Productivity & Bubbles
There have been many arguments by me that excessive quantitative easing by the Federal Reserve has created or helped create financial bubbles. That excess money finds its way sooner or later into the system somewhere; internet bubble, commodity bubble, real estate bubble etc. However, there are times where the excess money just exacerbates the bubble.
When reviewing the internet (dot com) bubble you can easily argue that enhancements in productivity provided fundamental reasons for increased corporate revenue and thus higher stock prices. Obviously, stock prices were pushed to extremes as greed influenced investment decisions. Easy and excessive money was the lighter fluid while productivity enhancements provided the fuel. When you have both fundamental and liquidity reasons for prices to go up the larger the bubble becomes. Determining where money will eventually flow during easy money times is much more difficult than the recognition.
Where will the money flow? Where will the next large new productivity enhancement originate from? It is not difficult to assess that money is easy right now as interest rates are low, and we have stimulus bills followed by bailouts, etc. The argument could be made that although money is easy it is not flooding the system because banks do not appear to be lending very aggressively, if at all. Where will the money flow? Is it emerging countries since their economies are in much better fiscal shape? Is it commodities, as our weakening dollar provides a nice support as does increased demand from emerging economies? Arguments can be made and well intentioned money can be gained or lost based on investment decisions from those arguments. I think productivity enhancements might deserve a much closer look.
Currently, it seems any increase in productivity is resulting from reducing the workforce. While this might help in the short term, no company can continue that path for long. We have heard in the past that a leap forward in productivity might result from; robotics, nano technology, longevity, or disease cures, etc. Truth be told, no one knows where it may come from and even if you thought you might know, any investments in those companies would come at a high premium as, other investors already beat you to it. Attempting to determine the next bubble, no matter how fun the attempt, might just not work. The best you might accomplish is slightly increasing the odds in your favor.
We continuously are able to place more data in smaller storage areas and download data via the internet faster and faster. These are productivity signs, but somewhat expected as we have witnessed these ever increasing technological enhancements since the computer age started. So when I discuss productivity leaps, I am speaking to something that jumpstarts productivity. One thing I am pretty sure of is that we will continue to have bubbles, and we will have jumpstarts in productivity from new inventions, disease cures, or some other unknown innovation. Even if you have no idea what that innovation will be, with human psychology being what it is you will have the opportunity to make money as greed takes over and money follows. Just make sure you aren't left holding the bag, or without a chair when the music stops.
Written by: Daniel Petrey, CFO, MBA