-->The Roaring 2000's?
The Daily Reckoning
Paris, France
Wednesday, 18 June 2003
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*** Just like old times...preposterous!
*** Stocks go nowhere...pound at new high...
*** De Gaulle's moment...and Edward's...
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Microsoft rose 2% yesterday, following an analyst's
upgrade. Just like old times...ha...ha...ha...
What's so funny?
Well, just that anyone would take analysts' upgrades
seriously. You haven't forgotten, dear reader, have you?
Four years ago, analysts were recommending something like
98 'buys' for ever 2 'sells' - just before $5 trillion
worth of capitalization was wiped out in the bear market
that began in 2000. And of the celebrity tech stock
analysts, 3 out of 4 have been fired or indicted. Jack
Grubman, Henry Blodget, Frank Quattrone, Mary Meeker...only
Meeker remains at her post, older but as clueless as ever.
It makes no difference to the lumpen-fund managers. They've
got money to invest and benchmarks to hit. If they miss
this tide of fortune (the Dow is already up 28% since
October), they could be doomed to spend the rest of their
lives wallowing in the brackish marshes of Wall Street,
doing semi-honest work for semi-honest pay.
Who would want that? What everyone wants is what he doesn't
deserve. Barron's promises investors double-digit returns
from stocks this year. Do investors deserve double-digit
gains? Of course not. They have not worked for it; they
have not earned it. All they do is provide capital.
Historically, what have people made on their capital? If
the dead could talk, you could dig them up coast to coast
and pose the question. You'd find out that the average real
return has been only about 3% since the founding of the
republic. Presently, it's even less. By decree of the Fed,
yields are lower than they've been since Buddy Holly and
Patsy Cline enjoyed hit singles. Lenders cannot expect
much. Investors should expect even less.
It is just one of those times. Sometimes people expect a
lot; sometimes they don't. We are still in one of those
times when people think they can get something for nothing,
or at least more than they deserve from what they have.
Despite three years of a bear market, and an aggravating
slump in the economy, people still have a remarkable
confidence in themselves, their institutions and their
leaders. They believe the dollar can do what no paper money
has ever done: survive. They believe stocks can do what
none have ever done: provide double-digit gains for
everyone, forever. They believe that George W. Bush and
Alan Greenspan can do what no man has ever done: look into
the future and improve it before it happens.
They believe these things despite the testimony of millions
of dead men. And they will continue to believe these happy
fantasies until they are ruined by them...and join the
chorus of the dead, too.
At least, that is our cheerful guess this beautiful morning
in Paris...
Over to you, Addison...
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Addison Wiggin, from across the desk in Paris...
- Exactly how will investors be destroyed?"Argentina, not
Japan," predicts Marshall Auerback.
-"A country with an unsustainable external debt burden, an
overvalued exchange rate leading to increasingly large
current account deficits, a huge and deteriorating fiscal
position: Argentina 2001 or the USA 2003?" asks Auerback on
the Prudent Bear site.
-"For all of the persistent talk of the need for the U.S.
to avoid a 'Japanese style deflation', we think the more
instructive parable is Argentina prior to the abandonment
of its dollar-peso pegged rate monetary system at the end
of 2001.
-"Like Argentina circa 2001, America no longer controls
its own economic destiny. In the case of the United States,
the Sword of Damocles is not the IMF, but China. The death
knell for the U.S. economy may well be when the Chinese
elect to float their currency because at that stage, many
of the other Asian central banks (with the possible
exception of Japan) may well find yet another compelling
alternative to the U.S. greenback, thereby sending the
latter into free fall, creating untold damage to the U.S.
credit system.
-"American policymakers, who persistently call for the
Chinese remnimbi to be floated," warns Auerback,"ought to
be careful what they wish for. It could well be the
precipitating event for the final denouement in this
extraordinary period of financial history."
- Meanwhile, the lumpeninvestoriat remain in a holding
pattern, as if waiting for air-traffic control signals from
the Fed. Absent any clear transmissions from the tower
below, the Dow meandered up 4 points yesterday to
9323...perhaps preparing for a spectacular nose-dive
following Monday's 200-point surge. If you recall, last
summer witnessed a healthy sell-off through the first
couple of weeks of July, ending in the year's lowest point
to date on July 21st. The S&P 500 closed up less than a
point to 1011. The Nasdaq closed up less than 2 points at
1668.
- The 2-day closed-door FOMC meeting begins next Monday.
Many a contributor to the financial chatter on-line and on
TV expect a rate cut of 50 more basis points. Our friend
John Mauldin expects 25...we here at the Daily Reckoning
are left with a simple question for Alan G. & Company: why
bother to meet at all? The first 12 rate cuts didn't do
diddly squat to help the economy back on its feet. Nor have
a decades-plus worth of similar"monetary policy" decisions
helped the Japanese scrub clean the mess left after their
own bubble burst. Unless, of course, they'd simply like to
see another spurt of speculation goose the DOW past
10,000...and another wave of 'refi' drive mortgage rates
down to 4.5%...those events might be fun for everybody.
-"The Bush administration's 'strong dollar policy' may be
lamely executed macroeconomic strategy, but it is masterful
theater - it is a tragicomedy," writes Apogee Research's
Andrew Kashdan. Mr. George W. Bush, letting on to his
secret knowledge of international currency markets,
recently tried to explain the nuances of the dollar
decline...and predict its near-term direction vis à vis the
euro.
-"[T]he interest rate differential had caused people to
sell dollars to buy euros to get a higher return on
investment," George the Younger explains,"and that's why
you're seeing pressure on the dollar...You'll see different
behavior as the interest rate spread begins to narrow
between Europe and the U.S."
-"How does our protagonist's theory square with the
facts?" Kashdan wants to know."Not very well,
unfortunately."
-"The short-rate differential reached its peak last year
and has been narrowing ever since alongside the significant
appreciation of the euro. Although the differential between
10-year U.S. and European interest rates has widened a few
basis points recently, its earlier narrowing also
corresponded in large part to the euro's rally. Even before
the European Central Bank finally slashed rates last week,
long-term rates in Europe had declined by more than half a
percentage point in just the last few months.
-"So the president's explanation doesn't hold water...so
much for the comedy," writes Kashdan."The tragic subplot
is that the dollar is falling because there are too many of
the damn things around, and lots of good reasons to sell
them. Mr. Bush and Mr. Greenspan are no doubt thankful that
U.S. asset markets have shrugged off the dollar's woes so
far. But there's no escaping the fact that, all else equal,
foreigners (and even domestic investors) will shy away from
assets that include a loss on the exchange rate."
- Kashdan:"Expect more dollar weakness before the final
curtain falls." [For more see:
The Economy: Bad, Ugly and Some Good
http://www.dailyreckoning.com/body_headline.cfm?id=3255 ]
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Meanwhile, back in Paris...
Two things...
*** Few people recall it; in fact, few people noticed when
it happened. But it was on this day that General de Gaulle
made his famous radio appeal to the French of 1940, urging
them to continue resisting the Germans.
True enough, de Gaulle could never measure up to the
stature of a great military genius such as George W. Bush.
Still, he was a remarkable man who did a remarkable thing.
Taken prisoner by the Germans after being run through by a
bayonet (his third wound in WWI), de Gaulle recovered...and
made 5 attempts to escape. Between the wars, like Stonewall
Jackson, he taught military history, brilliantly, at the
French military academy of St. Cyr. Then, in the opening
days of WWII, he successfully fought off Heinz Guderian's
tank attack at Montcornet. The small victory had little
impact on the war, however. By June 16th, it was clear the
war was lost.
Churchill came up with a scheme to keep the French in
action against the Germans; he proposed that France and
England be united. The French government would flee to
London...and the war would continue. Pétain, hearing of the
plan, thought Churchill mad. He, and the French government
in Bordeaux, prepared to lay down arms.
De Gaulle, realizing what was up, made plans of his own.
Winston Churchill recounted the scene on the morning of the
17th of June, 1940:
"De Gaulle went to his office, made a number of
appointments for the afternoon, in order to allay
suspicions, and then took himself to the airport with his
friend Spears. They shook hands, said goodbye, and then,
when the plane began its take-off, de Gaulle jumped in and
slammed the door behind him. The plane rose off the ground,
leaving the police and military officers with the mouths
agape. De Gaulle, in this little plane, brought with him
the honor of France..."
The very next day, de Gaulle formed his government in
exile...and went on the radio urging the French not to give
up.
*** Last night, it was Edward's turn in the spotlight.
Somehow, in defiance of the chromatic scale, Edward, 9, got
into the choir at his school. The boy has a rich voice, but
a range as short as his attention span.
The choir performed in the beautiful church of Notre Dame
de Grace. They knocked out pieces of Monteverdi's
Crucifixus, Mozart's Miserere and Mendelssohn's Herr Sei
Gnadig hardly pausing for a breath. All the boys seemed
completely focused on their work, with one exception; a
little boy up in the front row yawned...scratched his
head...and looked right, left, up, down - everywhere but at
his sheets of music. Occasionally, his mouth moved, but
rarely in unison with the other chanteurs. Of course, it
was Edward.
"Well, Edward, we were very proud of you," said his mother
after the show."But next year, let's try break-dancing or
acrobatics."
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The Daily Reckoning PRESENTS: Harry Dent, author of the
best-selling book, The Roaring 2000s, predicts an economic
boom and a soaring stock market based upon Baby Boomer
demographics. Dent does some very interesting research. But
recently, John Mauldin has had cause to wonder what he's
been smoking...
THE ROARING 2000'S?
By John Mauldin
Please consider the following excerpt from Dent's latest
special report,"What Happened on the Way to the Roaring
2000's?":
"Just as the 'tech wreck' in the newly emerging auto
industry was a golden opportunity for investors 80 years
ago, today's investors have the greatest buying opportunity
of this entire economic boom, perhaps of a lifetime, right
now...Our most likely forecast shows that the Nasdaq could
reach 13,000-14,500 by the top of this boom, 6 or 7 years
from now, which is more than ten times from its low of 1114
in October 2002."
Let's see...the Nasdaq at 14,500 by 2010? In my mind, the
above forecast could use a large dose of reality.
Let's rewind the tape to late 1999. I can't remember
whether it was Las Vegas or San Francisco, but both Dent
and I were speaking at a large investment conference. I
spoke first, telling the some 3,000 attendees there was a
recession in our future and the market was headed down.
Small (but polite) applause at the end of the speech.
Dent spoke a few minutes later, making fun of the doom-and-
gloom speakers who were on the podium earlier. We just
didn't get it, he said. He then showed us lots of charts,
which clearly demonstrated the markets and the economy were
going nowhere but up. Technology was in its innovation
stage, ready to explode. He quoted Schumpeter. The
performance of Harley-Davidson was the clincher. Lots of
(very enthusiastic) applause.
Fast forward to today. There has been a small bump on the
road to the Roaring 2000s. Dent tells us that has merely
slowed things down, but now we are back on track. Starting
with this year and going into 2004, the consumer is coming
back. Technology is once again going to drive the markets
to new heights. Climb on board.
Let's examine his arguments and then see the logical and,
in my opinion, absurd conclusions.
Dent points out that GM dropped more than 75% from late
1919 to early 1922. GM then went on to rise more than 22
times at its height in 1929. At the time, automobiles were
the 'new, new thing.' Even with a shakeout of automobile
companies, which saw many fail, the market still
experienced a boom. Coincidentally, we are having a
shakeout of technology companies today.
He then overlays the chart of GM from 1912 to 1922 with the
chart of Intel from 1992 through 2002. Again,
coincidentally, they match.
Then, we leap to the conclusion that since GM went up 22
times after its crash, the technology markets are poised to
do the same. Quote:"We fully expect a generation of
technology giants in today's new economy to parallel GM's
spectacular rise. Who wouldn't leap at the chance to see
their investments grow as much as 22 times in the next 6 to
7 years?"
He begins Part Two of his report by telling us that the
Internet, mobile phones and broadband are going to drive
this explosion. He shows the"S" curve for these
innovations. This"S" curve denotes the very sound and
reasonable theory that innovations (cars, phones, TV,
electricity, railroads) start out slowly, then slowly rise
until the point where their growth is dramatic, often
changing the entire economic structure, until the growth
flattens out as everyone adopts the technology.
Dent is right about the future growth of these
technological innovations. They will grow dramatically. But
will they drive the Nasdaq to grow 10 times in just a few
years? That is where we part company.
There are some very large differences between 2002 and
1922. First off, in 1922, the stock market was coming off a
decades-long bear market. The S&P 500 in 1921 was almost
exactly where it was 20 years earlier...investors had
actually seen a compounded negative 1% growth for the 20
year period. In short, there is no comparison between the
value of the market in 1922 and 2002. We are talking
historical extremes. Dent is effectively suggesting that
the next bull market is going to start from the highest
valuations in history.
Dent also tells us that:"[The] transformation of the
Internet will accelerate the emergence of the bottoms-up or
consumer-driven network corporation...This revolutionary
business model will usher in a new era of productivity just
as Alfred Sloan's new corporate model at General Motors did
starting in the early 1920s."
The problem is that so far this decade, the impact of this
increased productivity has, arguably, not been a net
positive. Instead, corporations are using the new
productivity to lay off employees. Further, the Internet is
making it possible to send jobs to lower cost countries
like India and Ireland.
The extent of the productivity ushered in by the Internet -
and certainly its future growth - is also in question. In
his HCM Market Letter, Michael Lewitt aptly summarizes a
recent article entitled"IT Doesn't Matter" by Nicholas G.
Carr in the Harvard Business Review:
"'[T]here are many signs that the IT [Information
Technology] buildout is much closer to its end than its
beginning.' Among the reasons: First, IT's power is
outstripping many of the business needs it fulfills.
Second, the price of essential IT functionality has dropped
to the point where it is basically available to anyone.
Third, there is more than enough fiber-optic capacity to
accommodate further build-out."
Besides, it is all well and good to choose the chart of GM
to compare to Intel. But that's 20-20 hindsight, isn't it?
In 1922, there were scores of automobile companies which
did not make it until 1929. If you had picked one of those,
the comparison would not look so pretty.
Even if there were numerous small tech companies to pick
from, which all happened to grow ten times over, their
statistical impact upon the Nasdaq would not be that great.
To account for the type of growth Dent is projecting, we
would need to see scores of the largest companies grow not
ten times, but 20-30 times or more to make up for the
companies which will not grow more than GDP plus inflation,
or about 50% (at best!), over that time.
These is where Dent's argument really hits a wall. Today,
June 18th, the Nasdaq is at 1668. For the Nasdaq to grow to
13,000 in 7 years, it would have to do so at a compounded
growth rate of 29% every year for seven years. If it
reached his upper target of 14,500 in just 6 years, the
compounded growth rate would be 36%! This means a doubling
of the Nasdaq every two years!
Meanwhile, the P/E ratio of the Nasdaq is in nose-bleed
range. The Wall Street Journal recently reported the
trailing 12-month P/E ratio of the Nasdaq 100 at 227, based
upon reported earnings. Compare that figure to the
estimated P/E ratio for the next 12 months - 36. The
Thompson First Call estimate is even lower: 32, based on
pro-forma earnings or EBBS (Earnings Before Bad Stuff).
For Dent to be right, earnings would have to grow over 30%
compound a year for the entire Nasdaq index for seven
years. I am not even going to bother to check the record.
There has never been a time when a major broad-based index
has seen average real earnings grow 30% a year for seven
years.
Either that growth happens, or the genuine P/E ratio will
have to get even worse. It will have to rise to levels that
will make the last Nasdaq bubble seem like a blip. Can it
rise to 500? Will investors forget so soon the last bubble?
Looking at the problem in another way, Dent is suggesting
the market cap for the Nasdaq will be more than the entire
GDP of the United States in 7 years. Depending upon where
you start and finish, he is suggesting growth to well north
of $15 trillion for the total worth of the Nasdaq market.
Microsoft is currently 10% of the total Nasdaq market cap.
Will Microsoft grow to a market cap of $2 trillion? Will
Cisco be worth $1 trillion? Can Intel rise to $1.25
trillion?
For Dent to be right, those companies would have to rise to
such levels, and scores more would have to rise along with
them. If these companies do not grow to such levels, then
which companies will? To get to $15 trillion, you have to
have some VERY large companies in the mix. We are talking
companies of a size and scale which dwarf anything we have
today, or even at the height of the Bubble.
I won't even touch overcapacity in the technology world
(e.g. the huge amount of excess fiber), which will hold
down growth and profits, the coming turmoil in telecom from
the WorldCom debacle, the massive investment that must be
made to build out the broadband world, etc. etc. This is
not the stuff from which steady and historically high
profit growth will come.
Sincerely,
John Mauldin,
for The Daily Reckoning
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