>No doubt a lot of Wall Street money is flowing into high-tech stocks b/c
>of reasonable expectations of future profits, current asset-earnings
>ratios be damned. And you're also right to point out that some correct
>guesses will be richly rewarded, and some other wrong guesses will be
>sternly punished. But isn't a lot of liquid capital flowing into
>high-tech stocks simply b/c there's no better place to park it (in part
>b/c of E. Asian doldrums/strong dollar), and this engenders an upward
>spiral of speculation, unrelated to "reasonable expectations" (i.e. your
>classic bubble) ?
A set of speculative stocks seems to be the last place one would want to "park...a lot of liquid capital," particularly at a time when absolutely secure long-term bonds are yielding a real interest rate exceeding 5% p.a. IMO the term "bubble" is not the best one to describe so selective (among sectors) a market, particularly when, in whatever is currently the most dynamic sector, there are periodic sharp declines in price that, far from "puncturing" a bubble, merely set the stage for a further advance *of those stocks that reasonably merit a leadership role*.
Shane
>
>On Mon, 21 Feb 2000, Shane Mage wrote:
>
>> My correction is to my third paragraph. *Negative* profitability, of course.
>>
>> >Doug wrote:
>> >
>> >>[I'd rather not say where this comes from, other than to say a market
>> >>newsletter, but it's a perfect example of New Economy reasoning,
>> >>coming from someone who used to be very skeptical in temperament. Lev
>> >>said these things in an interview with the ridiculous biz mag Fast
>> >>Company. What's amazing to me is that "value" is defined entirely by
>> >>the stock market - the actual production of profits, the
>> >>long-standing raison d'etre for capitalist enterprise, isn't merely
>> >>secondary, it's a hindrance to "value production." Who needs
>> >>something as mundane as sales? That's a relic of transaction
>> >>thinking!]
>> >
>> >From a Marxist standpoint, there is nothing at all wrong with Lev's
>> >argument. Capital is the mass of socially necessary labor time
>> >accumulated to serve as the basis for production of surplus value.
>> >The capital of each firm is subject to what Marx called "moral wear
>> >and tear," which we nowadays call "obsolescence." But the obsolescence
>> >of one firm's capital is produced by a technological advance that
>> >provides a profitable [temporary] monopoly advantage to the firm
>> >introducing the new technology. The laggard's capital is "destroyed,"
>> >but that "destruction" is compensated by the market which capitalizes
>> >the expected profit of the innovator at a much higher rate. This is how
>> >capitalist fortunes are made when they are made
>> >"honestly." From a
>> >Marxist view, this is a transfer of capital from loser to winner. It is
>> >also the very essence of capitalism as a continual revolution of the forces
>> >of production (and the main thing that Schumpeter learned from Marx!)
>> >
>> >The essential point is that technological knowledge--not merely its
>> >embodiment in machines--is an objective part of the productive forces
>> >of society (and historically the most important part). Under capitalism,
>> >according to the law of value, its producers
>> >contribute socially necessary labor time at an enormous multiple of
>> >the "standard" labor hour. The capitalists who employ it extract a
>> >correspondingly enormous amount of surplus value, which they realize
>> >directly, without need for any further transactions, by incorporating it
>> >into their capital base. But the transactions-based accounting system,
>> >which Lev rightly decries, not only refuses to recognize this, it as
>> >actually quite perverse. Research and development expenditures not
>> >only are not recognized as additions to capital, they are actually
>> >accounted for as *losses*!
>> >
>> >Once you realize this, you can grasp that negative "profitability" of a
>> >technologically
>> >dynamic firm, as measured by conventional, legally required, standards, is
>> >not merely irrelevant to the rational capitalist but even tends to be
>> >correlated with positive investment value. Rational investors, their eyes
>> >focused on the *future* returns of a firm over a long run measured in
>>decades,
>> >evaluate current expenditures, not for their effect on this years "bottom
>> >line," but for whether or not they really are likely to build up, for that
>> >firm,
>> >a durable "competitive (ie., monopoly) advantage." Some make right
>>judgments,
>> >some wrong. Those who are right will be richly rewarded, those who are
>>wrong
>> >will be harshly punished, financially. But in the World According to Marx
>> >(ie., the real world) the technologically dynamic sectors of capital will
>> >always outstrip the laggards.
>> >
>> >Shane Mage
>> >
>> >"When we read on a printed page the doctrine of Pythagoras that all things
>> >are made of numbers, it seems mystical, mystifying, even downright silly.
>> >
>> >When we read on a computer screen the doctrine of Pythagoras that all
>> >things are made of numbers, it seems self-evidently true." (N. Weiner)
>> >
>> >
>> >>
>> >> From where we sit, the new era economy should continue to defy the
>> >>outmoded actuarial tables that attempt to quantify it. On this score,
>> >>recent work by Baruch Lev has been truly eye-opening. Lev is, among
>> >>other things, the Philip Bardes Professor of Accounting and Finance
>> >>at NYU's Leonard N. Stern's School of Business, as well as the
>> >>director of the Vincent C. Ross Institute of Accounting Research and
>> >>the Project for Research on Intangibles. He has pioneered the
>> >>development of a Knowledge Capital Scoreboard, which attempts to put
>> >>hard numbers to intangible assets. Fed Chairman Alan Greenspan
>> >>recently noted that during the second half of the twentieth century,
>> >>the US tripled the real value of its output with no increase in the
>> >>weight of the materials produced.
>> >>
>> >>Lev contends that the half-a-millennium-old accounting standards
>> >>developed by an Italian monk in the 15th Century form a hopelessly
>> >>antiquated approach to determining value in the marketplace. Luca
>> >>Pacioli's system is entirely based on transactions. But transactions
>> >>and tangible assets describe a constantly shrinking portion of
>> >>today's economy. Economist John Kendrick has studied the main drivers
>> >>of economic growth and reports that there has been a general increase
>> >>in the contribution that intangible assets have made to US growth
>> >>since the early 1900's. In 1929, for example, the ratio of intangible
>> >>business capital to tangible business capital was 30% to 70%. In 1990
>> >>that ratio was 63% to 37%. So generally accepted accounting no longer
>> >>delivers accountability.
>> >>
>> >>Think about it. Lev points out that when a drug passes its clinical
>> >>test, huge value is created but there's no transaction. Nothing
>> >>changes hands. Nobody buys anything and nobody sells anything. When
>> >>software passes a beta-test it suddenly becomes valuable but, again,
>> >>there's no transaction. Or think about how value is destroyed. When a
>> >>big, old company is late in figuring out how to enter the world of
>> >>e-commerce, huge value is destroyed but there is no transaction. This
>> >>helps explain why - in the midst of a torrid 85% bull market gain in
>> >>NASDAQ stocks last year - half of the stocks in the S&P 500 were down
>> >>in 1999, and why more stocks made new lows than new highs by a wide
>> >>margin.
>> >>
>> >>Even more illustrative of the market's harsh treatment of companies
>> >>that refuse to embrace change is one recent study that showed that
>> >>stocks with no earnings had gained on average 52% while stocks with
>> >>earnings had lost 2%. Grasping the significance of knowledge-based,
>> >>or intangible, assets is what separates the sentient from the
>> >>stillborn in today's financial arena. The analytical ground is just
>> >>being broken on this front and promises to deliver an endless bounty
>> >>of insight and opportunity to investors.
>>
>>