There's a story about Robespierre that has the preeminent rabble-rouser of
the French Revolution leaping up from his chair as soon as he saw a mob
"I must see which way the crowd is headed," Robespierre is reputed to have
said: "For I am their leader."
The story about Robespierre is certainly apocryphal, but it helps in understanding the recent proliferation of books that herald the coming of a new and unprecedented age of prosperity. The Cold War is over, unemployment is low, inflation is lower, the stock market is booming. It's never been easier to see which way popular opinion is headed.
The new manuals of prosperity are the 1990s answer to the dark books of the 1970s and '80s that predicted a permanent oil crisis, the fragmentation of the United States, worldwide starvation and nuclear catastrophe. Just as the pop futurists of that era thought rising oil prices and double-digit inflation were the trumpets announcing the coming of the apocalypse, today's crop of professional and semi-professional seers imagine that the rising stock market is an escalator to the pearly gates of Heaven. So they rush to sing the praises of the new economic order, apparently convinced, like Robespierre, that if they just jump in soon enough they are likely to get credit for leading the parade.
Three books released in the past month are especially good examples of the race to give voice to the conventional wisdom. Two of them are resolutely and uniformly optimistic. "Dow 36,000" explains why the bull market will continue its trek to new plateaus, while "The Long Boom," heralds a new age of technological achievement, predicting a rosy end of history, in which the world will have conquered (in no particular order), cancer, poverty and global warming. The third, a guide to Internet stocks called "The Internet Bubble," is less sanguine in its projections -- but its pessimism is so mild, that it, too, belongs here as a kind of footnote, pointing out the slight flaws that highlight the overall perfection of the picture.
Of the three, "The Long Boom: A Vision For The Coming Age of Prosperity" might be the most perfect expression of what one might think of as the New Optimism. Based on a well-known Wired magazine cover story, "The Long Boom" purports to be a history of the world's future through 2020. The future it envisions is one where accelerating scientific progress meets the authors' preferred vision of social progress to make all the problems of today's world -- in fact, all problems, period -- obsolete. Like many futurist books, it is not precisely an argument for how things should be, nor an investigation into how they are, but more like a drumbeat meant to accompany the inevitable tide of progress.
"The Long Boom" was co-authored by Peter Leyden, a former editor of Wired; Joel Hyatt, a professor at Stanford; and Peter Schwartz, the founder of the Global Business Network, a West Coast think tank and consulting firm. The three authors together manage to put together a work that is not so much a "book" as a compendium of three kinds of essays: analyses of the main trends in economics and technology, fictional sections describing (in the past tense, for inexplicable reasons) the world's history through 2020, and letters from residents of the future.
This peculiar organization has two basic advantages. First, it allows the authors to experiment with a wide variety of type styles. Second, it makes it easy for the reader to see at a glance which sections could be safely skimmed or skipped over altogether. (Since I could not make heads nor tails of the "letters" or their function in the narrative, after a few chapters I simply stopped reading them.)
The first problem one notices with "The Long Boom" is the superficiality of its analysis. The main inspiration for much of it seems to be a breezy reading of major newspapers. Footnote after footnote refers readers to articles from the New York Times; in one discussion of the world's changing climate, the writers manage to get about four pages out of rewriting a Times magazine story. And when they don't come straight from the newspaper, the authors' insights most often are taken from a stew of received wisdom about national cultures. They tell us, in various places, that Brazilians live in racial harmony, that the Chinese maintain strong family links, and that the Russian people are able to endure a great deal of suffering.
This passage comes from a section about the coming economic ascendence of China: "The Chinese are the ultimate networkers. They have been working at this game of networking for a long, long time. They have sent out their spidery networks of traders across Asia and the world for centuries. Almost any small city in the United States and Europe is sure to have the beachhead of a Chinese network in the form of a Chinese restaurant or laundry or small shop of some sort."
Huh? I am not sure whether the writers support or oppose the proliferation of Chinese restaurants, but they seem to see it as surprisingly relevant to the course of world history.
From this kind of cultural analysis, "The Long Boom" blithely extrapolates a dizzying multitude of conclusions: the emergence of an Islamic fundamentalist regime in Saudi Arabia (never mind that the House of Saud is an Islamic fundamentalist regime), the ascendancy of the European-style welfare state, and many, many others.
Schwartz and Leyden's original Wired article was an ebullient vision of the world's economic future that paid little attention to the warps in the fabric. The book, by contrast, goes hog-wild in creating mythical crises, only to explain how they will be brought to a speedy resolution. The rise of Islamic fundamentalism, it seems, will be countered by the dramatic emergence of Turkey as a Middle East peacemaker. The global warming crisis will be resolved by a worldwide switch to hydrogen-powered fuel cells. International poverty will be solved through a European-inspired system of global taxation on electronic purchases. (This last is one of my favorite predictions: the authors not only think that the global taxes will raise $300 billion a year for development starting in 2008, but that these taxes, like the pennies and half-pennies skimmed from bank accounts by the villain in the movie "Superman III," will be so small as to be imperceptible.)
In a world where poverty and disease are distant memories, these authors think that the only problems left will be the strange ethical quandaries of a science-fiction novel. Once we've cracked the genetic code and found the gene that controls intelligence, the authors ask, should we use that knowledge to raise our children's IQs to 250?
Who cares? Even for the most fervent new optimists, I suspect that "The Long Boom" goes too far -- we might be nearing the end of history as we've always understood it, but even in the best case we'll still have enough real concerns left that we'll have better things to do than worry about whether our children might be too smart.
In "Dow 36,000" by James K. Glassman and Kevin Hassett, we do escape the realm of science fiction and get back to reality. However, "Dow 36,000" -- an extended argument for why the stock market will triple or quadruple by 2005 -- is equally striking in its optimism. "Dow 36,000" gets its inspiration from a long line of books that over the years have proclaimed the end of stock market cycles in a newly permanent age of prosperity.
Glassman and Hassett begin with an assumption much favored by professional prognosticators: Up until now, the world -- especially the financial markets -- have been in the grip of madness, but we are now poised to enter a newly rational era. Another way of putting this is to say that the authors are convinced that the financial world is about to shed it old beliefs and take on a new set of beliefs -- namely, their own.
The argument that Glassman and Hassett set out is squarely in the tradition of Irving Fisher, the economist who on Oct. 14, 1929, just days before the market crashed, announced that stocks had reached a permanently high plateau. The authors would not be offended by this comparison; in fact, they take care to discuss Fisher's predictions, and point out that while Fisher looked like an idiot in the short term and lost most of his own money betting on the market, an investor who had put money into the market even on that inauspicious date by today (70 years later) would have made a very great deal of money.
The discussion of Fisher is too delicious to ignore. It's almost a pre-emptive strike against critics who might be tempted to compare the starry optimism of the theories in "Dow 36,000" to Fisher's. It's as if the authors say, "Go ahead, compare us to Fisher -- in the long run, he was right." Anybody who is willing to cast their lot with the most reviled economic prediction of the century deserves some points for moxie and a sense of humor. But Glassman and Hassett miss the scary resonance of their own example. Fisher was right about one thing -- stock went up in the long run. But for most investors, decades is a bit too long to wait.
The core of Glassman and Hassett's argument is fairly simple. First, they argue, accurately, that stocks have traditionally been badly undervalued compared to bonds. There is a lot of support for this line of reasoning. Value investors like Benjamin Graham, the grandfather of American investment counselors, liked stocks that paid a dividend of 7 percent a year. In the post-war period, many stocks not only paid these big dividends, but as companies grew, their stock appreciated. Investors got huge returns -- reaping far more in profits than they would from investing their money in government bonds. Analysts thought this was as it should be, because stocks were considered much riskier than bonds.
From here, the authors go on to argue that over the years investors have realized that a portfolio of stocks held for a long time is not nearly as risky as analysts used to think. This has caused stock prices to rise dramatically. So far so good. It's at the next step that "Dow 36,000" makes some very questionable assumptions.
Glassman and Hassett think that over the long run stocks are no more risky than government bonds. Less risky in the financial world means more valuable. Thus, the authors think that stock prices still have to keep rising, until the return on stocks is about equal to the 5.5 percent annual return on Treasury bills. They calculate that stock prices still need to quadruple to get to their perfectly reasonable price. And they expect that four-fold rise to happen by the year 2005.
(The math here is a little bit subtle. For those interested, here's a summary of the argument: Say you invest $100 in stock, and the company whose stock you hold is grows at 5 percent a year. You're making 5 percent right there. But wait: if it's a big established company, it will also pay you dividends of about 1.5 percent, or $1.50. So you're now making 6.5 percent. That's too much, according to Glassman and Hassett, because it's a lot higher than the 5.5 percent you'd get from very safe government bonds. So how does the return get down to 5.5 percent? Well, the company could grow more slowly or it could make less profit. But there's no reason that should happen, regardless of what happens to stock prices. But what happens if the stock's price shoots up to $300, while growth and profits stay the same? The company is still making a profit of $1.50, but now that $1.50 is just .5 percent instead of 1.5 percent; in this case the total return is 5.5 percent a year, and the equation balances. There are some more bells and whistles -- in practice, the numbers are a little bit different and the equations thus show stocks quadrupling instead of just tripling -- but this is the core of the reasoning.)
It's here that the analysis reeks of reverse engineering -- careful juggling of the numbers to get a neat and extraordinarily optimistic projection. Plug in some very slightly different numbers, and you get some very weird results. As Allan Sloan pointed out in Newsweek, a shift of just half a percentage point in Glassman and Hassett's assumptions about the interest on Treasury bills can yield a prediction that the Dow should go up to 100,000 -- a number that the authors and investors would think awfully unlikely. Even worse, very slightly different assumptions would indicate that for their stocks to be "rationally" priced, many companies would not only need to stop paying dividends, but would actually have to charge their investors money for every share of stock they hold. Not likely.
Even worse, perhaps, is that the authors could have made exactly the same argument in the mid-1960s, when the stock market soared much as it did now, or, for that matter, in 1929. In fact, the argument would have made more sense then, when companies still paid big dividends. In both of those instances, they would have been spectacularly wrong in their predictions.
The best thing that can be said about "Dow 36,000" is that while wrong-headed, it is not pernicious. For years Glassman's Washington Post columns urged investors to buy stocks in reliable companies and hold them for the long term. The bottom line advice of "Dow 36,000" is no different. If you plan to put your money in an index fund and keep it there for a very long time, you're likely to do well no matter what happens to the stock market in the next five years.
One might imagine from the title that "The Internet Bubble" would be a counterweight to the blithe optimism of the first two books. And so, to some extent, it is. However, "The Internet Bubble" is also probably the most polite book about a stock frenzy ever written.
The authors of "The Internet Bubble," Anthony and Michael Perkins, are the founding editors of the Red Herring, a business magazine that thinks of itself as a combination of tip sheet and house organ for the venture capitalists who invest in technology companies. Thus, the authors are forced into a complicated dance in which they try to prove the obvious -- that Internet stocks are overvalued -- without ever offending the venture capitalists who have fueled the dot-com craze.
A big part of the book is devoted to a discussion of Kleiner Perkins Caufield & Byers, Silicon Valley's premier venture capital firm, and the portfolio of companies it has invested in. The bottom line for investors is that many of the companies are dramatically overvalued. Before getting to this key point, however, "The Internet Bubble" hems, haws and strokes the firm and its partners, at one point going so far as to say that it has attained a "godlike" status in Silicon Valley (this is meant as praise).
Because the authors see themselves as courtiers to the venture capitalists, they spend less time criticizing the valuations of Net companies than they do going over old territory, illustrating their book with the examples least likely to upset the current status quo. Thus they devote a long chapter to the 1980s frenzy for biotech stocks -- a frenzy that it is perfectly safe to draw attention to now that the bubble has burst and venture capitalists have retreated from biotech and most of that era's high fliers. They also spend a chapter on 3DO, a much-hyped software company whose stock rose to $50 dollars a share in the mid-90s and then swiftly fell to as low as $3. Here again, the worked over example is calculated to offend almost no one.
It is too bad that the authors pull their punches, because when they do get into Internet stocks, their analysis is extremely good. They masterfully pick apart @Home, pointing out that the Kleiner Perkins-funded company has to grow at an astounding rate to justify its stock price -- but that its growth has actually been far below expectations. Here their insiders' knowledge of Silicon Valley finance is put to good use, as they carefully recount the story of how Kleiner Perkins engineered @Home's merger with the Excite portal to save a company that was clearly in big trouble, and how investors, unaware of the behind the scenes maneuvering, subsequently bid up the stock of the merged Excite @Home.
The most interesting part of "The Internet Bubble" -- the real meat of the book -- is in the numbers it brings forward to measure exactly how much key Internet companies are overvalued. The book calculates the growth rates that would justify current Net stock prices by traditional valuation measures and often comes up with astonishing results, indicating that many Net companies would have to grow at several hundred percent a year.
Even here, however, the authors all too carefully temper their analysis. They conclude that Net stock prices would have to fall by 30 to 58 percent to reach realistic levels. Those numbers sound bad -- but the reality might be a lot worse. The Perkinses reach the lower number by assuming that Net companies will grow an average of 65 percent a year. If only that were so likely. Of course, some companies will grow that fast. Over and over again, the best companies on the Internet have confounded naysayers; I, for one, would be awfully leery of the prediction advanced by Barron's that Amazon.com will fall to $10 a share or less. But it is equally true that many Net high flyers will fail to grow at all -- and almost certain that a few of them will go out of business in a blaze of red ink. The scenario that Anthony and Michael Perkins propound isn't the worst case -- it's actually close to the best case scenario, squeezed into pessimistic clothing. As pessimists go, the authors are among the most optimistic around.
That's understandable; there is certainly no arguing with prosperity, and in the last few years the true pessimists have grown gun-shy. Gone are the days when bestsellers poured out turgid paragraphs about the population bomb, the oil crisis and the coming stock market collapse. But make no mistake: At the next sign of a market downturn they will be back in full force. If the prevailing winds of the economy change, the manuals of the new prosperity will be replaced again by 1970s-style scare stories about the impending apocalypse. Just as today's optimistic nonsense replaced yesterday's pessimistic nonsense, it too will soon enough be displaced by tomorrow's all-new brand of hogwash.