by Randolph T. Holhut
American Reporter Correspondent
March 25, 2001
DEALING WITH 'MAD DOW' DISEASE
DUMMERSTON, Vt. -- Will you still have a song to sing/ When the Razor Boy comes and takes your fancy things away?/ Will you still be singing it on that cold and windy day? The refrain from Steely Dan's song "Razor Boy" drifted into my head as I watched the carnage of the last few weeks on Wall Street. The Razor Boy was on the prowl.
There's a whole generation of investors that doesn't know or remember what a recession is like. I've only been on this earth for four decades, but I remember the recessions - those hard years like 1973-74, 1981-82 and 1990-91 when the economy went into the toilet.
Those times left their mark on me. In the mid-1970s, I watched my father barely hang on to his job as a machinist and our family just scraped by. In the early 1980s, a third of the guys in my Infantry basic training company at Fort Benning were fresh out of the unemployment line. The 1990-91 recession made the Gulf War a hollow victory and gave me my first taste of life in a downsized workplace.
I've learned to be suspicious of those who talk about prosperity as a given. You remember all the talk of the past few years: We've entered into a new economic era, business cycles no longer apply, the Dow and NASDAQ have only begun their climb upward.
We know how well the rosy scenarios turned out. In a little over a year, NASDAQ has lost 65 percent of its value and the Dow has declined about 20 percent from its peak last year. Stocks have gone up and down for decades. But since the last big stock market crash in 1987, a mass culture of investing has developed.People chatter about the market constantly, their obsession stoked by the avalanche of business news on cable TV and the Internet, as well as the ever-expanding business sections of newspapers. Every twitch of the financial markets is now covered breathlessly.
There may be millions of people that have money in mutual funds, but we are far from a nation of stockholders. More than half of Americans (me included) do not own stocks and the wealthiest 10 percent of Americans still control 80 percent of this nation's financial assets.
But the news media remains focused on the little investors - the ones that always get crushed in a bear market. This focus obscures the true reality of our market society.
On any given day, more than a trillion dollars is changing hands on the world's financial markets. But this casino-like frenzy produces nothing tangible to the real economy except profit for the fortunate few. The actions taken by traders in New York, Tokyo, London, Hong Kong and Frankfurt are often more important and have more impact than any action taken by any government. And into this vast, whirling casino have come millions of Americans who put their retirement money into stocks.
For the past few years, many financial analysts repeatedly said that stock prices were overvalued. Price-earnings ratios - the price of a stock divided by its annual earnings per share - have stood at ridiculously high levels, while dividend yields have been at historic lows.
No one seemed to pay attention as shares in the high tech and Internet IPOs were bid up to insanely expensive prices. Unprecedented amounts of money continued to flow into the stock market as investors became convinced that the market would continue to go up indefinitely. But the dirty secret about the economic boom is that it's been based on ever-increasing consumer spending (much of it financed with credit cards) and an ever-increasing foreign trade deficit. We had a $370 billion trade deficit in 2000 and consumer debt has doubled since 1990.
Neither trend is sustainable over the long run. Consumers can only buy and borrow so much. The same goes for businesses, many of which are equally leveraged.
Over the long run, the market will recover - or at least that's how it has worked over the past four decades or so. But that news is cold comfort to someone who is watching their investment savings vanish as stock prices keep going down. Those who went for the quick kill are paying dearly for it now.
A couple of years ago people were laughing at Warren Buffett, the billionaire who runs the Berkshire Hathaway investment group, for his refusal to plunge into the Internet bubble. Now you know why Buffett is a billionaire. By sticking with established, well-run, well-capitalized companies with proven track record and realistic growth potential, he's still making money while other funds have nosedived. Investing with an eye toward sound fundamentals always works. Overoptimistic speculation rarely does.
"Ever since 1637 and Tulipmania (in Holland), there have been a succession of booms and crashes," economist John Kenneth Galbraith in the fall of 1999, "That's all part of what Joseph Schumpeter called the 'creative destruction' of capitalism. It helps to clean the insanity out of the financial system. What I think we have now is a considerable amount of insanity that needs to be cleaned out. For example, we have far more mutual funds than we have intelligence to run them all."
Much to the surprise of many neophyte investors, capitalism's inevitable cycle of boom and bust didn't get repealed during the 1990s boom. It looks like we are now headed into the bust. The Razor Boy is on the prowl. It's not time to panic, but it certainly time to start paying attention.
Randolph T. Holhut has been a journalist in New England for more than 20 years. He edited "The George Seldes Reader" (Barricade Books).