Bill Baruch, president and founder of Blue Line Futures, reviews and previews the euro, Japanese yen...
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Steve Forbes: Freedom and Finance
08/20/2004 12:00 am EST
Steve Forbes, editor-in-chief of Forbes magazine, needs little introduction. He is one of the most prominent figures in the financial world, known for willingness to share direct and unhedged opinions on business, investments, capitalism, politics, and life.
"The fundamentals of this economy are very, very strong. There are two clichés in the stock market. One is that in a bear market, investors are going down the ‘slope of hope.’ You’ve had a bull market and you begin to feel it is written in the Constitution that the market must go up each year. And then the market takes a hit. You then have a sucker’s rally—a bear market rally— and you figure that things are back to normal. But the market goes back down again. You get a period of hope and then get smashed again. This happens again and again, and then finally you say, ‘Dear God, just get me even and I’ll never go near equities again.’ That’s usually the bottom.
"By contrast, in a long bull market, the reverse phrase is climbing a wall of worry. We are in one of those periods. In a bull market, oftentimes, people are often well aware of all the things that can go wrong. They are well aware of all the problems out there and well aware of the things that can get in the way of a good, vibrant, prosperous future. And that’s usually the time the market surprises you in a very pleasant way.
"If you look at surveys of money managers in the 1990s, especially in the late 1990s, as a consensus, they were always underestimating what was happening in the market. They couldn’t believe what was happening in the market. It wasn’t until 1999 that everyone truly felt that prosperity was here forever and that indeed there was some Newtonian law that guaranteed the market would go up 50% a year. That, of course, was the top— when everyone becomes a believer. Then March of 2000 came, and we all know what happened after that.
"Today, there is much uncertainty out there. The election is one of them. The war on terror—Islamic fanaticism—is another. The market has been very sloppy, and we are all worried about inflation, oil prices. The economy in the second quarter was slower than in the first. So there are a lot of uncertainties out there. But it is precisely at times like this that you have to have a little bit of fortitude. That’s why there are so few successful investors out there—precisely because investing is so often counter-emotional. In short, when you feel good, don’t. When you feel bad, do it— assuming you have any money left to do it. We are in one of these periods of uncertainty and doubt, but nonetheless, make no mistake; the fundamentals of this economy are very, very good.
"Another thing to keep in mind is that expansions never go in a straight line. You always have wobbles, both up and down. We always have periodic crises. There are always plenty of things that can keep you worried. But the fundamentals are in place for an enormous, sustained advance. We know what they are: productivity is very high by historical standards, even though it will fluctuate from quarter to quarter. The technology that is being created is very real— even though we have learned from time to time that not everyone makes money on technology.
"As an aside, who made all the money from mainframe computers? It wasn’t IBM’s competitors. Even IBM nearly went under in the early 1990s. The company that made the most money from mainframe computers was Wal-Mart. Sam Walton used mainframes better than anyone else. He knew that if you managed inventories better than anyone else, you could rise up. In a period of a couple of generations, that company went from a small Arkansas retailer to the largest entity in the world. Think of that for a moment. Wal-Mart is probably the first entity in history that employs more than a million people profitably. Post offices do. Militaries do. But they don’t make any money at it. This is the first entity to do it profitably. It’s simply amazing.
"The point is that technology is for real. In the early 1980s, what burst upon the scene? Personal computers. Everyone knew when the PC came on the scene that this was a big deal. Everyone got into the business. Everyone knew this was the wave of the future. But then step back and remember companies like Atari, Commodore, Franklin, Osborne. Texas Instruments didn’t even make money in PCs. In 1985, the head of Digital Equipment—a major, mighty company—said that personal computers were a passing fad—a hobby. And we looked at the carnage in the industry and we thought he was right. But the technology moved forward. Chips became more powerful. And thanks to things like graphics breakthrough, the mouse, the ability for PCs to talk to each other— and our lives and offices haven’t been the same since. So technology is for real and it is giving us real historic highs in productivity.
"Meanwhile, companies, after the excess of the 1990s, have gotten their act together. Profits will remain fairly strong. Personal incomes are strong. Corporate spending is going up in a very meaningful way. 2000 saw a collapse in business spending. Now that is starting to increase at double-digit rates. So even though we are having a bit of a pause right now, business spending will continue and that’s why the second half of this year should see good growth rates— probably in the area of 4%. Next year should be a very positive year as well.
"People worry about housing. Do we have a housing bubble? Probably in certain markets, yes. But if you look around the country, there are still housing bargains out there. People are discovering they don’t need to live in the major cities. Thanks to high tech, the sophistication gap between parts of the country are disappearing and more and more people are moving to areas like Des Moines, Iowa, and Lexington, Kentucky, Austin, Texas, Boise, Idaho, and Missoula, Montana. So yes, in parts of the country, housing could take a hit. But in much of the country, housing is still very affordable. Technology is allowing for the best of both worlds.
"Nanotechnology is real. I’m very excited about this area, particularly in healthcare. As I get older—and my heirs may not like it—but I like longevity. I’m very interested in this! In a few years, they will be able to take cells from your body and tell you in advance if you will get certain kinds of cancer, for example, if you don’t do something. Think about early detection—this is even before it happens! So great things are happening. I’d emphasize that they are not all happening here in America. Nothing is inevitable. If you don’t have the right environment, nothing will flourish. For example, take broadband. You all know how you need enhanced lines, or you’re going to spend an hour downloading a photo. Do you realize that the South Korea today, the average household has the equivalent of 4 T-1 lines—which in this country would cost you a couple of thousand dollars per month— and they get it for $39 a month. They are ahead of us in broadband by a huge margin. Japan is ahead of us, Italy is ahead of us, Scandinavia is ahead of us. This is why the election is important. Once we get through November, we should take agencies, like the Federal Communications Commission and certain Federal commissions, and send them to North Korea as part of a cultural exchange program! Get rid of them.
"We all know about the uncertainty regarding interest rates. Everyone thinks short-term rates will rise, and they probably will. But the thing to think about with interest rates is this: the Federal Reserve is like the equivalent of a fuel injector for a car. You can have a fantastic automobile, but if you don’t have sufficient fuel, the engine’s going to stall. If you have too much fuel, you’re going to flood the engine. Get it just right, and the engine has the chance to purr. A few years ago the Fed made a mistake, I think. They put in too little credit for the economy. About a year and a half ago, they reversed course, and I think they’ve overdone it.
"We’re having a mild inflation. We’ve seen oil prices shoot up. It’s not just uncertainty about Russia and Iraq. It’s also inflation. We’ve seen it with shipping prices and with steel prices. This gets to a very basic question. How do we know if the Fed is doing the job right or wrong? If you want to get a good barometer of what the Fed is doing—and economists gag at this—just look at broad-based commodity averages. If they are all moving in one direction, something is happening. And since you are busy people, just make it simple. Just look at the price of gold. Here’s all you need to know about central banking. And if you ever want to make a mid-life career change and become a central banker— remember this little rule, and you’ll do better than the Federal Reserve, the Bank of Japan, and the European Central Bank.
"The rule is this: if the price of gold is below $300 an ounce, that’s bad. That’s deflation. When it goes above $400 an ounce, that’s bad. That’s inflation. When gold hit $430 a few months ago, those of us who followed this knew that strange things were going to happen, and indeed they did. Don’t look at indices like the consumer price index— those are lagging indicators that tell you after it has happened. If gold goes down to about $350-$360, even $370, that’s okay. But above that, you’re going to have mild trouble. So right now, we have the equivalent of a bad cold. Not like the pneumonia we had in the 1970s. Just a case of the cold. Just be aware that whenever gold goes above $400, the Fed begins to extinguish money. Gold, like it or not, is the North Star. Gold is the monetary policy. It’s the best barometer around.
"Overall, there are other things to watch out for and a lot of things to worry about. One of the things we have to worry about is the aftermath of corporate scandals. The danger there is that the regulators and the courts muddy the difference between real wrongdoing such as Enron and honest business mistakes. Risk taking means that you can go wrong. It doesn’t always work out. Most new businesses fail within five years of inception. Yet, if you don’t have risk taking, we wouldn’t be here. We’d still be living in caves. It’s very easy in retrospect to look back and say, ‘Boy, that was a dumb idea.’ It’s always easy to look back and say, "That worked. Why didn’t anyone think of it sooner?’ You don’t know until you try. You want people out there taking risks.
"People are worried about our competitiveness. Instead of shaking our fist at the Chinese and Indians, we should instead be looking at what we can do to get our act together. We have the highest business tax rates in the world. We’re pretty good on the personal side, but on the business side, we have a ways to go. As I mentioned, in areas like broadband. And we have problems in our legal system, and our concerns with liability. The worst thing you can do to investing, the worst thing you can do to management, the worst thing you can do to entrepreneurship, is what’s happened to medicine in America where you are always looking over your shoulder wondering, ‘How is this going to look in a court room?’ Then you kill the economy when you do that, just as we’ve harmed medicine in this country. Just to give you a scary statistic: each year in America 50,000 high school kids participate in science fairs. In China, this number is 6 million. They are turning out more scientists and engineers than we are. Our schools turn their noses at science and engineering. We’re going to pay the price if that continues. So rather than worry about what the Chinese and Indians are doing, I think we should worry about what we are doing and get our act together. Then we can do what we have done for 200 years and that is ‘You may want to catch us, but a free people with the right incentives will always have the lead.’"
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