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Every great turning point
has its Irving Fisher. He was the Yale economist who in October of 1929
proclaimed that stocks were at a “permanently high plateau.” Later
that same month, the market crashed, the Depression started, and Fisher
became an object lesson in the dangers of public prediction. Less perfectly
timed but still pretty memorable was Business Week’s 1979 “Death
of Equities” cover story, which declared stocks passé as an
investment vehicle--just before the start of the greatest bull market in history.
Now Business Week is back for another bit of dubious
immortality, with a February 13 cover story titled “Unmasking the
Economy: Why it’s so much stronger than you think”:
"But what if we told you that the doomsayers,
while not definitively wrong, aren't seeing the whole picture? What if we
told you that businesses are investing about $1 trillion a year more than the
official numbers show? Or that the savings rate, far from being negative, is
actually positive? Or, for that matter, that our deficit with the rest of the
world is much smaller than advertised, and that gross domestic product may be
growing faster than the latest gloomy numbers show? You'd be pretty
surprised, wouldn't you? Well, don't be. Because the economy you thought you
knew -- the one all those government statistics purport to measure and make
rational and understandable -- actually may be on a stronger footing than you
think."
The article goes on to explain that government
statisticians are stuck in the days of railroads and factories, when physical
structures mattered. But today the real action is in R&D and brand
building and intellectual property, things that GDP numbers largely miss. Add
them back, and deficits shrink while growth soars. Far from being a decadent
late-stage empire, the U.S.
is actually a vigorous young nation with a bright future. Heck, we're the
creators of the iPod, Starbucks and exchange-traded
funds. We rock!
Now, some of the above is undeniably true: R&D
could be better represented in GDP calculations, and American corporations
are efficient in ways that are hard to quantify. And we do invent a lot of
cool stuff. But the conclusion--that the U.S. is actually a healthy
system--is wrong in a way that illustrates how our perspective changes at the
end of every long cycle. When time-tested measures like book value or
debt/equity or P/E begin to conflict with the impulse to extrapolate the
recent past into the indefinite future, people start looking for reasons to
ignore the old metrics. And they eventually come up with new ones that fit
their worldview.
Back in the late 90s, for instance, tech stock
investors dismissed concerns about NASDAQ companies' lack of earnings as
dinosaur thinking. For New Economy companies, earnings were
"optional" (I swear three different people told me exactly that in
1999). Eyeballs and mindshare were what mattered. As TheStreet.com's
Jim Cramer put it at a 2000 tech stock conference, "Most of these
companies don't have earnings per share, so we won't have to be constrained
by that methodology for quarters to come."
But old-fashioned things like earnings and debt
service ratios do matter in the end. So how do we separate reality from New
Era hype this time around? One way is to look at the effects of all this
"dark matter" R&D and brand building. If it's real and
producing wealth, then the rest of us should be reaping some benefits. Our
incomes should be rising and/or our balance sheets should be strengthening. But
as you can see below, this isn't the case. U.S. disposable income is crawling
upward at about the rate of population growth plus inflation, while debt is
soaring. A decade ago, Americans' disposable income exceeded household debt
by about half a trillion dollars. Now debt exceeds income by $2 trillion.
What's really happening? The same thing that happens
in every credit-driven boom: Easy money allows companies and individuals to
do things that make it look like a new era has dawned. In the 1920s it was
Ford and RCA changing the world with auto assembly lines and radio networks,
financed by sales to investors with growing stock portfolios. In the 90s it
was Amazon and Inktomi shifting the whole economy
into cyberspace, funded by a soaring NASDAQ. Today it's Intel and Wal-Mart
building super-fast chips and futuristic supply chains, fueled
by families borrowing against their homes. The good things are undeniably
good; computers keep getting faster and supply chains more efficient. They
just aren't enough to offset all the new borrowing.
So the end will come as it always does. When the
credit spigot is turned off--as it will be soon--consumers will stop
spending, businesses will find that their R&D isn't yielding the expected
return, and the economy will head south. Sorry Business Week, but under the
surface, things are actually much worse than they seem.
By : John Rubino
February 13, 2006
DollarCollapse.com
John Rubino is co-author, with GoldMoneys
James Turk, of The Coming Collapse
of the Dollar and How to Profit From It (Doubleday, December 2004),
and author of How to Profit from the
Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University,
he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with
TheStreet.com and a frequent contributor to Individual Investor, Online
Investor, and Consumers Digest, among many other publications. He now writes
for Fidelity Magazine, CFA, and Proto.
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