Don't Jump Ship! These Rough Seas Won't Capsize the Future
By Louis Rukeyser
Six questions to ask before you leap off the gangplank:
(1) Do you really think America is sinking?
As I've observed to you in the past, one of the most simultaneously endearing and infuriating characteristics of our national mind is its remarkable lack of memory. Europeans and Asians routinely retain grudges for centuries; we Americans are lucky if we are able to remember whom we were supposed to be mad at last year. It works in economics too, with a little help from our friendly, ever-obfuscating politicians. For example, to the extent that they think about it at all, most Americans have come to accept the bizarre myth that the 1980s were a period of stagnating growth, dwindling jobs, a worsening environment and soaring interest rates. (The precise opposites were true.) Similarly, the economy was not really totally wonderful a year ago, nor is it totally awful today. For a number of reasons, which we've been detailing to you on this page for many months, we're going through a rough patch now. But the Federal Reserve has finally been shaken into something resembling reality. Anyone who thinks lower interest rates, more-restrained regulation and meaningfully lower taxes--if we can get them--will not reignite the U.S. economy over the next year or two has forgotten what should have been learned in Economics 101. The historically strong uptrend will resume, powered primarily (as always) not by governmental "maestros," but by the genius and inventiveness of private citizens.
(2) Do you really think we're about to be torpedoed by a repeat of 1970s-style stagflation?
The evidence is to the contrary. The surge in energy prices that caused such consternation in the latest reports should be viewed not as a sign of systemic inflation but as an additional tax on economic growth. True inflation is a monetary disease, pure and unsimple. In any economy, some prices will be moving up and others moving down; such changes become inflationary only if the Federal Reserve validates them by printing too much money. So far from touching off a general inflation, the recent price increases for home-heating fuels have led consumers to skimp on other purchases. The prices of goods from computers to clothes have been coming down. And the only signal we've been getting from the precious-metals market has been a gigantic yawn. We scarcely have an overheated economy today: economic growth was a paltry 1.4% in the final three months of 2000, the slowest in more than five years, and the current quarter is so weak that it is likely to make the last one look good. The chastened Fed has plenty of room to repair the damage it has done.
(3) Do you really think the passing mood in Wall Street is a persuasive guide to our economic future?
It was Nobel laureate Paul Samuelson who first observed that the stock market had predicted 11 of the past four recessions. Ersatz tarot cards would be at least as useful a forecasting guide as the quotidian hysteria in the financial markets. (Remember "The Crash of 1987"--and the totally nonexistent "terrible recession" that followed?) This doesn't mean that the economy for the rest of this year is going to be all peaches and cream; plainly, it is not. Manufacturing in general and technology in particular are in a conspicuous slump; as I write this, there have already been 289 negative earnings preannouncements for the first quarter, vs. 33 at the same time last year. And analysts are further confused by the unforeseen impact of the Securities and Exchange Commission's new "Fair Disclosure" rules, which many company executives have interpreted to mean: "No Disclosure." This means that "visibility"--the ability to predict with any degree of certainty what sales will be a few months from now-is more limited than in the past. This has sent traders into an even-deeper funk. But as that estimable stock-picker Barbara Marcin reminds us in The Rukeyser Interview this month, overbuilt inventories do eventually get sold, and both corporations and investors will be smiling broadly again, down the road. By then, of course, the passing mood will reflect this, and prices will be very much higher.
(4) Do you really think technology is dead?
Savvy investors know better. They know that, given the glamorous and futuristic nature of the sector, it is prone to even more violent mood swings than most of the rest of the market. But technology is the future. It is not only changing and improving lives all over the globe; it is a key to the marvelously rising productivity that is enabling us to have better goods at lower prices worldwide. The sector periodically gets temporarily overvalued, and there is a healthy side to the market's renewed concentration on earnings, balance sheets, and authentic products and services. But, as usual, the downswing has been at least as overdone as the upsurge, and history tells us that the quality technology companies are going to look a lot shinier than they do right now. Reports of technology's death will again be seen, in retrospect, as having been laughably premature.
(5) Do you really think bonds or cash will outperform stocks over any extended period?
They never have--and they certainly won't over the next generation. That doesn't mean you shouldn't have any. On the contrary. Those who have followed our advice to avoid margin debt, and to invest only what they won't immediately need, are still sitting pretty. The stock market is no place for your first (or last) dollar. As I've often noted, forced sales have a way of turning out to be bad sales. It will be true again in 2001. Patience and perseverance are the way most stock-market fortunes get built. Bonds and similar financial instruments have a role in most portfolios, a role that appropriately grows as your need for reliable investment income grows. And a diversified search for long-term wealth can certainly include such areas as real estate. But as we learn time and again through the market's ups and downs (and tend to forget when it takes a periodic plummet), the long-term course of quality common stocks is steeply higher.
(6) What part of "buy low, sell high" didn't you get?
Everybody regards this a cliché, but all too few put it into practice. What Benjamin Graham described as "Mr. Market" is a perverse creature, offering the same values at dramatically different prices at different times. When the prices of quality stocks in technology, financial services, pharmaceuticals and an array of other attractive industries have reached multiples of the prices they fetch today, the same crowd of analysts who are so belatedly gloomy now will be giving these companies their highest recommendation. So the only real question for you should be: at which price would you prefer to buy them?
P.S. If you agree with me that happier times lie ahead, now is the time for you and me to start planning for some especially enjoyable days together. Enclosed with this issue is our announcement of The Seventh Louis Rukeyser Investment Cruise, our most exciting tropical itinerary yet--10 days in the Southern Caribbean, with a brilliant array of speakers (including Barbara Marcin!). And, if you want to get an even-earlier start on the celebration, we've managed to shake loose a few more excellent cabins for our luxurious 12-day Mediterranean cruise in August. For full details on both or either, call 800-278-5996, and join me for truly unforgettable fun and profit on the high seas.
By Louis Rukeyser
Six questions to ask before you leap off the gangplank:
(1) Do you really think America is sinking?
As I've observed to you in the past, one of the most simultaneously endearing and infuriating characteristics of our national mind is its remarkable lack of memory. Europeans and Asians routinely retain grudges for centuries; we Americans are lucky if we are able to remember whom we were supposed to be mad at last year. It works in economics too, with a little help from our friendly, ever-obfuscating politicians. For example, to the extent that they think about it at all, most Americans have come to accept the bizarre myth that the 1980s were a period of stagnating growth, dwindling jobs, a worsening environment and soaring interest rates. (The precise opposites were true.) Similarly, the economy was not really totally wonderful a year ago, nor is it totally awful today. For a number of reasons, which we've been detailing to you on this page for many months, we're going through a rough patch now. But the Federal Reserve has finally been shaken into something resembling reality. Anyone who thinks lower interest rates, more-restrained regulation and meaningfully lower taxes--if we can get them--will not reignite the U.S. economy over the next year or two has forgotten what should have been learned in Economics 101. The historically strong uptrend will resume, powered primarily (as always) not by governmental "maestros," but by the genius and inventiveness of private citizens.
(2) Do you really think we're about to be torpedoed by a repeat of 1970s-style stagflation?
The evidence is to the contrary. The surge in energy prices that caused such consternation in the latest reports should be viewed not as a sign of systemic inflation but as an additional tax on economic growth. True inflation is a monetary disease, pure and unsimple. In any economy, some prices will be moving up and others moving down; such changes become inflationary only if the Federal Reserve validates them by printing too much money. So far from touching off a general inflation, the recent price increases for home-heating fuels have led consumers to skimp on other purchases. The prices of goods from computers to clothes have been coming down. And the only signal we've been getting from the precious-metals market has been a gigantic yawn. We scarcely have an overheated economy today: economic growth was a paltry 1.4% in the final three months of 2000, the slowest in more than five years, and the current quarter is so weak that it is likely to make the last one look good. The chastened Fed has plenty of room to repair the damage it has done.
(3) Do you really think the passing mood in Wall Street is a persuasive guide to our economic future?
It was Nobel laureate Paul Samuelson who first observed that the stock market had predicted 11 of the past four recessions. Ersatz tarot cards would be at least as useful a forecasting guide as the quotidian hysteria in the financial markets. (Remember "The Crash of 1987"--and the totally nonexistent "terrible recession" that followed?) This doesn't mean that the economy for the rest of this year is going to be all peaches and cream; plainly, it is not. Manufacturing in general and technology in particular are in a conspicuous slump; as I write this, there have already been 289 negative earnings preannouncements for the first quarter, vs. 33 at the same time last year. And analysts are further confused by the unforeseen impact of the Securities and Exchange Commission's new "Fair Disclosure" rules, which many company executives have interpreted to mean: "No Disclosure." This means that "visibility"--the ability to predict with any degree of certainty what sales will be a few months from now-is more limited than in the past. This has sent traders into an even-deeper funk. But as that estimable stock-picker Barbara Marcin reminds us in The Rukeyser Interview this month, overbuilt inventories do eventually get sold, and both corporations and investors will be smiling broadly again, down the road. By then, of course, the passing mood will reflect this, and prices will be very much higher.
(4) Do you really think technology is dead?
Savvy investors know better. They know that, given the glamorous and futuristic nature of the sector, it is prone to even more violent mood swings than most of the rest of the market. But technology is the future. It is not only changing and improving lives all over the globe; it is a key to the marvelously rising productivity that is enabling us to have better goods at lower prices worldwide. The sector periodically gets temporarily overvalued, and there is a healthy side to the market's renewed concentration on earnings, balance sheets, and authentic products and services. But, as usual, the downswing has been at least as overdone as the upsurge, and history tells us that the quality technology companies are going to look a lot shinier than they do right now. Reports of technology's death will again be seen, in retrospect, as having been laughably premature.
(5) Do you really think bonds or cash will outperform stocks over any extended period?
They never have--and they certainly won't over the next generation. That doesn't mean you shouldn't have any. On the contrary. Those who have followed our advice to avoid margin debt, and to invest only what they won't immediately need, are still sitting pretty. The stock market is no place for your first (or last) dollar. As I've often noted, forced sales have a way of turning out to be bad sales. It will be true again in 2001. Patience and perseverance are the way most stock-market fortunes get built. Bonds and similar financial instruments have a role in most portfolios, a role that appropriately grows as your need for reliable investment income grows. And a diversified search for long-term wealth can certainly include such areas as real estate. But as we learn time and again through the market's ups and downs (and tend to forget when it takes a periodic plummet), the long-term course of quality common stocks is steeply higher.
(6) What part of "buy low, sell high" didn't you get?
Everybody regards this a cliché, but all too few put it into practice. What Benjamin Graham described as "Mr. Market" is a perverse creature, offering the same values at dramatically different prices at different times. When the prices of quality stocks in technology, financial services, pharmaceuticals and an array of other attractive industries have reached multiples of the prices they fetch today, the same crowd of analysts who are so belatedly gloomy now will be giving these companies their highest recommendation. So the only real question for you should be: at which price would you prefer to buy them?
P.S. If you agree with me that happier times lie ahead, now is the time for you and me to start planning for some especially enjoyable days together. Enclosed with this issue is our announcement of The Seventh Louis Rukeyser Investment Cruise, our most exciting tropical itinerary yet--10 days in the Southern Caribbean, with a brilliant array of speakers (including Barbara Marcin!). And, if you want to get an even-earlier start on the celebration, we've managed to shake loose a few more excellent cabins for our luxurious 12-day Mediterranean cruise in August. For full details on both or either, call 800-278-5996, and join me for truly unforgettable fun and profit on the high seas.
