In Today's Daily Reckoning:
*** No mo' mojo fo' 'wealth effect'
*** Investors on pins and needles...what will the Fed do
*** How you really make money on the Internet - cast your
bread on the digital water
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*** Today's the big day. Will the Fed hike rates again?
*** But will the market celebrate? It will try. But the
good news is already built into stock prices. Expect a
weak rally...and then, most likely, a weak sell-off. But
if I could really tell you what to expect from the market
on a day to day basis, I wouldn't be writing this letter,
would I? Nope...I'd be paying no mortgage, and living
among the gods.
*** The Nasdaq managed a lame 22-point gain
yesterday...as investors bought the rumor of no further
rate increases. Likewise the Dow rose 33 points.
*** The leaders were the Big Techs - Cisco and Intel.
More money will be lost in these two stocks than in any
others...but we will have to wait for the market to tell
its story to give you the details. Intel rose 1 �. Cisco
added $2 to its price.
*** But while the crowded trades got more crowded, the
average stock actually fell. There were only 1325
advancing issues on the NYSE yesterday, compared to 1477
*** The stocks that fell most were the big retailers.
Walmart, for example - the world's biggest retailer -
fell below $50. Home Depot is only just a bit above the
$50 mark. Bradlees has fallen 85% below its 12-mo. High.
Land's End is down 66%. J.C. Penny is down 65%. American
Eagle - 62%. And Saks - 60%.
*** The retail sector is getting crushed. How come? "The
wealth effects that have powered the U.S. economic
growth," writes Dr. Kurt Richebacher, "are gone, and
there is no chance for their return."
*** The wealth effect, just to remind you, is what you
get when people see their stocks rising. They feel richer
- and spend more money. The extra spending looks and
feels like real demand - which triggers more hiring and
greater production from businesses. It all works as a
kind of 'virtuous circle.' But beneath it, there's no
virtue at all - but a dangerous illusion. Stocks are not
the same as savings. They go down as well as up. And when
they go down (or nowhere), as they have this year,
well...no mo' mojo fo' the 'wealth effect.'
*** Plus, there's something else going on. Americans earn
money in the good ol' U.S. of A. But they spend it buying
goods made overseas. The cash goes out of the U.S. Then,
the foreigners come back to the U.S. and buy capital
assets - stocks, bonds, real estate and businesses. In
big transactions - those over $1 billion - foreigners
purchased $168 billion worth of U.S. assets last year.
Americans, on the other hand, bought only $3 billion of
*** Remember when the Arabs were rich on the oil crisis?
Pundits worried that they were buying up precious
American assets. That was the 70s. Then, in the 80s, the
Japanese got rich. And what did they do? They bought U.S.
assets - especially big, over-priced prestige properties
like Rockefeller Center.
*** But now it's the Americans themselves who are
supposedly on top of the world. So, you might think we're
out buying up valuable businesses all over the world. Uh
uh. We're still selling our own businesses to foreigners
- while we buy stereos, autos, vacations, designer jeans
and other consumer items.
*** This has two major, immediate effects. First, the
dollar goes up. Because you need dollars to buy things
from Americans. They won't take zlotys or ringgits. So,
the dollar rises as demand for it increases. The dollar
rose against the euro yesterday - as the battle between
these two currency blocs continues. German GDP increased
in the last quarter by 1% - putting the German economy in
very good shape. But still the euro lost about 50 cents.
*** The other major effect is that the money that U.S.
workers spend goes onto the revenue figures of foreign
companies, not U.S. companies. They get paid by U.S.
firms, but they buy from the foreign firms. So it's the
foreign companies that make the profits. This effect -
exporting U.S. profits abroad - and the fact that the
'wealth effect' has lost its mojo are hurting the retail
*** DrKoop.com announced that it lost $40.6 million last
quarter - on sales of $2.5 million. How could any company
do so badly? This is an achievement.
*** DrKoop is actually a very small company - smaller
than most of the companies here at my Internet
conference. But the companies here are not losing money
on the Internet - they're making it. It is almost as if
they were two different worlds. Entrepeneurs sell their
losing companies with the well-known names to public at
insane prices. And they keep the profitable companies
private. DrKoop - which the market still believes to be
worth more than $40 million - will soon be bought out or
go bankrupt. And the little companies you never heard of
will keep making money.
*** The secret to making money on the Internet - from
what I heard at yesterday's session - seems to be to use
it to serve your customers and forget about making a
profit from it directly. Then, guess what, you make a
profit on it. Ain't it amazing? Give - and you get.
*** Gotta run...today's session is about to begin.
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I am fascinated by trying to figure out the real
effect...and future...of the Internet revolution. So much
money, dreams, hopes, hoopla and folderol are staked on
the New Era of the Internet...it seems worth the effort
to understand what is really going on.
So far, we have seen that there is no evidence that the
Internet really is increasing productivity. The numbers
are a statistical mirage...hedonic measures, which as
described in the Contrarian's Glossary, produce the kind
of pleasure you have pay for later - like drinking too
Now come more numbers, from the Economic Policy
Institute...relayed to me by Bill King...that prove the
same point. Turns out that the last 10 years have not
been especially rewarding for most working people. The
average income was $38,885 in 1998. That's not much
different, in real terms, from the average income 10
years ago. Productivity has increased...the average
person produces 12% more per hour. But this is an annual
rate of increase less than half as great as it was in the
`60s and `70s. What's more, the average person only gets
1.9% more income per hour.
Men, by the way, actually have lower incomes today than
they had 30 years ago, adjusted for inflation. Household
income has only increased because women are working...and
everyone is working a lot more. Mothers worked six weeks
more than they did in `69. Fathers worked an entire extra
month. Americans work more than the citizens of any other
industrialized nation, including Japan. This is progress?
While productivity and hourly earnings have not risen
significantly during the `90s...taxes have. Since Bill
Clinton walked into the Oval Office, federal tax receipts
have risen to 21.7% of GDP. Between 1945 and 1990, they
averaged only 18.6%.
This is what is going on in the real world...not the
virtual world. People are working harder. Earning
scarcely a dime more money for their efforts. And paying
more in taxes. This doesn't sound like Eden to me.
But there is something else going on. Bruce Bartlett
explained in yesterday's "WSJ" why there has been no tax
revolt. People shifted their money from banks to mutual
funds in the `90s. Stocks rose. The wealth effect made
them feel wealthier, even as their hourly incomes went
nowhere. What's more, the tax burden actually fell...as a
percentage of income plus capital gains.
Thus the central illusion of the Internet era has had
broad implications. Investors believe the Internet is
making businesses more productive. This drives up stock
prices and makes stockholders feel wealthier. This allows
tax collections to rise.
A bear market and recession can be expected to reverse
the whole process. Stocks are already falling. Soon,
people will not feel wealthier, they will feel poorer.
They will then shift their eyes from the income side of
their personal ledgers to the debit side. And there they
will find big outlays to government...which they will be
concerned to reduce.
They will also shift their attention from stock market
gains to paycheck increases. Internet companies, in
particular, have been able to keep employee costs
artificially subdued by offering workers a cheap currency
- stock options. In a bear market, these options, so
highly prized today, will become more like collectibles
than currency. They will resemble Confederate war bonds,
without the fancy engraving. Companies do not report
stock option compensation as a current expense. If the
value of the options were properly accounted for, as Dr.
Richebacher has remarked, Microsoft, to cite one example,
would go from a profit of $4 billion to a loss of $18
million. This is exactly what will happen on the P&L
sheets when options lose their currency.
Workers are not incidental to the Internet economy. They
are not the standardized, replaceable parts of the
machine age, arriving every day into the ports of
Baltimore and New York along with the bananas from
Central America. They are the essential ingredient.
Capital was the essential ingredient of the Industrial
Marx was right to call it capitalism. But this New Era is
different. The workers are going to want to get paid real
money, not the virtual stuff. And, after they are paid,
there won't be much left for capitalists.
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Last modified: April 01, 2001
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