Wondering where the stock market is heading next? Try taking a class in the History of the Business Cycle, 101. Today's Daily Interview takes a breather from Wall Street and ventures into the ivory tower for a chat with
University of San Francisco
Michael B. Lehmann
, who thinks his age -- he's 60 -- gives him a historical edge.
Michael B. Lehmann
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Cohen & Steers Equity Income Fund's
Indeed, the market has witnessed some uplifting gains in the past three weeks. The tech-heavy
Nasdaq has gained about 15%, while the mighty
Dow rose about 8.7% for the month. Nevertheless, April's gains don't guarantee that stocks are out of the woods and safe from the bears, according to Professor Lehmann, who teaches economics.
With history as his tool, Professor Lehmann believes that prices remain overvalued and that a recession could still be in the offing, Today's New Economy, he says, remains subject to the booms and busts of the traditional business cycle. And for bulls who argue that today's valuations in technology are justified by higher productivity, Lehmann has one thing to say: remember the railroad boom of the 19th century.
How does your perspective differ from an analyst or a trader?
: I have a historical view; I'm going to be 60 years old in November. When you talk to anyone in the industry, it's like asking an automobile dealer what he thinks about driving. Of course, they want people to drive. These people are pushing a product. They're working for a brokerage firm and they make a living when people sell and buy stocks.
Classic bulls argue that stocks have been chronically undervalued throughout history because investors have ignored their long-term record of steady gains. Bears on the other hand argue that current valuations are "irrationally exuberant" and will topple. Where do you stand?
: I'm a bear. In my own view,
price-to-earnings ratios are still too high, especially in a climate of deteriorating earnings. If you go back two years, everything looked great; the forecast looked great, and the P/E ratios were much too high based on trailing earnings and even forecast earnings. You had crazy price-to-earnings ratios and many of these guys have crashed down to earth.
It is true that in the post-war period stocks have been a very good investment. And it's also certainly true that in the long, long haul they've been a good investment. But with regards to history, there were periods when the stock market was a terrible investment. For example, the Dow hit 380 in 1929 but by 1932, it had plunged to about 42. That's a 90% decline. It didn't get back to 380 until 1954, and that's 25 years later. And on Feb. 2 1966, the Dow hit the 1000 mark just about for the first time, but didn't break through the 1000 barrier for good until 1982. So that's 16 years, and in those years inflation was substantial, so putting it in current dollars really understates the situation.
But aren't today's higher valuations justified by today's pace of technology?
: There were times when there was technological advancement -- the railroad, electricity, radio, television. But that doesn't mean there hasn't been the business cycle. And the stock market is related to the business cycle. In competitive capitalism, it's inevitable that when the situation appears rosy, investors invest a huge amount of capital and build up excessive investment ahead of the market. But not all investment can earn a substantial return, and when that's recognized, there's a pullback.
An example would be the optimism with regard to the building of telecom infrastructure, and the debacle that hit
. If you go back 125 years, the same kind of thing happened with the railroads. The railroads were built out into the West ahead of traffic, when the settlers weren't there. The railroads were going from Chicago to Seattle, but had to wait 10 years in North Dakota to justify the traffic before they push out again. And so this has happened over and over again with radio, television and the automobile. There has been lots of new technology, but that doesn't mean there's no boom and bust.
With respect to the new economy, folks say that productivity, which is output per worker, is going to rise forever, but I think that's premature. We have to wait until the downturn comes, and if there's a recession, productivity will fall. If you look at the early 1960s, productivity levels rose to at least as much as it is now. But then there were periods after that when it fell during recession. You can't just judge during the upswing of the cycle. You have to look and judge during the downswing as well.
Do you think the market is on a downswing?
: I think it's possible that we could be in for a period when the stock market declines for five or 10 years. It depends on whether we'll have a worldwide recession. I still believe that we'll have a recession, which is a minority view. But sometimes the majority is wrong. And if it does happen we could be in a bear market for a long time just like the 1966 to 1982 period.
My view is that that economy is still going to go south, the profit outlook is going to go south and that P/E ratios are going to fall. Under those circumstances, you know the stocks will fall even more. So I'm very pessimistic; I still think there's more bad news coming.
What investments do you personally hold?
: Cash. For years I was in the market, but no more. Just because there's a New Economy doesn't mean that we've done away with the business cycle and the bear market. Here's my advice for the stock investor. "All that glitters is not gold." That's
. If people keep that in mind, they'll be better off.