Michaels: Post Bubble Psychology
08/15/2003 12:00 am EST
James W. Michaels holds the highly prestigious title of editor emeritus at Forbes, after serving as editor of the magazine from 1961 until 1999. Michaels, who also appears each week on Forbes on Fox, was recently named as "one of the ten outstanding business journalists of the 20th century." Here are his comments from Atlantic City.
"I’d like to try and apply post-bubble psychology to understanding the market we are in today. What history teaches us about post-bubble markets is that when the next bull market begins, almost nobody believes it. In these periods–these early post-bubble markets–people emphasize the negatives. It helps build a wall of worry. Yet the stock market keeps jumping over that wall. We’re at such a time right now. This market has been climbing a wall of worry. You know the refrain–unemployment, Osama, Kim Il Sung, stocks aren’t cheap by historical standards, interest rates are rising, we have an unsustainable balance of payments, etc. But you know something? I’ve been here before and it’s always the same.
"When the turn comes, people are skeptical of it. Investors have been burned and the media is in such a funk, yet the market keeps ignoring these concerns and keeps going up. Here we go again. The New York Times recently said that this was a sucker’s rally of small investors chasing burned-out Internet stocks. Forget the media bias. Let’s peer over this wall of worry. I see some awfully good things out there. I want to emphasize two of them:
"One is the tax cut--and more specifically--the dividend tax cut. I believe firmly that this change is going to lead to real changes in corporate governance, and put the kibosh on these costly, unnecessary mergers, which have wrecked so many company balance sheets. It’s going to make sure that more of the profits that companies make are returned to investors rather than being left in corporate treasuries and often wasted. Here’s just one simple figure. If the 500 companies in the S&P 500 index were to treble their dividend rates, they would still only be paying out about 30% of their profits. So they can triple their payouts and still have plenty of money to reinvest in their business. So what I foresee happening is that we are entering a new era in which stocks will be held for income as well as for capital gains–and both will be taxed at a 15% rate. I see this as a tremendous positive.
"The second thing is technology. The technology revolution isn’t over. It’s already improved productivity and coming down the road is a whole new world of technology. Broadband communications are in such an early stage that we really haven’t seen anything yet. I need hardly mention biotech and nanotech. Finally, where else are you going to go with your money other than stocks? The bond market today is as volatile as the stock market. There is no refuge there. I think real estate is at least peaking. Cash is not trash, but it doesn’t pay its own way. If you hold money market funds, you’re losing money to inflation every year. So back to that wall of worry. When that wall of worry disappears, I think it will be too late to invest. If you don’t feel a little worried, the time probably isn’t right to be investing. Look through that wall of worry, because this rally is for real–and if you’re not sure that is right, that alone confirms my point."