The lack of new jobs in the U.S. economy could be making the stock market somewhat "toppy," in the analysis of William Wolman, author and former BusinessWeek chief economist. Wolman questions the usual explanation of the job problem -- a rise in productivity. In his opinion, many Americans are working far more hours than the productivity numbers measure. In fact, he ventures what he calls a radical notion that the workweek should be shortened, but with no reduction in pay.
Wolman also takes the position that some control over drug prices may be necessary, and he notes that at least 10 countries outdo the U.S. in life expectancy, including nations that do limit the cost of drugs. He acknowledges that controls could limit the returns on pharmaceutical stocks. Still, regular, systematic inputs of money into the market over the long term can pay off, Wolman suggests. He adds that technology stocks could be a good place for patient investors, on the theory that the Nasdaq could ultimately attain its old highs.
Wolman made these and many other points in an investing chat presented Jan. 13 by BusinessWeek Online and Standard & Poor's on America Online. He was responding to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Bill, a member of the audience gives us an opener as good as anything I could do: Is the market looking a bit toppy?
A:It's very early to tell. The employment number that came out last Friday is clearly at least somewhat upsetting, and I think that's what the market's reacting to. Whether it is the top or not really depends on whether that number is giving us a reliable signal that the growth of the number of people at work has been very slow and will continue to be very slow.
I'm deeply unimpressed with the explanation that Greenspan gave at that Bundesbank meeting earlier today -- namely, that it all can be explained by the huge rise in productivity in the American economy.
Everyone should realize that what the productivity number actually measures is nothing that you or I would call productivity. Instead, it's output per measured hour worked. Stress the word "measured," because it seems to me that most people, including semiretired people like myself, are working more hours than the number that appears on their paychecks, which is a little under 35 hours a week for most people.
So I think that the best description of the American economy right now is the title of a famous cartoon that once appeared in The New Yorker, in which it said: "Hey, Jack, how much do you tip the whipper?" The point involved is that people have been stretching their work hours in ways the government does not measure, and I can see limits on that process.
I think the market's reaction to the extremely small increase in the establishment employment, which are the best data available, is valid. And that's what concerns me about the market for the remainder of this year...that makes me believe that the market could indeed be somewhat toppy.
Q: Do you think the euro will be moving down soon? Europe can't afford to have its value so high.
A:This isn't entirely a question of what European governments want to do. The fact of the matter is that the level of the dollar depends on what the people in the private sector in Europe are comfortable with -- where the dollar will settle.
Some very smart people, like Warren Buffett and [George] Soros, worry about this. The International Monetary Fund itself has expressed concerns that the twin U.S. deficits are a danger to the dollar. So although there may be some government interventions by the Europeans and the Japanese and so on, I think the dollar will continue to be troubled as long as the twin deficits remain high.
Q: Where do you see interest rates for 2004?
A:It's hard to see a scenario on which interest rates will decline. On the contrary, a gradual rise during the year is likely. I notice with interest that homebuilding stocks have been relatively weak over the past few days, and I take that relatively seriously.
Q: A market strategy question -- sell now and buy in the summer doldrums or at the next crisis?
A:I'm a great believer in gradual, systematic investment in the market, which beats other kinds of investment in the long run, decisively. Just read Jeremy Siegel's Stocks for the Long Run, and you'll become a believer in what I'm saying. The big trick is steady investment made early in one's life. I believe the Siegel numbers more than any claptrap that emanates from the Street.
Q: Is there a bubble in housing prices? Certainly Manhattan co-ops seem to have gone through the roof.
A:The kind of answer that Greenspan gives to this, as he did at that meeting in Germany this morning, is that all housing markets are local markets. This, of course, is correct, but the facts of the matter are that it seems to me that many local markets are really pretty wild.
I happen to live right now down on a lake in northwestern New Jersey. Every time I have any social intercourse with anybody around there, what's happening to housing prices is the No. 1 subject of discussion -- it often seems like the only subject of discussion.... Just look at your own local market and ask the question as to whether it's in the grip of unrealistic expectations.... I really do think that a dose of reality is appropriate to everyone.
Q: How about the bond market now? Should I sell muni bonds in the next six months?
A:I don't think there will be capital gains in bonds for the remainder of this year, so I can't get too excited about the bond market.
Q: In a recent poll, businesspeople said their biggest concern was rising health-care costs. How do we address this problem? Won't the recently enacted Medicare-reform legislation, creating a drug benefit, only exacerbate the situation?
A:I think there's no question that the U.S. does need a drug benefit program for the tens of millions who do not now have them. It also seems to me, quite frankly, that something has to be done to control drug prices in this country.
I know that's a miserable conclusion to reach, but I really don't see any alternative. I can't resist saying that most Americans have an inflated opinion about the quality of this country's pharmaceutical manufacturers. I notice with great interest that there are at least 10 countries in this world, including our neighbor to the north, in which life expectancy is higher than it is in the U.S. That's reality.
Under these circumstances, and particularly since some Scandinavian countries are included, the notion that some control over drug prices will undermine American health does not stand up under scrutiny. The questions surrounding drug prices are very tough, but it doesn't seem to me that giving the industry completely free rein to charge what it wants for a product that contains heavy government subsidies in many cases is realistic.
Q: So what does that bode for investing in pharmaceutical stocks?
A:I think the answer is that over the very long run, the industry will face some regulation, which will limit returns.
Q: What are your opinions on the immigration issue?
A:I am an immigrant. Since I was born in Canada, I cannot refrain from feeling that everyone who becomes a legal resident of the U.S. should go through a legal process to do so, just as I did. I therefore really object to legislative proposals that sort of sweep this process under the rug. I also think that the notion that companies can offer jobs to illegals only if no American is around to fill them represents a bureaucratic nightmare of incredible proportions that would require an army to enforce properly. I therefore have severe reservations about the current proposals.
An amnesty for workers who are now in the U.S. may be inevitable, but as far as new immigrants are concerned, I really believe that serious legal immigration is the only alternative to what would eventually be chaos.
Q: Based on your views of the economy and the market, what industries look best for investing as 2004 begins?
A:The Nasdaq is still down some 60% from its old highs, and if you're really, really patient, I believe that those highs will be broken sometime over the next decade. It has always been the case that the market does go over its old highs for broad indexes, so very, very patient and systematic accumulation of tech stocks is the order of the day for young people with patience.
I also recommend taking a look at biotech stocks in particular. When it's all over, the biotech revolution will make the Internet stuff look pale by comparison. The opportunities are simply enormous in the long run.
Q: Do you think that Bush will make a move to bring down the deficit if he gets elected to a second term?
A:I think it likely that events in the world economy would push him in that direction.
Q: How long do you think we can have an uptick in the economy without a corresponding increase in jobs? You touched on this earlier.
A:I think the answer to that question depends on the "tip the whipper" idea that I touched on earlier. As long as American workers can increase the length of their normal workday and use it efficiently, it can go on, though I think there are limits to that process.
I have a radical idea that's not getting any discussion yet, which is that we ought to start thinking about shortening the length of the standard workweek, while retaining the pay that we now get. This may sound a little bit goofy, but after all, we've done it before.
Q: Here's a reference to your book, The Great 401(k) Hoax: Bill, you're an expert on 401(k)s. Will there be any 401(k) reforms soon?
A:There is virtually no sign of any serious 401(k) reform beyond the effort at some companies to reduce the proportion of their contributions to 401(k)s that are made in company stock.
Anne [Colamosca, co-author of the book] and I have argued strongly in many venues that employees must get together and challenge their employers to make their 401(k)s better. Our reporting has shown that this has worked fairly well for some small companies with smart bosses, and we believe that everyone should talk to their fellow employees about doing this kind of thing in their own companies.
Q: What motivation do foreign countries have to keep lending to the U.S. government?
A:The answer is that the U.S. is a major market for their exports, and they sure don't want to see it close up or dry up. But as the dollar falls, the return on dollar-denominated bonds drops in world markets, so there are some pressures that result from this.
I myself believe that the argument for making some serious effort to slow the growth in government spending is a good idea, but I also believe that the Democrats have a point about the excessive tax cuts for the rich. What we need, as we come to the end of our hour, is some sensible compromise in Washington, God willing.