Nasdaq And The Pessimism Bias: I Heart Capitalism by Jared Dillian, Mauldin Economics
Let me begin by saying that if you aren’t on Twitter, you’re making a huge mistake. I was encouraged to get on Twitter years ago by a tech-savvy friend. There is a learning curve. It’s not the easiest thing to get the hang of. Used correctly, it can make you smarter. If you could take a smart pill to make you smarter, you would take it, right? Get on Twitter.
So I saw an interesting table on Twitter—someone had taken a photo of a table out of the print version of Barron’s magazine and tweeted it to their followers. I am reproducing it here:
Nasdaq, Then And Now
Below are the top 10 stocks in the Nasdaq Composite Index.
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The first thing you notice is that there’s been a huge turnover. Sun Microsystems disappeared, the box business was so bad Dell took itself private, and WorldCom… well, we all know what happened to it.
But the even more obvious thing is the valuations. If I’d told you 15 years ago that big tech companies like Cisco and Intel would end up with valuations in the teens, you would have called me crazy. And even if you had believed me, you probably would have thought that the P would go down, instead of the E going up.
I mean, think about this. The biggest company in the world – Apple – makes so much money that the stock is almost cheap. Some very smart people think it’s really cheap. I have at times considered making it one of my picks in Bull’s Eye Investor, where I make an effort to focus on value. And it has a $750 billion market cap!
I don’t mean to contradict myself in the span of two weeks, but it’s hard to make the argument that tech (or the overall market) is grossly overvalued judging from the column on the right. For clarification, I think that early-stage financing is out of whack, not big-cap tech.
Hold that thought.
Everything Is Amazing, and Nobody Is Happy
I bought a house recently, and we’re in the process of moving. My friend Adam flew up from Florida to help out. We were taking a break from lugging furniture around, and my wife was putting away some stuff in the kitchen. She took a waffle iron and put it in the cabinet.
“See that waffle iron?” I said to Adam. “We just got that from Wal-Mart. $15. It makes amazing waffles.
“The old waffle iron we got 18 years ago, it made crappy waffles and eventually broke. It cost $80 in 1996.”
Adjusted for the increase in quality, the price of that waffle iron dropped about 90% in 20 years.
Then we started looking around the house at other things that are cheaper today. Ceiling fans. Adam told us that a good, quiet ceiling fan costs about $200 today. 20 years ago, it would have been much more.
Same with apparel, which once took up 11-12% of the average household budget but is now only 3-4%. Why? Clothes can be produced overseas for less. We don’t even have a textiles industry anymore.
Improvements in global trade, better technology, better manufacturing techniques, and better logistics are responsible for cheaper clothes, cheaper ceiling fans, and cheaper waffle irons. Not to mention TVs, which are almost 99% cheaper in real terms.
So of all the pet peeves in the world, probably my biggest is when people (usually on the left) gripe about stagnant incomes over the last 15-20 years without taking into account the truly gargantuan increase in standard of living that we all enjoy, and how much purchasing power we’ve received from the deflationary effects of free-market capitalism.
If median incomes were about $30,000 for individuals in 2000 and are still about $30,000 today, that $30,000 goes much, much further today than it did back then.
So then I start to think: Are human beings really that dumb? Do we need to get paid more every year to think we are getting richer? Answer: Unfortunately, yes. Hence the push for inflation.
You might have heard that Walmart is raising its minimum wage. The company’s management aren’t dummies. They’re well aware that gasoline prices have plummeted and that the freed-up money in the consumers’ wallets is plowing back into its checkout lines—just in time for a price increase. As a client of mine eloquently stated, “Mrs. Walton raised no dumb children.”
The Pessimism Bias
People generally think things are getting worse. No doubt about it: the world is going to hell one way or another—just turn on the news. I actually stopped using the Drudge Report as a news source about a year ago. It’s so relentlessly bearish, it was screwing up my decision-making.
However, things are awesome right now. If you’ve ever seen that Louis C.K. bit on how great things are, he understates it massively. Things are much better than that. You can get waffle irons for $15, and you can get Cisco stock at a P/E ratio of 13.
But I’m always on the lookout for the turn, for when things actually do start getting worse. Like, I’m worried about net neutrality and the FCC’s interventions in the Internet. Surely this will make broadband more, not less expensive in the coming years.
And if you really want to read a book that will make your head explode, go pick up an out-of-print copy of Kiril Sokoloff and Gary Shilling’s 1983 book, Is Inflation Ending? Are You Ready? Monetarists tend to think that inflation arises from too much money, but Sokoloff and Shilling identified another cause: “inflation by fiat.” They looked at the deregulation that was happening in the early ‘80s and predicted that inflation was going to drop precipitously.
Speaking of inflation, you can get the book for a penny on Amazon.
I’m not even saying the stock market will go up (though it probably will). I’m saying don’t be so freaking grumpy all the time. It makes people make really bad decisions.
Skepticism is different from pessimism. Pessimism as a strategy generally doesn’t work. Optimism generally does. But the pessimistic argument is so compelling because it seems smart.
If you time-stamped every doomsday prediction you saw in the news and put them all in a spreadsheet and monitored them over time, you would find that virtually none of them came to pass. Pessimism sells newspapers. You read about the one fatal car accident, not the 999,999 cars that didn’t get into an accident.
It’s okay to doubt. Doubt is the foundation of rational thought. But don’t confuse booms with bubbles, and don’t read any articles with “crash” in the title.
That should be a good start.
Editor, The 10th Man
Jared’s premium investment service, Bull’s Eye Investor, is available now. Click here for our introductory offer. For Jared, no asset class or type of investment is off limits. From an iconic sports outfitter to a particularly liquid frontier-market ETF—Jared picks the best vehicles for his subscribers to profit from tomorrow’s trends today. Put Jared’s ingenious mix of market analysis and trader’s intuition to work in your portfolio today. Follow Jared on Twitter at @dailydirtnap.