Monday, June 21, 1999

Fribbling Down My Chin...

By FoolCrum

I haven't written in since my prognostication of lower markets (which came true only briefly) last Fall. The global economy had some serious regional issues to resolve and the general sense of the investor was based on the feeling that things have been so right for so long that it's time for them to not be right for a while. Well, in the words of the venerable George Bush, "here we go again."

While there are some fathomable philosophical stabilization's in many of the world's troubled regions, the facts do not support actual change in the way that we keep hearing about them. Things are not getting better; they only seem better because those in power have had to adopt the ideals and prospective changes in purpose (though not yet in meaningful action) necessary to get in on the International Monetary Fund's (IMF) gravy train -- which, as Alan Greenspan put it so eloquently, will not rescue, but advance these economies further into the problems of debt and debt recovery that is the basis of their problems initially. The old adage, "you can't borrow yourself out of debt," holds true.

The only measures that can make a lasting difference (though they will not benefit our economy immediately, which is part of the problem of adoption) are decreased government spending -- which is politically incorrect; increased tax collection efficiency -- which increases the costs of collection and therefore makes the first issue somewhat conflicting; and stringent across-the-board belt-tightening and opening of the free trade barriers that serve to allow your national businesses to increase their market and therefore earn more money on which they will pay taxes. What stands in their way is the justifiable fears of huge multibillion dollar companies gushing into the country and buying off all of the best corporate assets and draining profit and competitive advantage out of their own country into coffers on foreign soil. The problems are that none of these solutions carry a "Vote For Me!" campaign motto with them, and none of them will make any difference for the first few years of implementation.

The best way to get out of debt, as any good financial adviser will tell you, is to pay it off as quickly as possible and at the lowest possible interest rate -- and cut up the credit cards that are not essential. Malaysia is a prime example of the issues that plague many of it's regional partners. Foreign investment comes in and artificially expands its economy. Whole cities and communities spring up around these artificial economies. Population base shifts dramatically with the efforts of the poorest members of society wanting to get to where they can improve their condition. This artificially bloats social service loads and public service loads. Housing springs up and so on and so forth. Since the tax base has increased in a dramatic way, the government settles into greater public spending, less careful accounting practices, cronyism, and speculative loan and investment practices. Stringent regulations are seen as archaic since money is not in shortage and those regulations stand in the way of personal advantage.

At some point, the economy gets through the hyper-growth period and settles into a normal growth pattern. Almost immediately, the foreign investors fail to renew their commitments to upgrade factories and re-invest capital. In fact, some of the money begins to flee to higher-yield economies. Workers want better wages, numbers of jobs decrease, individuals and businesses begin to default on loans. Unemployment rises, tax income falters, government services noticeably reduce, population becomes agitated at the seeming lack of official concern for the social ills that seem to build every day. Suddenly, it's August and you can't hide the fact that things are going badly. More liquid assets flee the country, heavy-hitter mutual funds gather their skirts and head for the hills and then corporations begin rapid deployment of outsourcing and capital flight out of the economy to preserve the profits that have been made over the high times.

Now we are up to date on where they were in October... November, December, January, February, March, April, and what do you know? Not a thing has really changed! The problems haven't changed or shown dramatic improvement, but we have had Brazil to worry about, a war "somewhere else," interest rates that keep trying to give us early warning signs of increasing inflation, and an economic guru (sorry, Alan) who is trying so hard not to sink Wall Street.

Nothing has changed but perception. I have made money and most of you have also, so we don't complain. But we should still not have our heads in the sand and believe that the Bulls will wrest permanent control of the market from "those other anal party poopers." I see no reason the market can't go to 18,000. Why not? The market should not be based on plain vanilla P/E valuation but on the number of investors who wish to share the success of a limited number of very successful companies.

The truth is, there is more dollars than shares available and valuations are changing in a meaningful way. This is not a sign of over-valuation, but of supply and demand. What is going to give us the real sense of value is the risk-reward environment in which we find ourselves as these local and global problems resolve. Will our favorite companies continue to do well and draw other investors who will drive up the price share? Is that as important to us as the income of the company and the rate at which its fortunes rise? Mr. Greenspan has said it well -- there is no new era of prosperity, only another cycle of the same type that has come around before. Only this one has lasted longer and we have no immediate clear signs of it stopping soon.

Let's keep a clear perspective on these things, as Fools, and not allow the fluff media to lead us around by the "news." Let's keep in mind the values and standards by which we invested. Keep an eye on the international economies and be watchful of how they affect our own. This is our defining moment as investors -- when we can Foolishly watch the fortunes of others ebb and flow while we go about our business and keep our wits when these fluctuations happen. Should we ever take money off the table if things change for the worse? Sure. Diversify more if things get bad. But keep your Foolish head about you.

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