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Jewish World Review April 23, 2001 / 30 Nissan, 5761

George Will

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Consumer Reports

Causation can work ... -- THE CREATOR, a wit warns, is going to come down and pull civilization over for speeding. The stock market has done that to America's economy.

Time was, the economy drove the stock market. Now causation can work the other way, at least when the market controls confidence. However, although surveys show plunging consumer confidence, consumer behavior is producing a negative savings rate -- spending outstripping after-tax income. Consumer spending is two-thirds of GDP, and in this year's first quarter, such spending probably was 3 percent higher than in last year's first quarter.

Today's economic events constitute a $4 trillion puzzle, that being the amount of wealth (exceeding the combined GDPs of Britain, France and Italy) that has quickly come and gone among Nasdaq stocks. So quickly; all of the $4 trillion was here only on March 10, 2000, Nasdaq's apogee. That may explain why Americans do not miss it more than they do: They hardly had time to become attach- ed to it.

The Wall Street Journal's Holman Jenkins recalls John Maynard Keynes's warning that low trading costs (Keynes never imagined online trading) in a context of abundant liquid capital make it too easy for investors to buy or sell on whim, rumor or perceived portents (Keynes never imagined CNBC). Yet investors remain remarkably free from the volatility that was predicted because of the new demographics of stock ownership. A majority of households own stocks, and mutual funds have surpassed banks as the major repository of savings. Investors' money is still flowing into equities.

Furthermore, the budget surplus may help divert more money from cautious investors to stocks. Such investors often have favored 30-year Treasury bonds, a species endangered by the government's reduced borrowing.

Investor stoicism, as Gretchen Morgenson of the New York Times calls it, has been remarkable, considering that if the shares of Yahoo, Cisco, Oracle, Sun Microsystems, Intel, AT&T and Microsoft were now to begin rising in price 15 percent a year, it would take them 20, 10, nine, nine, seven, seven and six years respectively to regain their recent peaks.

Could it be that the birth, and the bursting, of the tech stock bubble came about because Netscape founder Jim Clark craved a new boat? Journalist Michael Lewis, in his book "The New New Thing," says the decision to take Netscape public in August 1995 came when the company was 18 months old and had not earned a cent. But Clark, eager to finance a grandiose yacht, launched one of history's most successful share offerings.

Thus died the axiom that tech companies went public only after at least four consecutive profitable quarters. Soon we were in the brief, giddy life of capitalism without profits, during which some investors decided that only pre-modern investors thought the value of shares should be a function of the firm's future cash flows. Such investors became fixated on what are known in New Economy jargon as "nonfinancial metrics." Those are supposed ways of measuring value in a company when monetary measurements do not show value.

One such measurement is Web site traffic. Another is "engaged shoppers," measured by (no kidding) page views per viewer per month. Then there is a company's ability to claim shares of consumers' minds. Morgan Stanley has reported that one company ( had a "leading mind share among consumers." This, translates the Times' Morgenson, means that some "72 percent of the total time spent by Internet users on real estate-related Web sites in September was spent on Homestore's properties." However, what often is missing from these recondite measurements is how, if at all, they translate into revenues, not to mention (and often this is not mentioned) profits.

The Wall Street Journal first used the phrase "Internet bubble" in 1995. In 1996 Alan Greenspan put the phrase "irrational exuberance" into our economic lexicon. But what exuberance is rational nowadays?

Earlier this month there was a striking one-day rally when Nasdaq surged 8.9 percent, the Dow 4.2 percent. This happened for two reasons. Dell Computer announced that it would hit its quarterly revenue target -- but that target had been lowered in anticipation of the first quarter-by-quarter decline in the company's sales in seven years. And an uptick in the number of people applying for unemployment benefits suggested that the economy was slowing and thus the Federal Reserve might again cut interest rates, which it did last Wednesday.

The market's eager response to such meager good news does not indicate a recession mentality. Can there be a recession without one? Probably not.

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