Who Wants Yesterday's Newspaper?
Who wants yesterday’s paper? Who wants yesterday’s girl? Who wants yesterday’s paper? Nobody in the world.
Jagger & Richards
Now, thanks to James Grant of Grant’s Interest Rate Observer http://www.grantspub.com, I have the precise moment at which the myth of the New Information Era will be destroyed.
Mark your calendars. “On May 4, at 8:30 a.m. on the dot,” writes Grant, “the Labor Department will report on the growth in non-farm productivity for the three months ended March 31.”
If we’re really in a New Era — productivity will be rising at impressive rates. That is the big promise of the Information Age…that the availability of information at negligible cost makes it possible for people to become much more productive than ever before. If productivity isn’t rising at extraordinary rates — well, no new era.
And the most recent figures suggest — at least to those who believe them — that the average working stiff is producing more each hour he works. The figure that came out on March 7 — covering the period ending Dec. 31 — showed labor productivity increasing at a healthy annualized rate of 6.4%.
I have reported to you on several occasions the insights of Dr. Kurt Richebacher, whose newsletter we publish. (http://www.dailyreckoning.com/rich_report1/index.cfm)
Dr. Richebacher has pointed out that the growth and productivity numbers put out by government statisticians are mythical. They have been bent and persuaded to such an extent that they no longer give a true measure of what is going on.
You are probably not very interested in delving too deeply into the statistical legerdemain behind the numbers — as Bismarck said of nations’ laws and sausages, it’s best not to know how they are made. But the productivity numbers are especially interesting to me — because they highlight the point I have made, and perhaps over-made, that raw information ain’t what it’s cracked up to be.
Grant reminds us of the work of Robert J. Gordon of Northwestern University. Last June, Professor Gordon had examined the productivity numbers for the preceding five years and presented the findings to the Congressional Budget Office — confirming what Dr. Richebacher had observed.
“There has been no productivity growth acceleration in the 99% of the economy located outside the sector which manufacturers computer hardware,” Gordon explained. “Indeed, far from exhibiting a productivity acceleration, the productivity slowdown in manufacturing has gotten worse: when computers are stripped out of the durable manufacturing sector, there has been a further slowdown in durable manufacturing in 1995-1999 as compared to 1972-1995, and no acceleration at all in nondurable manufacturing.”
So where do the productivity numbers come from? Grant cites the work of two “crack economists,” Medoff and Harless, who must have taken time off from their study of the crack market to look at labor output. Medoff and Harless argue, as does Dr. Richebacher, that the numbers from last year were extremely distorted by the Y2K non-crisis. A huge amount of money was spent solving the problem, or at least not making it worse. That spending was then statistically manipulated and misunderstood — so that it came out as a big increase in output of the computer sector…and seemed to confirm the existence of a New Era. As Grant puts it, “Rarely has a botched calculation delighted and enriched so many guileless people.”
It’s no wonder the calculation was botched. The intersection between the new growth, productivity and inflation numbers has become such a hazardous crossing it is amazing anything gets through without at least a bent fender. For example, the number-crunchers believe they can adjust the dollar figures for the quality of the output. This idea is applied only to one sector — computers. Since a new computer can handle much more information than an old one — even though the new one costs less — it is deemed to be more valuable. But would a newspaper be more valuable if it gave you yesterday’s news, too?
Or news from a year ago?
Information isn’t wheat. Or automobiles. You can’t eat it. You can’t apply a coat of wax on the weekend…and you can’t put it on your head to keep off the rain. So the ability to access or manipulate twice as much information as the year before does not necessarily make your computer twice as valuable. And yet, the “hedonic” adjustments imply this kind of blockheaded logic.
During the last quarter of last year, people working in the computer sector were apparently extremely productive. They replaced old systems — which might be vulnerable to the Y2K bug — with new systems that worked faster, handled more information and were thought to be Y2K immune. And they did all this — the workers, not the computers — working 9 to 5…or even less. The Bureau of Labor Statistics assumed that the people doing this work put in 37.6 hours per week. But, again as Grant puts it, “Medoff and Harless scoff at this…” Y2K repairs, unlike say, the newest Pentagon boondoggle, could not be delayed into the next decade. They had to be completed by the end of the year. And the companies doing the work couldn’t be sure if they would ever see such Fat City times again. So they worked around the clock to get the work done.
Labor productivity increases as the hours worked per unit of output go down. It is almost certain that the info tech workers put in more hours than the BLS thinks in the run-up to Y2K. What is less clear is the value of the output itself. Medoff and Harless discovered something interesting — that putting out yesterday’s news actually increased the BLS’s statistical measures of productivity.
“Hedonic price indices can be distorted,” they report, “by the effect of obsolescence. That is, if a particular item becomes obsolete, it will appear that its price has come down. In fact, the price of an absolutely superseded item [such as yesterday’s paper or yesterday’s girl] may go to zero. But this doesn’t reflect a true decline in its price, or in prices overall. It certainly does not imply an increase in productivity.”
Another curiosity of this statistical hocus-pocus is that the BLS assumes that people substitute cheaper items for more expensive ones. If an item falls in price — like yesterday’s paper…or the price of information processing — the BLS assumes that people use more of it. This has the effect of decreasing the cost of living figures.
Rising productivity, rising rates of growth, stable prices — these have been the essential promises of the New Era. Without the wind of Y2K in their sails, Grant predicts that the productivity figures that come out next month will be disappointing. The New Era myth will be laid to rest.
But the guileless people to whom Grant refers are the investors who had the good sense to buy over-priced tech, Net and telecom stocks based on the myth of the new era. The fact that the stocks rose did nothing to dispel the illusion. My guess is that the productivity figures next month will have little effect on them. But it may not matter. Because…the market is not a slave to logic and reason…it is the master of them. It will crush the myths that reason leaves intact.
Paris, France April 12, 2000
*** Another bad share day for the Nasdaq. The index fell 132 points.
*** The cracks seem to be widening in the TNT myth of perpetual growth and prosperity. The Nasdaq is down 20% from its March 10 high. Yes, it could still mount a rally to a new high…but it’s getting less and less likely.
*** The tide of the popular imagination seems to have turned against the high-flyers. A cover of a magazine (I think it was “Newsweek”) portrays the techs, Nets and telecoms as a ticking time bomb.
*** The smart money is fleeing the TNT stocks in favor of the “Old Economy” companies. The Dow companies are safer and more reliable. David Dreman, in “Forbes,” tells us that Internet-related stocks will lose $9 billion this year, while Dow stocks will earn $150 billion. Which would you rather hold in a bear market?
*** The answer? Neither. In a real, major bear market, the really smart money gets out of equities almost completely.
*** Maybe that’s why the bond market is doing so well…But is it a real bear market?
*** Well, that’s the big question. It looks as though we are in a major bear market — an extremely confusing and chaotic one. Ed Yardeni says that 79% of stocks on the NYSE have fallen since April `98. But the Nasdaq has provided a hook — giving the CNBC chatterers something to chatter about and keeping investors bullish. But the valuations and the stories on the TNT stocks just got to be too absurd. Now the Nasdaq bubble seems to have been punctured. It is deflating — or appears to be. And the hook has passed back to the Dow.
*** MSFT hit 119 1/2 on Dec. 30. It’s now below 85. CSCO hit 81 3/4 on the 27 of March…and is now 70. A chart from Bloomberg shows that Cisco could keep growing its earnings at the present rate for 10 years…and even then it would still have a P/E over 40. These macro-cap growth stocks are an invitation to lose money.
*** Not only is the Dow rising — breadth is increasing, too…for the first time in two years. Yesterday, for example, there were 1,517 stocks advancing and 1,435 declining.
*** Most likely, this Dow action is just a “hook” and not a real bull market. The Dow is still expensive. It has a long way to go — down — before it is once again a value.
*** My friend John Mauldin wrote to tell me about a new study by the Fed. It shows that inverted yield curves — when interest rates on short-dated T-bills are higher than the rates on long bonds — are good predictors of recession. Subtract the 90-day T-bill rate from the 10- year Bond rate. “If the average spread for one quarter is .02 or less,” John summarizes the study, “then there is a 25% probability that there will be a recession within a year. The more negative the spread gets, the higher the probability of a recession.”
John notes that the yield curve has been in negative territory recently — “Tombstone Territory,” he calls it.
*** Jim Rogers, a former partner of George Soros, and now known as the “investment biker,” was asked what he thought were the odds of a recession in the not-to- distant future: “Certain,” he replied. “The bear market in stocks has been under way for awhile but has been hidden by the averages. Be careful in the economy and the market…especially after the next rally.”
*** Another friend of mine has started an Internet bank. “We want to be the only bank you’ll ever love,” says David Galland optimistically. I have not tried it. But Adrian Day reports that he “loved it.” The idea is to avoid brick and mortar expenses and pass the savings on to the customer — in the form of higher interest rates and lower loan rates. http://www.everbank.com
*** Prince Charles has given up eating lunch for Lent. He is a relic of the past. Now everyone celebrates Easter, but no one keeps Lent. Life is all upside…
*** Shakespeare was Italian! A Sicilian academic claims that a man born in Messina, Michelangelo Florio Crollalanza, fled to London to escape the Inquisition. He translated his name to English and took on the Christian name of “William” after the son of his English hosts — whose own son of that name had died.
*** Women are taking over the world. Or at least they’re taking over a world. Richard Russell reports a study showing that 40% of women versus only 15% of men intend to get an advanced degree. And women already decide the outcome of most elections. But, of course, in the new entrepreneurial economy, both college degrees and politics mean less than they did before.