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Join Date: 10 2001
Location: Yerevan
Posts: 5,466
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TOO MANY TREASURE HUNTERS
By Marc Faber
The investment management industry has become a huge sector
of the economy in most industrialized countries, and the
money that is sloshing around the world now dwarfs the real
economy by an unprecedented margin. Just consider that in
the United States, manufacturing employment has declined to
its lowest level since the 1950s, while debt-to-GDP is at a
record high and continues to rise, and stock market
capitalization as a percentage of the GDP is near a record.
Put simply, we seem to be producing less in the way of
goods as a percentage of the economy, but an increasing
amount of paper money at a faster and faster clip. These
trends lead to the disproportionate growth of the financial
markets compared to the real economy. If they persist,
which I doubt they can do forever, eventually the Western
industrialized nations will produce very little (as a
percentage of GDP), but instead an ever-growing army of
investment wizards will spend their days trading financial
instruments, including stocks, bonds, mortgages,
currencies, options, derivatives, and so on!
How sustainable is such a trend when, in fact, financial
markets by themselves don't create wealth, but are a
byproduct of wealth creation in the real economy? This may
be a controversial question, but let us compare two
economies for a moment. In the first economy, people work
in factories and the services sector and invest their
savings to boost the output of goods and services. In this
economy, the financial economy only serves as a conduit for
channeling savings into investments. In the second economy,
the entire population has largely given up on working and
instead trades financial instruments 24 hours a day.
It is easy to see that both economies could have full
employment and "growth" - provided, however, that the
monetary authorities continuously expand the quantity of
money in the economy where the entire population is engaged
in the financial market. But, real wealth would only be
created in the economy that produces goods and provides
services and annually channels its savings into net new
investments (capital spending exceeding depreciation
charges); the purely financial market economy would only
produce paper or imaginary wealth, which would not be
sustainable in the long run.
To put it another way, the economy producing goods and
services builds wealth based on its investments in new
technologies and structures (net new investments), whereas
the purely financial economy builds its "wealth" on
financial asset inflation, which at some point inevitably
spills over into hard asset inflation as well (real estate,
art, commodities, etc.), but which does not produce any new
"real" investments.
Now, I am not suggesting that the United States has already
reached this hypothetical stage of economic development -
after all, it is not unusual that, with fewer workers in
the manufacturing sector, more goods can be produced
through improved productivity - but we are steadily getting
closer to this situation. (Productivity gains aside, one
should not forget that more and more retirees are being
supported by fewer and fewer workers.) According to The
King Report, which is an excellent daily economic and
financial newsletter, 350,000 General Motors retirees are
supported by 118,000 GM workers, half of whom, according to
GM, are due to retire over the next five years. Therefore,
there will soon be more than 400,000 retirees supported by
fewer than 100,000 workers!
One of the symptoms of an economy that creates "artificial
wealth" through asset inflation is the weakening trend of
its currency, as the asset inflation makes its price level
relatively expensive for the production of goods and
tradable services, when compared to countries whose price
increases are contained by an increase in the supply of
goods and services as a result of real capital formation.
In other words, the longer the Fed attempts to kick-start
the U.S. economy through asset inflation with ultra-easy
monetary policies, the longer the U.S. dollar bear market
can be expected to last.
But that aside, there is another angle to the financial
markets and the financial services industry becoming so
huge when compared to the real economy that I wish to
address. (In the first nine months of 2003, global capital
market debt issuance surged 22% to US$3.72 trillion
compared to 2002.) For an analyst, a fund manager, or a
strategist, the analysis of companies and macroeconomic
fundamentals begins to take a back seat. Of more importance
is their analysis of what their peers in the financial
industry are thinking, how they are currently positioned,
and in what way they might change their positions in the
future.
In other words, in terms of one's performance, what one
thinks of a stock, a sector, or a country is less important
than what other fund managers and investors might think
about the same assets. Therefore, as silly as it may sound,
an analyst attending a company presentation at a conference
should actually pay less attention to what the company has
to say than to the reactions of the other fund managers
about what the company is presenting. If the company's
presentation is well received, the other fund managers will
immediately place buy orders for shares of that company;
whereas if the presentation disappoints the fund management
community, sell orders will follow.
Now, I am not suggesting that this "momentum" investing
style will yield substantial returns in the long run, but
in many cases stocks can have large moves for totally wrong
reasons. A good example of this would be the sharp gains
Eastman Kodak shares had in the late 1990s, when digital
photography was just beginning to proliferate.
Even a relatively superficial analysis would have shown
that a company whose profits depend largely on selling
nonreusable films and developing them could only lose from
the new digital photo technology, which is bound, over
time, to make non-reusable films obsolete. But the momentum
players were at it and drove the shares to their highest
level ever, dead ahead of the worst disaster in the
company's history - the loss of a fantastic franchise and
the duopoly in the photo industry it had shared for the
last 20 or so years with Fuji Photo.
I have mentioned this because of the recent strong rebound
and significant outperformance of the old high-tech
favorites of the 1998-2000 bull market. In the same way
that many of the "nifty fifty" stocks in the 1970s,
including Kodak and Xerox, broke down in 1978 below their
1974 lows, we could also see, after the current rebound
runs its course, new lows in Nasdaq stocks sometime in the
next few years. In addition, we can see that Eastman Kodak
and, I might add, the entire "nifty fifty" sector of the
early 1970s weren't good investments after 1973. For most
of the 1980s and early 1990s, Kodak and Xerox (as well as
Polaroid, which went bust last year) were lower than in the
early 1970s and, inflation-adjusted (in real terms), never
actually made new highs above their peaks in 1973!
Kodak is an interesting example of a "high-quality" company
that fell on hard times for no other reason than "creative
destruction" as a result of a new technology, and one has
to wonder how many of today's favorite momentum stocks,
such as Cisco, Intel, Microsoft, Oracle, Sun, etc., will
eventually encounter a similar fate. In fact, Hewlett-
Packard would seem to have many similarities to Eastman
Kodak, since sales of cartridges and toners for printers
subsidize the entire company.
Stocks do not always go up in the long run. The reality is
that most companies go out of business in the long term,
and investors must continuously look for new companies,
regions, sectors, and asset classes within the investment
universe. After a bubble bursts, there is always a change
in leadership, a fact which investors much also take into
account.
In today's investment climate, those fund managers who
share my concerns about the U.S. economy have only two
choices when confronted with a rising market. Either they
can stick to their defensive strategies (high cash position
and ownership of low-volatility stocks) and risk their
jobs, bonuses, and the loss of impatient clients, as they
are bound to underperform the market for some time; or,
despite being bearish at heart, they can go long the
sectors with the strongest momentum and, often, also the
weakest long-term fundamentals and highest valuations
(high-tech stocks over the last six months) and perform
admirably well.
The reader will easily be able to see which choice most
fund managers will take. In fact, I feel sorry that some of
my friends who are first-class thinkers and analysts are
forced to take investment decisions based on market
momentum, in order to perform and keep their jobs and their
clients, but which run totally contrary to their own
fundamental analysis and judgment.
It may sound harsh, but the entire financial service
industry is like a huge brothel. The brokers push stocks
they know nothing about, but which move and, therefore, can
be turned over quickly, thus generating commissions. The
analysts recommend stocks not necessarily based on sound
fundamentals, but because they are showing signs of rising
momentum as other analysts are also recommending them. And
the fund managers are forced by the brothel's owners to
perform by buying sectors that they don't really like but
which will, as they soar, give full satisfaction to the
brothel's clients. In the meantime, newsletter writers and
financial advisors like myself are also actively
prostituting them, as our clients also expect - aside from
just sound financial advice - some moneymaking ideas.
I wish to stress that while I am critical of the financial
system and the gargantuan financial service industry, which
forces its professionals to invest increasingly according
to momentum (excessive liquidity), I am not critical of
most of the very brilliant fund managers, strategists, and
analysts I come across. In fact, I am stunned again and
again by the quality of analysis, breadth of knowledge, and
fine personalities of the people I meet in the financial
service industry, but sadly, the relentless supply of new
paper money created by the Fed forces all of us to act in a
way that doesn't always conform to our own beliefs.
For my taste, the Western financial markets are too large
compared to the real economy and will have to be deflated
at some point much further than has already happened since
2000. There are also too many smart people and treasure
hunters involved in the financial service industry, which
makes it more difficult for the average investor to perform
well.
Valuations remain extremely high and the renewed leadership
of the old favorites is more of a symptom that the recent
strength is a powerful bear market rally within a long-term
downtrend, which is once again likely to fool the majority,
than the beginning of a new bull market. The old leaders
and current momentum plays are likely to disappoint at some
point, in the same way that Eastman Kodak, Polaroid, and
Xerox performed poorly after the 1973 bubble peak in the
"nifty fifty" stocks.
In fact, I don't believe that the current environment
presents excellent entry points for most financial assets.
If the correction does not come now, it is likely to be far
more severe later and, therefore, investors will be in a
position to buy most financial assets cheaper sometime
within the next 12-18 months.
Regards,
Marc Faber
for the Daily Reckoning
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хотя нам же был указан путь - радоваться за тех, у кого деньги есть. "пж жив, я рад !" (кин-дза-дза)
