Dave Pollard's environmental philosophy, creative works, business papers and essays.
In search of a better way to live and make a living, and a better understanding of how the world really works.



December 15, 2003

HOW THE STOCK MARKET COULD COST YOU YOUR JOB

Filed under: How the World Really Works — Dave Pollard @ 13:56
P/E Ratio
The Western economy, under the Bush laissez-faire business and trade doctrine, has become a dragon eating its own tail. While the dangers of the Bush regime’s political extremism are already evident in the chaos and endless war and violence that the regime has imposed on the world, the dangers of the regime’s economic extremism are just becoming evident. The neocons’ strategy of oversimplifying everything to single, extreme principles is undoing the checks and balances that are the only hope for a peaceful and stable world, both politically and economically.

Bush’s economic extremism was best summarized by one of his own neocons, Grover Norquist, who said “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” Thom Hartmann explains this horrendously simplistic and dangerous philosopy here. This philosophy might be summarized as follows:

Politics: America is the defender of the free world. Most of the rest of the world is run by evil tyrants who hate freedom or by cowards who lack the courage to confront the tyrants. America must therefore unilaterally take on the responsibility to run the whole world according to American values. Any country, and any person within America, who does not share this vision is our enemy. Our enemies sacrifice their rights, which are a privilege the government can give and take away. Politics is war: it is about obtaining and holding power by any legal means. In politics there are only winners and losers. There is no room for fairness, honesty or compromise. Might makes right and the end justifies the means.


Economics: The market is always right. Any restrictions on business or trade distort the market and must be eliminated. Government and business should always help each other out. Anyone who wants to restrict business is our enemy. Business is war: it is about making profit by any legal means. In business there are only winners and losers. There is no room for fairness, honesty or compromise. The winners are entitled to their spoils. Anyone who wants to succeed in business can. The poor and the unemployed are losers who just aren’t trying hard enough. They have to learn to help themselves, not get help from government.

As Hartmann points out, the anti-abortion, pro-capital punishment, god-fearing components of the neocon agenda are merely window-dressing to “fill the tent”. They’re expedient but not essential to the philosophy.

With government control over big business largely eliminated, the economic system quickly becomes dangerously unstable. We have recently seen unprecedented whipsaw movements in stock markets and currency markets. ‘Free’ trade has bankrupted most third world economies. Small businesses have been crushed by the ever-increasing power of the oligopolies that now control almost every industry. More than half of us describe ourselves as ‘underemployed’ — doing work that is beneath our capabilities and underpaid accordingly. Most of us have our retirement incomes dependent on the continued prosperity of the Fortune 500, in which our pensions are invested. There is no alternative investment: fixed-income investments pay almost no interest (thanks to the successful corporatist campaign to brand inflation as ‘evil’, which it is not), and the housing market is so overheated that a bubble burst is inevitable. Because of the staggering and unprecedented US debt and trade deficit, interest rates are poised to spike, which will make repayment of mortgages and consumer debt impossible and force millions into bankruptcy, send stock and bond markets and the US dollar into a tailspin, and force abandonment of the US dollar as the global monetary standard in favour of the Euro. That in turn will force huge increases in tax rates in the US to repay the colossal debt.

The chart above shows the Price/Earnings (P/E) ratio of the S&P 500 (blue line). With the run-up in the last week since that chart, the P/E ratio stands at about 30. That means that the average price per share is thirty times the average expected earnings per share for the next year. Why would people pay thirty dollars for a share that is only earning one dollar per year? Would you give someone thirty dollars today with the promise of getting a dollar a year in return? Of course not. These stock prices are discounting anticipated massive increases in profits for the S&P 500 companies in the future. One rule of thumb suggests that the P/E ratio discounts what annual percentage increase in profits is ‘built in’ to the current stock price. By that measure, the profits of the S&P 500 will have to increase by 30% per year, more or less forever, to justify the current prices. If you gave someone $30 today with a promise of getting back $1 next year, plus $1.30 the following year, plus $1.69 the year after that, etc., it now looks like at least a reasonable investment.

So if the stock market (and your pension) requires the typical S&P 500 company’s profits to grow endlessly by 30% per year, how is that going to be achieved? Most of these companies are now global, so the increase is not going to be achieved by expanding into new markets. If they take over another company, they’ll have more profits but also more shares, so growth can’t come that way either. There’s very little innovation in the economy, and what there is tends to be more than offset by the inevitable drop in prices (and hence profits) once a product becomes ‘mature’. In short, there is no reason to believe that these 500 globally dominant companies can expect to increase revenues considerably in the future at all. Consumer debt is already at record levels, the little guys have already been squeezed out by the oligopolies, and spending on new products is simply replacing spending on older, obsolete ones.

How do you increase profits if revenues are flat? You cut costs. Material costs have already dropped in recent years, so the principal way you cut costs today is by reducing the cost of labour. That means offshoring, outsourcing, getting rid of the union, firing older workers to bring in cheaper younger ones, and lowering product and service quality. All of that means laying off and under-employing domestic workers, creating unemployment and underemployment. This of course becomes a vicious cycle, since this further reduces consumer spending power and forces yet more ‘productivity’ improvements (offshoring and layoffs) to keep profits rising, the ‘Wal-Mart Dilemma’.

Eventually you crash into a wall: At some point there are simply no further ‘productivity’ improvements to be had, even if you ‘win’ the treacherous Race to the Bottom. Then what? Then you realize that a reasonable P/E ratio for the S&P 500 is 10 to 15 (which is what it always was until a generation ago), not 30. After you’ve lost your job to ‘productivity’ cuts, and after you’ve been forced to buy stuff from Wal-Mart made and serviced by the third world people that took your job away, then you lose half or two thirds or more of your pension as stock markets tank.

Mind you, once the calamity of the Bush debt, the Bush trade deficit, the Bush tax cuts for the rich, the profligate Bush war spending, the Bush subsidies and handouts to corporate friends start to register on the ‘free’ markets, you probably won’t have to wait for the no-more-productivity-improvements wall to eliminate your retirement income. The ‘efficient market’ should wipe them out well before that. And watch for an interest rate spike to accelerate the decline further, and a housing price bubble burst to accompany the collapse.

Oh, well, there’s always reverse mortgages.

STEVE RAKER ON SADDAM’S CAPTURE

Filed under: How the World Really Works — Dave Pollard @ 09:19
saddamI was going to write something about the capture of Saddam, but Steve beat me to it, and he expresses my feelings perfectly.

MARGARET WHEATLEY ON AMERICA’S, AND THE WORLD’S, DARK NIGHT

Filed under: How the World Really Works — Dave Pollard @ 09:05
reaperJon Husband of Wirearchy recently drew my attention to Margaret Wheatley’s site, and particularly this article. I have encountered Margaret’s work and writing often in recent years, and share both her concern about the fundamental problems of business and society in 2003, and her optimism about the opportunity for change. Here are a couple of excerpts from this recent article that I found especially inspiring:

I experience this as a dark time for America, where we have lost our way. I search to find the means for us to see clearly through the darkness. I want us to be able to see both the destruction, and the stars. I felt this even before we chose war, for more fundamental reasons. In the past several years, America has embraced values that cannot create a sustainable society and world. Presently, we organize our activities around beliefs that are inherently life-destroying. We believe that growth can be endless, that competition creates healthy relationships, that consumption need have no limits, that meaning is found in things, that aggression brings peace. Societies that use these values end up, as do all voracious predators in nature, dead.

I know that most Americans would be shocked at this list of national values, but I see them clearly in our behaviors and the choices we make. I also know that this is not who we want to be, so how did we get here? What happened to our ideals about life, liberty, democracy, independence, imagination?

This devolution frequently happens to individuals, organizations, and nations. It’s a gradual and nearly invisible process where values quite contrary to those we treasure seep in and grow in power. As these contrary values are used in more and more decisions, higher principles recede into the background and have little influence. We may still think they matter, but they aren’t guiding our behavior. Usually, it takes a crisis and deep distress for us to look honestly at ourselves and notice who we’ve become.

I feel that America is standing on the edge of an abyss, a dark night of the soul. In a dark night, meaning is lost, identity disintegrates, and we move into that most creative of spaces, chaos. W.B.Yeats powerfully describes a dark night in “The Second Coming.”
Things fall apart, the center cannot hold;
Mere anarchy is loosed upon the world;
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

I have no idea if America will acknowledge this dark night that feels so obvious to me. I can only hope some of us will be brave enough to ask, “What do I love about America that I want to preserve at all costs?” This question takes us into deep territory, revealing the qualities of life and human community that truly inspire us. And our connection to each other strengthens as we dwell in this life-affirming space. I always leave these conversations reenergized, stronger, bolder.

At a personal level, I fear waking one morning from this awful trance that has dulled my imagination and heart, and wonder what happened to the energy and ideals I once had as an American. In his poem, “The Truly Great,” British poet Stephen Spender warned that we must: “Never to allow gradually the traffic to smother with noise and fog, the flowering of the spirit.” Sacred values erode so slowly, lost to our awareness through subtle, darkening forces. I hope we can find the means to see through this dark night.

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