Sharemarkets and the End of Time
My A+ idea for 2000
The recent whiplash in the markets caused me to ruminate on the end of time. If there is not a crash it will be the end of time.My perception is that we have all used our skills and knowledge of markets to price assets. We all know the utility of investments in real estate, fixed interest assets and equities. We all have risk management strategies, albeit of a rudimentary kind. We have a balance of assets to suit our purse, lifestyle and time of life.
The problem is that these skills will seem invalid if equity indices continue their inexorable upward trajectory. Indeed the skills of financial experts, who have higher degrees in finance and years of practice, are also fundamentally invalid. True they may have some marginal advantage in picking preferences, but their real advantage is to be investing now in this strange era.
If there is not to be an extremely severe correction-cum-crash, then our present becomes a unique era, separated by a great discontinuity from the past. Forget cycles; forget price/earnings ratios. Buy equities and see capital growth. This is an era of boundless easy wealth creation. It is clearly unlike the past where British stocks grew at an average of 4%real return per annum during the twentieth century. It also pre-empts the future for we are the lucky ones, We will be in the markets and the next generation will not get a look in.
The levitation of share prices has brushed aside the forces which normally function to keep prices low. Normally shares dip sharply when the price/earnings ratio becomes too high and many shareholders voice their insecurity by selling. Similarly rising interest rates normally check share prices, and make fixed interest attractive but markets now quickly rationalize any increased rate change as unimportant or even beneficial. A banker friend tells me share prices rise now despite falling liquidity.
Many sage observers believed that the whiplash on Wall St on April 15th was the beginning of a crash. I still believe that is so and that the subsequent recovery is a dead cat bounce. Indeed, the important casualties in a crash, are not the indices (which may seem reasonably healthy for sometime) but financial institutions and the attitudes of investors. In the 1929 crash shares bounced but a year later banks began to crash, leading the world into the abyss of depression.
The essence of our times is that for at least five years the equity markets have been in the grip of euphoria. The bull market has prevailed and has been fed by the issue of technology shares which have rapidly increased in price. While there are obviously good shares in companies offering much needed product (Microsoft, Nokia etc.), every reader will have examples of folly: of companies never likely to make a decent return on capital. My example is the 900,000 people who recently stumped up with five hundred million pounds to subscribe to Lastminute.com.
There is startling evidence that the euphoria has not been deflated. Even the 35% fall in the NASDAQ is being rationalized. It is commonly said that the NASDAQ is still as high as it was last October, so a healthy correction has taken place and this is an excellent time to buy. As I predicted in my last article (NBR April 20) prominent brokers were telling their clients about good opportunities as the fundamentals are sound. Banking and finance have never been so good. Abbey Cohen reassured the world that stock prices would rise 15 to 20% this year.
Bullish brokers are not urging indiscriminate buying. The euphoria remains but the opportunities lie in different lodes. Even the optimists accept that on-line retailers are now the detritus of the market, followed also by business-to-business stock. But the bulls emphasize that big companies are going to gobble the small, so now advice is needed on picking the new whales which will trawl through the krill of dot.coms which are no more than a web page and a prospectus of financial dreams.
The Internet jackpot has gone to companies building the infrastructure that powers the network. Companies that have patents, trade secrets, software platforms are gorillas that have an edge. Oracle: Sun Microsoft, Intel, Cisco, Hewlett-Packard are close to their peak prices. These companies might thrive but most dot.coms will go the way custom carmakers did when Henry Ford opened a production line.
So will stock markets shrug off a temporary check, and soon resume their onward and upward trajectory? It is not easy to speak confidently, but I believe reality will exert a growing influence on this irrationally exuberant market. Perhaps the notion that playing the market is as much fun as a trip to Vegas will die.
Reality has decimated the long waiting list for new floats. Adventurous take-overs of old economy companies by payment in dot.com shares now seem absurd. To understand what happens to Internet companies in which investors lose faith look beyond NASDAQ to Japan. Japan has two large Internet companies; Hikari Tsushin briefly enjoyed a top ten status by capitalization. Its shares are being offered at one tenth of heir recent high. Japan's answer to Bill Gates' empire, Softbank, has also had a price collapse. Neither share is trading despite desperate sellers.
Tech stocks have been flattened by a tidal wave circling the globe. London's conservative BBC said British stocks were 'slaughtered', not inappropriate for a 40% dive, quite apt too for France's Nouveau Marche's fall of 43% and Frankfurt's' Neuer Markt slip of 34%. The markets are now awash with companies which are newly suspect to investors. The market's fate will depend as much as anything upon the NASDAQ's direction, though, conceivably, a fall in one big market could drag down others.
In the five weeks before April 14, the companies listed on NASDAQ lost US$2.25 trillion. Some of that loss was borne by margin traders whose debt in New York stood at US$265 billion in February. Others borrowed or mortgaged to buy. Such losses will have deep reverberations as unfortunate investors plunge from riches to poverty.
The immediate effects are psychological. People who felt secure (and well off) because of their dot.coms will now feel insecure. Perhaps they will switch to old economy shares but this is a painful process when paper losses are realized. Meanwhile many dot.coms will shrivel, releasing a work force feeling duped by valueless stock options.
Households have plunged further into debt because their stocks made them feel wealthy. America's debt overhang and external deficit mean that the consequences of a crash could be very severe. Already the private sector deficit (the gap between savings and investment) has increased to 4%, a level, which an IMF study suggests, leads to recessions.
These are what Confucius would call "interesting times". Stock markets are not acting rationally. The roller coaster ride will undoubtedly continue. But will the markets defy time and resume a rising trajectory? Or will reality prevail and deliver yet more severe correction?
NEVILLE BENNETT
Christchurch, New Zealand
5 May 2000Neville Bennett teaches "Japan and the World Economy"
at the Canterbury Graduate School in New Zealand
Also by Neville Bennett
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