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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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People felt good about spending money, and consumer sentiment explodedWHY THE BIG CHANGE AFTER 1994? PRODUCTIVITY SOARS Real gross domestic product grew by 4.5 percent a year during the last half of the 1990s. Roughly a percentage point faster than its long-run average, this growth was strong enough to push the civilian unemployment rate down to 4 percent by the end of 2000, a rate not seen since 1970.21 The investment establishment did not see this coming because they looked at the companies of the old dominant investment system and concluded correctly that their productivity had fallen to a level insufficient to produce competitive economic growth (GDP), which in turn was insufficient to raise stock prices. So what was responsible for the compelling jump in GDP that initiated a new trend of rising prosperity? The outstanding productivity gains came from the companies of the soon-to-be-born new dominant investment system as well as companies of the old system that had adopted realize, capitalize, customize. Figure 4.4 shows this clearly. The fact that so many experts were unable to anticipate the renaissance of American business should not be lost on us today. What was simply misunderstood then is often conveniently ignored now, for all the reasons set out in earlier chapters. The status quo must be maintained, frequently at the expense of investors like you (and us). Consequently the spin that is put on business news can be as partisan as that heard during any election campaign. It is common knowledge among investment professionals, for example, that government statistics do not capture the output of most companies of the new dominant investment system. The Office of Management and Budget (OMB) is forthcoming about this. They know that data on the twentieth-century industrial economy does not provide a clear picture of what is happening today. The OMB has taken steps to correct this, and changes will be fully implemented by 2004.22 Nonetheless, investment rhetoric ignores the contributions made by twenty-first century companies to the economy. It does not differentiate between the falling productivity of the twentieth-century industrial complex and the rising contribution to our national wealth by the companies of the new dominant investment system. There are more spin doctors than statesmen in the world of finance. One statesman is Louise Yamada, senior technical analyst an vice president for research at Smith Barney. In her must-read, groundbreaking book, she explains how, in 1994, she saw the prosperity ahead by recognizing that growth was coming from a new place: We are experiencing the initiation of an entirely new, knowledgebased technological cycle (even a new long-wave cycle) consisting primarily of communication, information (networked intelligence), electronics, catalytic, and precision technology which renders efficiency to existing processes and defines new frontiers, and we are witnessing the dynamics of its force. It cannot be disputed that communication and information technology is a new horizon in which innovation is key and evolution into burgeoning new technologies is just beginning.23 1995: A REAL BULL MARKET BEGINS In 1995 wages, after inflation, rose for the first time in 20 years.24 People felt good about spending money, and consumer sentiment exploded (see Figure 4.5). If this turnaround were simply the result of a new technology making existing companies more productive, we should be concerned about how long the positive effects would last. If it were only the result of massive spending on computers, software, and related appliances, we should worry that it is over. But that was only one of the fortunate circumstances that were about to change things forever. A fusion of elements in 1995 released kinetic energy with a velocity that would not only initiate the birthing process of a whole new dominant investment system but also ensure its dominance over the financial universe of the twenty-first century. THE ELEMENTS THAT CREATED THE NEW DOMINANT INVESTMENT SYSTEM Discussed in detail in the following sections, these four elements created the new investment system: Completion of an incubation interval Dependable consumer economy Improvement in economic conditions Surge in foreign exports The economic scholar Joseph Schumpeter recognized periods of innovation as a necessary interruption of what would otherwise be the static circular flow of capitalism. 26 The French historian Jacques Barzun refers to it as a preparatory period for prosperity. In The Great Boom Ahead Harry Dent calls it an innovation wave.27 In Economics in Perspective John Kenneth Galbraith does not name it but agrees with Schumpeter that it causes economic life to continue and enlarge. 28 We call it an incubation interval. It is a period of history that spawns a superabundance of new ideas that must be cultivated and developed during this interval before they become ubiquitous enough to increase productivity. An incubation interval lasts about 20 years, and one of these occurred between 1970 and 1993. Here is a short list of groundbreaking developments. The incubation interval was the embryo of the dominant investment system that was growing inside our economy. The only other time more groundbreaking ideas, products, and services were conceived was during the incubation interval of the nineteenth century, which helped give birth to the Dow as the dominant investment system. It is a testament to human ingenuity that while the world seemed to be deteriorating in the 1970s and 1980s, many people disregarded the blight and went about the business of pouring talent and energy into their visions of how to make the world work better. Element 2: Dependable Consumer Economy Imagine the incubation interval taking place in an economy like Afghanistans. Who would buy those first personal computers generating profits that could be poured into research and development, resulting in an even better product, and eventually becoming something without which we could not live? Without that chain of events there would be no need for the Web, no need for the Internet. Without the Internet the billions of dollars of productivity increases in American corporations would not have occurred. Each invention from the incubation interval was nurtured by the consumer economy until it could stand on its own. The cushion of the consumer supports distribution channels and marketing networks around the laboratory of capitalism that is the domestic U.S. economy. It is so constant that we speak in terms of how fast it is growing. The worst that happens is that once every 10 years or so consumers will not buy more than they did the previous year. During the economic slowdown of 2000-2001 Americans spent $1.8 trillion, which was more than the entire economies of Australia, Saudi Arabia, and the United Kingdom combined.29 Figure 4.6 reveals that consumers failed to increase their total purchases over the prior year in only two instances, 1980 and 1990, after which a gentle, upward trend developed into 1995. This increasing momentum helped to fuel the launch of the new dominant investment system. Element 3: Improvement in Economic Conditions A fact of life is that high federal deficits suck money out of the economy that would otherwise be used elsewhere. That the falling budget deficit occurred when it did left room for a surge in capital investment in new companies and technology (see Figure 4.7). The fall of interest rates after 1994 allowed companies to borrow money for research and development, expand operations, or acquire other companies at low costs in order to improve profitability (see Figure 4.8). The low interest rates were the result of low inflation shown in Figure 4.9. A decreased government deficit, low interest rates, and inflation meant more money available in the early 1990s, just when companies of the new dominant investment system needed it (see Figure 4.10).30 The enrichment of the economy fueled spending by the domestic consumer who would buy the new products created during the incubation interval. This circuit of energy-producing factors was enhanced by one last critical element, foreign trade. A boom in global trade occurred in the mid-1990s. In 1990 the United States sold $652.9 billion of goods and services abroad. By 1995 this jumped to $969.2 billion, almost a 50% increase.31 The companies of what would soon be the new dominant investment system benefited the most. There is no question that global trade played a substantial part in launching the new investment system. Why this occurred is worth exploring. In the early 1990s every major (and minor) country came to the realization that growth in world trade had outpaced growth in industrial production.33 Trade had become more profitable than the industries of the old dominant investment system. This moment of clarity led to the Uruguay Rounds, which had as their goal the reduction of tariffs and trade barriers. Final agreements were signed into law in 1994. A contentious political debate enveloped the Uruguay Rounds, much of it due to the hotly contested passage of the North American Free Trade Agreement (NAFTA) the year before (1993). Trade with Mexico was supposed to ruin us; of course, it did not. In 2000, Mexico imported more U.S. goods than did Japan, China, and the United Kingdom combined.34 It was not just the dropping of trade barriers that provided the export windfall. Falling global interest rates and confidence in the American economy, as a result of the declining deficit, played their part. None of this would have had any effect had we not had something new to sell the goods and services developed during the incubation interval. The smallest things can change our lives the chance meeting because you wait a little longer at a counter to get your change or the book you picked off the shelf because on that particular day its blue jacket held more appeal than the yellow one next to it. It should be easy to understand that when the four major economic events just described which by themselves could shift the balance of the investment universe converged with a laser intensity on a fixed point in time (the mid-1990s), the investment world was sent spinning in a new direction. That we sorely needed a new direction is not a part of any financial dialogue. That 1995 was a pivotal year in which prosperity for many Americans only just got started is not part of the rhetoric. That twentieth-century industrial companies, as represented by the Dow, had failed for 25 years to be sufficiently productive to enhance our economy and an entirely new corporate organization had surfaced to create wealth is obscured. Instead, the story has been framed in such a way as to preserve the status of the old dominant investment system. In Calvinistic style we are reminded that we should be grateful for the great bull market the Dow gave us in the 1980s and 1990s. That the wealth created after 1995 was not derived from the old dominant investment system is glossed over. That any wealth that was created by the old dominant investment system prior to 1995 was not sufficient to keep our standard of living from declining for the first time in half a century was overlooked. If the early 1980s initiated a bull market, it was a party to which only a select few were invited. IF IT WAS NOT A BULL MARKET, WHAT WAS IT? Unquestionably, the Dow rose at a higher rate from 1982 to 1994 than in the 1970s. More people were buying stock than had done so for a decade. This is not saying much. A new perspective is required to understand what created that counterfeit bull market, and Figure 4.11 shows that perspective clearly. Ownership of stock dwindled so badly after 1967 that a cavity is created in Figure 4.11. It was money dribbling into this cavity that caused stocks to rise in the 1980s. The so-called bull market was merely stocks returning to some meager level of ownership by the investing public. You can see that it was only in that pivotal year of 1995 that stock ownership began to approach the levels of the 1960s, when the Dow was in its prime. If your cab driver, plumber, electrician (or whoever) talks about buying stock, the opportunity has passed. Its time to sell. This clich is often put forth as a reason why stocks will do poorly in the twentyfirst century. Figure 4.11 shows that household ownership of stocks in the 1950s and 1960s remained above the level reached in 1995 for 15 years. A similar stretch today would take us to about 2011, right to the projected end of the acceleration phase. In other words, we have a long way to go before we must be concerned that too many people own stock or that we should take that fact as a signal of deteriorating prices. Imagine what would happen if the new dominant investment system, which saved our necks, was regarded with the same reverence as the old one that nearly ruined us. It would mean the new dominant investment system would be the source of job data, economic output, and corporate performance. This would mean that the financial news would suddenly become more positive. It would be like taking off a pair of sunglasses after the sky had clouded up. What had appeared stormy turns out to be only fluffy big clouds over a brilliant blue background. If companies like AdvancePCS or Fiserv were given as much press as Disney, we would understand better what these companies do and how important they are. The formulation phase would not take as long, and clarity would come to the financial markets sooner. In spite of our supposed sophistication, this process does not seem to be happening any faster than it did 100 years ago. You will learn in the next chapter that the circumstances surrounding the birth of our new dominant investment system are all too familiar. You will read that the birth of the Dows dominance mirrors events today. We can use the parallels as a guide to our own future. NOTES 1. On January 11, 1973, the Dow was at 1051.73. On December 6, 1974, the Dow was at 577.60. 2. Ivan Boesky plead guilty in spring 1987. 3. On August 25, 1987, the Dow was at 2722.42. By October 19, 1987, the Dow was at 1738.74. 4. The Dow recovered equally well from Word War I and II. The Dow went from a low of 65.95 on U.S. entry into WWI and despite a recession reached a new high of 119.62 on November 3, 1919, less than a year after the war s end. The strike on Pearl Harbor in December 1941 caused the Dow to sink to 92.92 by April 28, 1942; but even before the war ended, the Dow hit a new high of 152.53 on December 16, 1944. By the war s end in 1945 the Dow reached a new all-time high of 195.82 on December 11. 5. Kevin L. Kliesen and David C. Wheelock, The Regional Economist (2001, July). 6. Ibid. 7. The Dow was at 1287.20 on November 29, 1983. 8. Topline Investment Graphics, Standard & Poor s 500. 9. Venita Van Caspel, Money Dynamics for the 1980s (Reston, VA: Pren tice Hall, 1980), p. 60. 10. John Frank, Patrick Houston, Pary Pitzer, and Jeffrey Reyser, The Farm Rut Gets Deeper, Duns Business Month (1983, January), p. 48. 11. Chase Investment Performance Digest (Concord, MA: Chase Global Data & Research, 1994), p. 58. 12. John Frank, Patrick Houston, Pary Pitzer, and Jeffery Reyser, The Farm Rut Gets Deeper, Duns Business Month (1983, January), p. 48. 13. James B. Treece, William J. Holstein, Boyd France, and Ronald Grover, The Widening Trade Gap: Is Tokyo Calling Congresses Bluff, Business Week (1985, June 17), pp. 50-51. 14. Tokyo Market: Now a Leader, New York Times (1990, January 1), p. L31. 15. Stocks Up, Stocks Down, Forbes (1994, January 3), p. 49. 16. Are Hard Assets the Next Big Play? Forbes (1994, April), p. 49. 17. Charles Allmon, Forbes (1994, April), p. 46. 18. Retrieved from www.astromoney.com. 19. Editorial, Forbes (1995, October 23), p. 334. 20. Forbes (1996, June 17), cover. 21. Kevin L. Kliesen and David C. Wheelock, The Microchip Flexes Its Muscle, Regional Economist, p. 6. 22. National Economic Trends, August 2001, Federal Reserve Board of St. Louis. 23. Louise Yamada, Market Magic (New York: Wiley, 1998), p. 144. 24. National Economic Trends, August 2001, Federal Reserve Board of St. Louis. 25. Wilshire Associates Incorporated. Data used with permission. 26. Robert Heilbroner, The Worldly Philosophers (New York: Simon & Schuster, 1953), p. 295. 27. Harry Dent, The Great Boom Ahead (New York: Hyperion, 1993), pp. 138-139. 28. John Kenneth Galbraith, Economics in Perspective: A Critical History (Boston: Houghton Mifflin, 1987), p. 181. 29. National Economic Trends, July 1, 2002, Federal Reserve Bank of St. Louis. 30. M1: the sum of currency held outside the vaults of depository institutions, Federal Reserve banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions, except demand deposits due to the Treasury and depository institutions, minus cash items in process of collection and Federal Reserve float. M2: M1 plus savings deposits (including money market deposit accounts) and small-denomination (less than $100,000) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments of less than $50,000), net of retirement accounts. M3: M2 plus large-denomination ($100,000 or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to non-bank U.S. addresses held at foreign offices of U.S. banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds (funds with initial investments of $50,000 or more). 31. U.S. Department of Commerce Bureau of Economic Analysis, Survey of Current Business. Retrieved from www.bea.doc.gov. 32. Statistical Abstract of the United States (Washington, DC: U.S. Department of Commerce, 1997), p. 802. 33. World Trade Organization. Retrieved from www.wto.org. 34. National Economic Trends, Federal Reserve Bank of St. Louis. |
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