Again, I can't speak for the entire small group of us who think this is a bubble, but the fact that we have 5 million people day-trading online is not the reason to call this a bubble. I cited that as an anecdote. We've all heard countless stories--there's an article today in the Financial Times about a doctor who's rearranged his schedule so he can trade online. Everybody has a story of a sister-in-law or brother-in-law or someone who's staying home so they can trade online.
As a professional I have no problem with people making money in the stock market--long, short, or speculating in soybeans, or anything like that. I cited that activity as a warning sign because it has become so endemic to the system these days. You can't taste or feel a bubble. It's a bit like art or pornography: You have to recognize it when you see it, and people can disagree whether they see it or not. So I cited the speculation that goes on on a daily basis as one example.
I don't care that people have all this information because, for one thing, information is not knowledge. Knowing the price of everything and the value of nothing really is not very useful. Investing is about determining what something might be worth and trying to buy it at a discount, or buying a really great business at a fair price, a couple of definitions, more or less as Warren Buffet has given them. He's an investor who certainly has been eulogized by the new-era types and his thoughts are something we can probably agree on.
And I agree many professionals have behaved recklessly, such as Long-Term Capital. I believe there's a lot of reckless behavior going on in the mutual fund industry. We just haven't seen it yet because we haven't had a decline that's lasted more than 15 minutes. I think the concentration in many of these mutual funds will be a problem. Janus comes to mind--yeah, it's had a spectacular record but we'll see what it does when something bad happens. Can you really unwind a portfolio so concentrated, with so much money piled up in so few names that are such high fliers? Maybe they can, but history would suggest that is a recipe for trouble.
The pros have become wacky simply because the demand for superior performance and the pressure has become so great. In a variation of Gresham's law, prudent money management has been driven out by the wacky kind. Everybody's trying to keep up with the S&P, which really has been driven by the Nasdaq 100, and so you get this incredible infection and spread of speculative behavior.
I don't think comparing the Japanese economy as an export-based economy to ours now changes anything about the bubble. The bubble is the result of speculation in financial assets and/or real estate that has been bred by excess credit creation, which has been allowed for exactly the reasons that Dave alluded to. The combination of the first post-Cold War economic boom, now nine years old, all the technological innovations, plus NAFTA, have brought us a very unique period in which we've had low inflation and strong growth.
However, the combination of that and people's belief that inflation will always warn us when something goes wrong has put us in this situation: The Fed has created too much liquidity, we've got excess capacity all over the globe, and we've got rampant speculation, in my opinion, in the financial markets--ergo, the bubble. And the tremendous excess capacity that's been built up here and all over Asia and everyplace else, is what will lead to the big bust. It wouldn't just be stock market speculation. It's a combination of stock market speculation, the misallocation of resources, and the excess capacity that gets created.
If you want to compare periods, I would make the argument that the '20s were far, far saner. The technological advances were far more powerful, in my opinion, than the harnessing of PCs today. I don't think the breakthroughs are comparable, but that might be an argument for another day. But the balance sheet for the country was better. We weren't running a massive trade deficit, we didn't have a balance of payments deficit, our national debt wasn't sky high, we were a net creditor country, etc. Now we are none of those things. And let's not even discuss the surplus because of accounting machinations. There is no budget surplus.
While we both agree the economic environment for the last eight or nine years has been quite unique and we both understand and agree on the reasons, I argue that excess credit has been created because of all the things I just listed above and the resultant low inflation and productivity enhancements. And it has stimulated the excess capacity and precipitated the bubble. Dave cites these good things that supposedly are reasons for the new era, and he says that GDP stock market cap doesn't matter because now we're more internationalized and we have this period of unique prosperity.
But I say, "Show me the earnings." As I cited yesterday, since the end of 1996 basically there's been no earnings growth and the market's up 70 percent. And since the end of 1994, earnings are up a total of 29 percent and the market's up 177 percent. So I think that tends to make the argument that this is all about speculation rather than investing.
My point about stock splits was just another anecdote, not an explanation of why I think it's a bubble, but I really take umbrage at the argument that stock splits are because companies believe things are better and they are basically sound. While that's true in some cases, I think they are being used totally as a promotional tool and people are getting totally carried away with it. Microsoft, in the last five days after its split, added $50 billion of market capitalization. It only has $18 billion in revenues. Things are all out of proportion. When Citron, which has now been halted by the SEC for a couple of weeks, announced that it might split its stock (when it was $8) and made three or four announcements about a potential upcoming split, that was hype. Yesterday, Infinity Internet, a 70-cent stock, announced a stock split and has traded up to $1.78. That's hype! So I don't think the argument holds water that it's a positive declaration that brings in new investors and it's all sane. I believe it's a strong indicator of the lunacy of the period.
If you are trying to make the argument of bubble, there's no black-and-white definition. But what I say is, if it looks like a bubble, acts like a bubble, quacks like a bubble, it is a bubble.