 3,164. “Techs Savaged” read the headline in Reuters – a bit hyperbolically. “People have freaked out,” said one broker.
*** The focus of the problem in the tech sector was weakness among the chipmakers. Xilinx dropped 21%. Altera lost 27%.
*** Other techs suffered similarly – including Broadcom, down 5% and Intel, which lost $1.50. Lucent, the world’s largest supplier of telecom equipment, announced late in the day that it was having trouble – and lost 26% of its value. ‘Freaking out’ investors are nervous and unforgiving.
*** The Nasdaq has lost almost a quarter of its value since September 1st. Birinyi Associates’ figures were given in Monday’s Wall Street Journal: “Some 1,364 Nasdaq stocks are down 20% or more since Sept. 1, of which 830 are down 30% or more.”
*** “Intel…” the WSJ report continues, “has lost 45% of its market capitalization since Labor Day; Dell Computer is down 40%; Oracle is down 25%, and Microsoft is down 21%.” That was on Monday morning. The figures are worse today.
*** According to Kevin Klombies, Oracle’s Larry Ellison lost $1.2 billion in net worth yesterday.
*** The Dow fell too as the ‘Autumn of Anxiety’ seems have turned more quickly than the leaves. The Dow was down 43 points yesterday, with 1132 issues rising and 1688 falling. 35 stocks hit new highs on the NYSE; 111 hit new lows.
*** The brokers – such as Morgan Stanley and Lehman Bros. – fell sharply yesterday. Bear markets mean lower trading volumes and lower profits for the brokers. Most investors and practically all the financial media now believe that the bear market they never saw coming, and whose existence they refused to recognize, is now over. Still, the smart money seems to be betting that there are leaner days ahead for Wall Street.
*** A word of caution: Mr. Bear doesn’t like to do things in an obvious way. I would not be surprised to see him lighten up in the days ahead, in order to let the citizens of Nasdaq Nation recover their mood of complacency. Then, the Big Surprise, as I mentioned yesterday…may be how aggressively Mr. Bear attacks. When that happens, investors will not merely ‘freak out’ – they will get out.
*** National heating oil supplies are 35% below last year. Also below last year’s measure at this time is the temperature. Oil rose 4% yesterday, to over $33 a barrel. Oil has recovered half the ground it lost after the Clinton Administration opened up the strategic oil reserve. It has since been revealed, however, that many of the bidders for that oil were speculators, not oil men, and that much of the oil will be sold to Europe.
*** The euro was up a little yesterday. Gold rose a bit too.
*** “The global Yahoo! franchise is stronger today than ever before,” said Tim Koogle, Yahoo’s chairman, in the NYTimes. The company announced $82 million, in quarterly earnings. The figure represents 13 cents a share… one penny more than analysts expectations. The company, however, warned that 40% of its advertising comes from pure Internet companies, which will be a drag on revenues in the next quarter. “If companies like Yahoo! are feeling effects of a pullback in on-line spending,” said an analyst at Deutsche Bank Alex. Brown, “then second- and third-tier companies must really be struggling.”
*** One of those struggling businesses is reviewed in an article in Advertising Age: “Pets.com as a business is in dismal shape. Since the ad campaign kicked into high gear in the fourth quarter of last year, the company has spent more than $3.50 on marketing and sales expenses for every dollar it’s generated in revenue. That’s $76.6 million in marketing and sales spending from October through June vs. $21.6 million in revenue.
“Pets.com’s second-quarter loss-$24.1 million on revenue of $8.8 million-shrank from the first quarter’s eye- popping loss of $39.1 million on revenue of $7.7 million. The company had little choice but to slow spending: Even with its lower marketing spending last quarter, it still burned through nearly half of the $70 million cash it had in the bank as of March 31.”
“Pets.com VP-Marketing John Hommeyer left in May-right after finishing his one-year vesting period…”
*** Many analysts believe Pets.com will not survive the year as an independent company. Ironically, the only value the company may still hold for potential investors is the brand image created by an ad agency: a sock puppet. Company officials have declined to reveal how much of their website sales consist of the sock puppet replicas they are selling for $20.
*** And just how long Harry Potter’s brand of wizardry will continue to beguile the crowds is anybody’s guess… but stock in Enesco – the company responsible for this particular popular sensation – might be worth a look. GrantsInvestor.com’s Eric Fry: “Since June 1, KDE insiders [purveyors of the Pokemon phenomenon] have sold 107,900 shares for $2,261,012. Meanwhile, since April, eight separate Enesco insiders, defined as management and directors, have purchased 144,400 shares at a cost of $665,568, or $4.60 apiece on average. None has sold.”
*** I walked downtown yesterday to the Motor Vehicle Administration to get my driver’s license renewed. The office is in a Baltimore subway station. But what a strange place it is. Hundreds of millions have been spent to build the system – and it is practically deserted. I felt like the Omega Man, stalked by dark shapes of creatures who were once human. Maybe no one really wants to come to downtown Baltimore.