Vulgar Capitalism

Dr. Kurt Richebacher makes a shocking assertion in his

January issue. Not only does democracy mature, age, become vulgarized and, finally, decrepit — so does capitalism.

Richebacher believes the U.S. economy has entered a period of “late, degenerate” capitalism — where true growth has been replaced by greed and the short-sighted quest for shareholder value.

Lawrence Kudlow, quoted on CNBC, said that American capitalism is now at a stage that allows investors to “eat the cake and have it too.”

He meant that technology and all the market efficiencies we have heard so much about have made the old formula for capitalist growth a thing of the past. No longer is it necessary to save and invest in capital improvements. Now you can have growth without saving…and without capital investment, either.

Thus is the promise made: the new capitalism can give you something for nothing — the same promise made by degenerate democracy.

And the promise is widely believed. Huge amounts of money have gone into the stock market. But the figures show that there has been relatively little in the way of capital investment — and little improvement in corporate profits.

“More than anything else,” said a recent issue of “Business Week” magazine, quoted by Dr. Richebacher, “the surge in profitability of American corporations has been at the root of the U.S. stock market’s incredible run.”

But the trouble is, there has been no surge in profitability. “Profits in the nonfinancial sector were down 0.4% [third quarter of `99] against the second quarter and 1% against the same quarter a year ago,” wrote Dr. Richebacher. Unlike the numbers reported by the S&P 500, the Commerce Department figures are based on some 20,000 companies…and take into account changes in inventory and depreciation values. They show no surge in corporate profitability.

The S&P 500 companies, however, are the leading practitioners of vulgar capitalism. As Charles Parlato put it in “Personal Finance”:

“The new tactics used by public corporations are unprecedented massive accounting write-offs…and unprecedented corporate stock buybacks. These tactics have enabled highly capitalized American corporations to manufacture earnings and drive their stock prices ever higher while driving down their own cost of capital.

“The iteration of this process over several years will create the perception of ever-rising earnings and vigorous business prospects, even though book value and dividends are growing…at a rate significantly less than reported earnings per share.”

Rather than investing in new plants and equipment, which tend to depress earnings in the short run, degenerate capitalists seek to increase shareholder value by making acquisitions. This increases the perception of activity. The commentators on CNBC can talk about “synergy effects.” The Greatest Show on Earth will have more drama and excitement — as the personalities involved can be paraded before the mobs and allowed to display their magic.

But a KPMG study, reported in the “Financial Times” revealed what these high-stakes mergers and acquisitions really accomplish. About 83% of cross- border mergers did not deliver shareholder value. In more than half of them, shareholder value was destroyed.

The idea of new, fresh, vigorous, “early stage” capitalism is to invest money to produce more product and more profit…and to accumulate the profits in order to make further investments.

Late, degenerate capitalism shifts its aim towards producing higher stock prices. The higher stock prices make people feel richer even though the total stock of productive capital is declining. This, too, is a paradox of money that has not been fully explored. People feel richer…which encourages them to spend more money…but which leaves them poorer in the long run.

This is exactly what Dr. Richebacher believes is happening. The extra consumer spending increases the trade deficit. This is money paid to workers in America but spent on products that come from overseas. The amount is $300 billion in 1999. It is a growing cost to U.S. businesses (money given to employees) that does not come back to them as additional revenue. This is the real reason, he believes, that U.S. corporate profits have not grown.

In the end, it is impossible to eat a cake and still have it. You either consume — or you invest. Currently, Americans are consuming. The rise in stock prices leads them to believe they are getting richer. But their wealth is actually declining.

This is another way of looking at inflation. When the money supply is increased, it gives people the illusion of extra money to spend. But when they step up spending, they consume a share of their wealth that might otherwise have been saved and invested. They end up poorer. Likewise, the inflation of stock prices is having the same effect.

[To order the Richebacher Letter, call 1-800-433-1528 and ask for code 3471.]

Best wishes for the weekend,

Bill Bonner

Montastruc, France February 11, 2000

P.S. I’m down near Toulouse — the center of the Cathar heresy. I haven’t yet figured out what the doctrinal problem was…but I’m learning a lot about the history of it, and it wasn’t pretty.

More on this to come…

*** What a wild, wonderfully out-of-whack world. The “Buy the Dips” crowd rushed into the market early yesterday — as it always does following a major decline.

*** But like Pharaoh’s army, they were swallowed by the sea of negativity. By the end of trading the Dow stocks were slightly less out-of-whack with the rest of the market. That is to say, they were down 55 points.

*** The Dow is now down 7% for the year 2000. But it’s got a long way to go to catch up with the rest of the market. The new highs/new lows ratio topped out on Oct. 3, 1997. The Advance/Decline ratio has been in decline since April 3, ’98. Transports began going down on May 12 ’99 — and are down 14% for this year…and 33% from the high.

*** True to form, there were 1,228 stocks advancing yesterday; 1,797 declining. Seventy-six stocks hit new highs on the NYSE; 255 hit new lows.

*** But while the Dow stocks are getting more in whack with the rest of the market, the Nasdaq stocks continue to soar out of this whole, big wacky world. The Nasdaq rose 122 points.

*** Internets rose, generally, but AMZN, whose site got shut down by unknown hackers, fell $4. Were the hackers short?

*** The mighty fallen: Warren Buffett’s Berkshire Hathaway stock has fallen 43% from its high of 82,000. You may recall that even Buffett himself thought it was too high at the top. But na?ve investors thought Buffett was invincible — that somehow his stock would rise…no matter what the current price.

*** April gold rose $10.10 to close at $318. Anglo Gold confirmed that it was winding down its hedging operations.

*** Oil rose slightly, too — analysts said “supplies are tight.” Oil is at a post-Gulf War high — N.Y. light crude is going for $29.23/barrel.

*** Meanwhile, bonds dropped. Commodities and bonds seem to be telling us that inflation is on the rise — but I’m not convinced.

*** Stephen Leeb, in a recent issue of “Personal Finance,” tells us that Qualcomm would have to sell more hand-held phones than the world has people for its recent price to make sense.

*** Much of the excitement in the Nasdaq is now focused on biotech companies. But Leeb warns that these companies have little hope of success. Many have only a single drug to sell and nothing in the pipeline. And they’re trading at four times their growth rates. The appeal of biotech is similar to that of other tech and Internet areas — the infinite possibilities of the imagination. There may be a new era of miracles on the horizon. But have the drug companies cured any disease yet?

*** The last major breakthrough in drugs was the advent of antibiotics — which occurred 70 years ago. I have made the argument that the sense people have that we live in an era of revolutionary change is an illusion. Even in biochemistry — the big changes happened before I was born.

*** Both “Personal Finance” and our own “Fleet Street Letter” offer tempting alternatives to biotechs or other high-priced stocks. There’s an REIT, for example, that has increased dividends every quarter for more than 20 years. Nevertheless, the price fell 23% last year — so that it now yields more than 10%.

*** Dan Ferris ( is leading a small group of investors to Chile next month, where he’s discovered a company in the very un-exciting business of making particle board. Believe it or not, particle board has become trendy for making furniture. They don’t try to disguise it. The stock beat the S&P by 150% last year…and has a 14% profit margin. There are only 10 spots left on the trip. Call 1-800-926-6576 or 561-243-6276 for details.

*** The euro attempted to move higher — but was unable to reach parity with the dollar. It is trading at about 98 cents.

*** Zimbabweans go to the polls this weekend. In Africa, the appeal to larceny is often less hidden in the get-out-the-vote folderol than it is in the West. The voters are being urged by state media to approve a constitution that may allow the government to take the property of white farmers without compensation so it can be handed over to blacks. The prices of white-owned farms in Zimbabwe must be at record lows.

The Daily Reckoning