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― THE FRIDAY
LETTER ―
(emailed weekly, from Gilder Publishing,
for friends and subscribers)
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| http://www.gilder.com/ | Issue 249.0/June 2, 2006
SIGN-UP A FRIEND FOR FREE!
HEADLINES:
▪ The Week / Gilder: The Schizophrenic
Stock Market
▪ Friday Feature / Gilder: Wealth Does Not
Create Poverty
▪ Friday Blogger Bonus / Global Warming: Correlation is
Not Causation
▪ Readings /
|
A N N O U N C I N G : The
Gildertech Blog |
The
Week / The Schizophrenic Stock Market
‾‾‾‾‾‾‾‾‾‾‾‾‾
George Gilder (05/27/06): You’d think it’s time to stock canned
goods and sweep out the bomb shelter.
Oil is over $70 a barrel, Iran’s got nukes, and soon they’ll price
gas per ounce. The Fed has jacked short rates up 15 times. Guys, you’re killing
us. The yield curve is as flat as a subsidized Iowa corn field. There’s $1
trillion of teaser rate Adjustable Rate Mortgages about to burst all over
Southern California and ’burbs everywhere. Gold is over $600, commodities are roaring,
the dollar is dropping again, there are trade deficits as far as the eye can
see and GM is on life support. Drunken sailors in D.C. are running a sea of red
ink and every time it’s sunny, some antigrowth global warming nutjob wags his
finger at your $100-to-fill SUV. It feels like the ’70s all over again, a blaze
of malaise. Except . . .
The stock market is like the little engine that could, and seems
to go up everyday. The Dow is just shy of its all-time high, the S&P 500 is
over 1300 and Nasdaq has doubled in three years. Yee-ha, bull markets are fun,
but something doesn’t add up. They say the stock market climbs the Wall of
Worry, but this is ridiculous—it’s got the Wile E. Coyote Acme Jetpack on.
So what is it? The stock market knows something and is predicting
some future the rest of us can only guess at. I think it knows how the economy
is now structured and is not letting on. It may have figured out that we’re
about halfway through a transition from an industrial economy to a design
economy. And all bets are off.
Banks don’t fund growth anymore, the stock market does. A flat
yield curve is less important. Why borrow at 6% when you can sell shares to
fund expansion. Those that have to borrow, like GM, are rightly starved. Those
that can grow unabated (Google, Goldman and yes, financial firm GE) use the
stock market for funds.
Perhaps here’s how the world works these days. No need to borrow
billions and build big ethylene plants anymore. You invent something here
(chip, movie, iPod, medicine, financial instrument), email the design overseas
for manufacture in $1-an-hour factories (OK, not financial stuff), and then
ship it back for consumption. Sure, this runs up trade deficits, and our
precious dollars leave the country, but that’s only half the story. Those
dollars come back and invest in the U.S. Most go into long bonds, 10 years and
30 years. That’s why Alan Greenspan left with a puzzled look on his face.
Foreign buying is keeping long rates low; the yield curve is flat.
But maybe the stock market has figured out that we’re running out
of long bonds. Maybe, just maybe, the surprise is fiscal discipline being voted
into office in November and shrinking red ink in D.C. Marginal rate tax cuts
and lower rates on dividends and cap gains might actually work and increase
revenue. If we run smaller deficits, then there’ll be fewer bonds for
foreigners to buy, so they have to buy something else with those dollars and
the next big pot of liquidity is—hmm, let me think for a second, oh yeah, on
Wall and Broad, the $15 trillion stock market. When bonds are scarce,
foreigners are going to have to buy our stocks, or so the stock market might be
screaming.
It may also be saying that gold is dead, our economy is structured
to generate a return on investment on even $70 oil, trade deficits are actually
a good thing, innovation will resolve long-term health-care liabilities, and
that lower prices for beach-front homes won’t derail the economy. But make up
your own mind. The time to load up was three years ago. The stock market is
notoriously schizophrenic. Remember, it thought you could sell pet food over
the Internet. But it’s more often right than wrong, especially when proving
pessimists wrong and optimists delusional.
Andy
Kessler’s next book The End of Medicine: How Silicon Valley (And
Naked Mice) Will Reboot Your Doctor, will be published by Collins in
July. Hear Andy Kessler speak at the Gilder/Forbes Telecosm 2006
Conference in October.
Order your copy of The End of Medicine today: http://www.amazon.com/exec/obidos/ASIN/006113029X/gilderpublish-20
(Posted on May 31 to http://blog.gildertech.com)
|
Gilder/Forbes TELECOSM Conference world's leading technology and
communications companies . . . |
Friday Feature / Wealth Does Not Create Poverty
‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾
GTR Subscriber (5/27/06): George, interested in hearing your thoughts on
the Enron trial?
George Gilder (5/28/06): Except for Fastow, this was a witch-hunt where the
prosecutors extort guilty pleas from underlings in exchange for testimony
against their bosses. Lay and Skilling were guilty of various misfeasances, and
if we want to make examples of over-optimistic execs they might be given some
gentle jail time. But almost equally guilty were executives in hundreds of
large firms falling apart in the midst of an inscrutable deflationary crash,
when virtually none of the numbers you get from the accountants capture the
full extent of the cascading damage. I went through it myself and I know what
it is like. No one believes that the entire company, every "asset" on
its books is going to virtually zero. It's unbelievable until it happens to
you.
The idea that you can go to jail for not knowing what is going in a gigantic
global company, the idea that you can be convicted of insider trading for
trades made months after you leave a company, and the idea that constructs
fully approved by armies of costly lawyers and accountants can lay waste to the
rest of your life is worthy of the Moscow trials. Congress has created a
regulatory maze that every executive depends on lawyers and accountants to
unravel. No one reads all the paper he signs. The idea that the losses in Enron
stock can be assigned to "fraud" is preposterous in the face of equal
losses in tens of thousands of other firms.
As The Wall Street Journal pointed out, the executive salary cap led to
an excessive reliance on options for executive compensation. I might add that
the rise in personal tax rates to a level almost three times capital gains
rates also channeled most of the nation's economic growth and tax yield into
the capital gains category. (The government as always was the largest single
beneficiary of the lower rates, which of course, generated most of the new
revenue all across the code.)
An important factor in many of these corporate cases is unseemly enrichment of
entrepreneurs through stock sales in companies that have not yet truly
succeeded in establishing their businesses. Personally, I like and respect Gary
Winnick, but Global Crossing was merely a technical success, not a financial
going concern, when he extracted $600M from the stock (out of his $4B
holdings). Similarly, Lay and Skilling or Bernie Ebbers should not have been
able to leave the wrecks of their companies as centimillionaires.
Even though most of the millennial bankruptcies were caused by a federally
engineered deflation that punished all debtors, I believe that as part of a
bankruptcy proceeding it is legitimate to retrieve earlier bonanzas reaped by
the owners. Much of the outrage exploited by the prosecutors stemmed from this
egregious enrichment of entrepreneurs leading their companies toward
bankruptcy.
Having said that, I fear for this country if most of its citizens come to see
corporations as somehow part of a zero sum game economy, where the riches of
some come at the expense of others. No matter how you disguise it this belief
makes capitalism impossible. If you believe economics is any where near a zero
sum game where wealth creates poverty, you are effectively a socialist. The
inevitable harvest of your belief is war of every man against every other in a
Hobbsian wasteland where life is solitary poor nasty brutish and short.
Compiled from
several May 28 posts by George Gilder on the www.Gildertech.com
subscriber-only message board. Logon now to read the complete
discussion.
________________________________________
Friday Blogger Bonus / Global Warming: Correlation is Not Causation
‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾
Nick Tredennick (5/27/06): After reading hundreds of pages of
articles and books on global warming, my favorite is “Aliens Cause Global
Warming” by Michael
Crichton. It can be found here: http://www.crichton-official.com/speeches/speeches_quote04.html
I
also wrote a short piece that borrows heavily from Michael. See "Chicken
Little and Global Warming" here: ftp://www.tredennick.com/pub/documents/Publications/
Michael
Crichton's State of Fear is also a good introduction to the hoax.
The next piece I write on global warming will contain the following: 95.5% of
the CO2 comes from natural sources other than man. Water vapor, which is about
4% of the atmosphere, has an absorption spectrum that covers the CO2 absorption
spectrum. CO2 is about 0.03 of the atmosphere. Global climate models (GCMs)
don't model clouds (water and water vapor) well, so H2O effects, which are a
hundred times more important than CO2 effects, are ignored. Human activity
doesn't measurably affect the atmosphere's H2O content.
Climate response to CO2 concentration is logarithmic, not linear. Doubling the
CO2 in the atmosphere doesn't double the effect, just as wearing five hats
doesn't give five times the shade.
Global climate changes correlate well with sunspot activity, which is also not
amenable to political manipulation.
I think the cause and effect relationship is inadequately established.
Correlation is not causation. Are CO2 levels the cause of warming oran effect
of warming? This reminds me of the businesses that tell you there's a
correlation between high intelligence and a large vocabulary and then encourage
you to buy their vocabulary-enhancement courses.
Actually, I'm not convinced that anything other than noise is being measured on
scales shorter than decades.
Blog link: http://blog.gildertech.com/index.php?/archives/13-Aliens-Global-Warming.html
George Gilder: Thanks for the 100-word dispersal of the gigaword cloud of
halitosis of the global warming catastrophists. Amazing feat, Nick.
The only thing to add is the historic record, confirmed by an array of other
evidence such as ice cores and tree rings, that temperatures were enough warmer
a thousand years ago, three thousand years ago and six thousand years ago to
render current conditions a little cooler than average over this period. Some
of us older folk recall the halcyon days when Greenland was green and Iceland
populous. Then mid-Millennium it got cold--the Little Ice Age--but it has warmed
up a bit since then. This correction may continue awhile its gentle Laodicean
wave. So what?
I'm just glad that Al Gore invented the Internet before he mastered
meteorology.
Read more blogs by George Gilder and the GTR editors on the
Gildertech Blog page: http://blog.gildertech.com/.
_________________________________________________
Readings /
‾‾‾‾‾‾‾‾‾‾‾‾
Ashby Foote: Big Ben Benanke Faces Big Exam
http://www.clarionledger.com/apps/pbcs.dll/article?AID=/20060602/OPINION/606020315/1285
Karlgaard: Second Thoughts on Paulson
http://blogs.forbes.com/digitalrules/
Remembering Lloyd Bentsen
http://article.nationalreview.com/?q=NDhmOTJlMDk2ZmUzMGNiMGMzMzFlMzVkOTg4NWVkODU=
Schumer’s Tax-Cut
Shortsightedness
http://article.nationalreview.com/?q=OTA5OTU1NGZjMDNmODJlOGJkY2I3ZjRiYzJjMzM2N2U=
Would Adam Smith Approve?
http://author.nationalreview.com/latest/?q=MjE0OA==
Speculating On Spectrum
http://www.forbes.com/2006/05/25/wireless-auction-fcc_cx_ck_0526spectrum.html
Most Customers Want
Simplicity In A Cellphone
http://www.technologyreview.com/read_article.aspx?id=16941
AMD Tips Process Roadmap,
Slams Intel
http://www.eet.com/news/design/showArticle.jhtml?articleID=188700724
Oil-Hunters Seek Super Help
http://www.redherring.com/Article.aspx?a=17075&hed=Oil%20Hunters%20Seek%20Super%20Help
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