Ross M. Miller
Miller Risk Advisors
December 13, 2004
For the indefinite future, this commentary is going
sporadic. I am not yet reduced to blogdomóI haven't the proper pajamasóbut
I will be less predictable in my postings. Even in sporadic mode, my
commentaries will appear more frequently than Bill Gross's and you can
judge for yourself their relative utility. Like a blogger, however, I will
no longer limit my commentaries to a regular Monday appearance, which
should make the ones that show up on the web more timely. And I have not
run out of material, just the time to write it all up. (I already forgo
the time required for more than cursory proofreading.)
"Adventures in Retailing" will continue for
several more installments. The next one will cover Manhattan's great
bookstores of the past. (No, not the ones in Times Square that Rudy and
Disney put out of business.) And lots more serious finance is in the worksófrom
my primer on cointegrated time series to more advanced topics.
This week, I deal with odds and ends. Both my students
and I survived my return to teaching, though the optional final exam
(which is not getting many takers) is on tap for this week. Still,
following one of many lessons that GE taught me, I am willing to declare
victory and move on to the next semester, which is over a month away.
My major teaching initiative was to introduce more
"reality" into finance. This resonated with the MBA students who
worked during the day and were subjected to me in the evening. However,
the full-time students who apparently bribed a state official to get into
the course (Hey, Eliot, why don't you look at corruption in your own
backyard?) were a rather disconsolate lot. Given that I will be moving to
academic prime time in the spring and will teach only full-time students,
both undergraduate and graduate, I may have to make my "reality
challenges" a tad easier. For example, I am considering having the
students in my fixed income class construct bond portfolios where they
will get bonus points only if they beat a benchmark managed by (who else?)
As for the Google prediction exercise, its stock fell
from 190.64 at the end of October to 181.98 at the end of November, a
decline of 4.5%. For a while, Google dipped below 170 and seemed only to
recover with the help of several strategic touts by analysts. My students
tended to be overly optimistic and their average prediction was near 200,
though only a handful were as optimistic as their professor at 221.24.
Outside predictors tended to be a pessimistic lot, but were further off in
their predictions, the low being 100.
The bottom line is that no one, students or outsiders,
nailed the prediction. No one came within 5%, and the dozen or so students
within 7% earned a perfect 5 out of 5 for their predictions. Those
students who blindly followed the Capital Asset Pricing Model's view of
the world fared the best. It is unclear what lesson was imparted by this
exercise, but a good time was had by almost all.
In recent months, the financial news has been dominated
by a bleak outlook for the U.S. economy. There are lots of different
stories being tossed around, but the most persistent are the twin deficits
(federal budget and trade) and Asian countries that will bury the U.S. In
both cases, we have been there before.
As far back as I came remember, I cannot recall a time
when the U.S. ran a trade surplus. And twin deficits are nothing new,
that's what happened during the Reagan years and we survived them.
Of course, as my accounting students might remind me,
all accounts, even trade accounts, are always "in balance." The
"trade deficit" is just a "merchandise" trade deficit.
It would not make good headlines to crow about our financial surplus that
offsets the missing merchandise. Even after Enron, ImClone, WorldCom, and
so on, the U.S. continues to produce the best financial products in the
world. And the budget deficit is just one of many ways we produce those
Even if we dodge the twin-deficit bullet, there is
always China or India. Journalists always like to highlight some country
as the up-and-comer that will humble the U.S. economically. And that is
not to say that someday it will not happen, as it almost certainly will.
Bill Gross and his stopped-clock ilk must eventually get it right. But
eventually is a long time. Probably longer that the time between the Sox
winning the Series.
I am tempted to play the Randy Newman song that goes,
"It's money that matters" for my students. Randy, no slouch,
almost had it right. It's capital that matters. China and India both have
raw human numbers working in their favor. And they have a window of
opportunity. What both China and India have to realize is that their
employment booms are transient. Jobs start in the U.S., move overseas, and
then get automated out of existence. A coherent college-educated phone
support worker in Austin might lose his job to an incoherent script-reader
in Uttar Pradesh, but it is only a matter of time far shorter than
"eventually" before machines are doing it for themselves. It is
not a long-term winning bet to be "long" people, and both China
and India are as long as you can get.
My final observation, and the focus of one my
forthcoming sporadic commentaries, is that digital storage is getting
really small and really cheap. Gigabytes are about to yield to terabytes.
This matters much more than deficits or foreign competitors. Know what to
do with cheap storage and you will be the master of the universe. And
remember, don't be evil.
Copyright 2004 by Miller Risk Advisors. Permission
granted to forward by electronic means and to excerpt or broadcast 250
words or less provided a citation is made to www.millerrisk.com.