This is the best economy I’ve ever seen in 50 years of studying it every day, Alan Greenspan told President Bill Clinton in May 1998, as reported by journalist Bob Woodward in Maestro, Greenspan’s biography.
A little earlier, Greenspan had figured that there had been a stupendous boom in productive capital and the money that businesses were spending was yielding an extraordinary return because of increased worker productivity.
The computer, high technology investments and the internet were paying off. And, said Greenspan, the payoffs had to be real because the higher profits and economic growth had continued for several years now. It was now almost two years earlier, in December 1996, that Greenspan had spoken of irrational exuberance. And the stock markets had not stopped expanding.
Greenspan for long had wondered why prices continued to stay stable even as profits were rising for American corporations. Several bouts of exhaustive accounting investigations later, he was closer to understanding the effects of computerisation which “ensured that there were few shortages or bottlenecks in the economy, allowing for quick replacement and quick refurnishing”.
Which brings me to the “byproducts of a meltdown” theory. Which is that while there may be a period of pain for businesses and investors, as must follow any period of excesses, such phases also bring with them some welcome corrections and shift in perspectives. Undoubtedly this has been expressed many times before but there are always a few differences here and there.
My primary submission would be that the current market meltdown marks the end of the post-dotcom new economy. What Michael Lewis in his book called it the New New Thing is the Old Old Thing and is almost as much part of the economic output equation as is perhaps electricity.
So if the new economy is indeed pretty old and is either the real economy or just the economy, then why would the companies that support the efforts of “corporations trying to ease the bottlenecks”, to use Greenspan’s term of a decade ago, be bigger than the companies who are doing the de-bottlenecking to hold their profits, or more appropriately now, survive.
Now this question obviously could have been posed at any point in the last eight years and the answer could have been the same. Yet it takes market shake-ups to review belief systems. It’s happened to investment banking in this round, in case you didn’t notice. Until last month, Wall Street was defined by them. Now it almost appears like they never existed.
A little background on the new economy in the Indian context. The growth of IT services exploded with the Y2K opportunity as Indian IT companies used that platform to integrate with global corporations’ thrust for higher productivity and lower costs.
So much so that despite the dotcom bubble burst in 2000, most inherently strong technology companies began bouncing back by 2003 with the rest of the market — in India and overseas — with many hitting lifetime highs in late 2007.
Since 2000, companies like Infosys have been held as “bellwether” stocks for the Indian market as a whole. For two reasons broadly. First, they have been high-performing companies with very strong managements leading them. Second, because the general belief, rightly so, has been that the businesses were somehow insulated from everything else happening around because of the inherent and integrated nature of their offerings.
The first part still holds, the second does not. This article is not arguing about whether or not IT companies will get beaten down because of their exposure to European and North American banks and financial institutions, which they will to some extent; rather that the byproduct of this meltdown is that these companies and their performances will be viewed through a different lens.
Information technology is not the only sector. Nowhere in the world have I seen or heard of real estate firms enjoy such attention and capital markets patronage as they did in India for a while. They may continue to do so in the next bounce-back but I would reckon that their dream run is over. And there were will be other sectors as well.
Put more simply, the hot growth sectors of the 2000-2008 phase may not enjoy the same status in the next wave. As it must happen. But one key byproduct will be a look at companies that contribute to the direct growth and expansion of the real domestic economy. That’s what will help us in the next phase of growth, not a renewed focus on the earnings of the same companies that “powered” the previous bull run.
Why am I saying all this? Because market shake-ups often lead to re-allocation of capital. The re-allocation cannot be driven by the same assumptions that drove the initial allocation, whether in equity markets or debt. Allocation is also based on outlook and a future view on what will be exciting. The future still promises to be exciting, for the economy.
