January 13, 2002
From the desk of Jane Galt:Postcards from the MBA Wars
Postcards from the MBA Wars
Accenture has pushed back the start dates for its New York MBA's yet again, this time to some fuzzy time in the fall, provided that the stars line up and the gods of Mammon do not further punish the service economy. A classmate who had been waitressing to pass the time until her start date (previously pushed back twice, from September '01 to May '02, and now to Don't Let the Doorknob Hit You on the Ass on Your Way Out), tells me that the recruiters she went to told her that she'd be better off looking in strategy consulting than in Investment Banking (her former trade). Since I can tell you from personal experience that the strategy consulting biz is in approximately the same shape now as the buggy whip industry was in 1910, this is Extremely Bad News both for yours truly, and for the economy. Why? Because if strategy consultants are in the toilet, the restructuring pain that usually accompanies recessions has not yet begun, and firms are still more focused on staving off bankruptcy than building new markets. I can also tell you that the Investment Bankers I know are not doing deals -- they're pitching like hell, but nothing's going live. Which means that the pain of bankruptcy sell-offs and distress mergers that usually accompany a recession haven't yet begun, and people are more focused on avoiding risk than building new businesses.Lesson: we ain't going back to the 90's any time soon. Stock valuations, IMHO, are totally insane, because people are still thinking, in the backs of their minds, that 90's valuation levels represent some sort of a baseline. I have said it before, and I will say it again: corporate earnings cannot possibly support current valuations, even at very low levels of inflation. That means that a significant portion of current stock prices represents the buyers belief that it will experience capital appreciation independant of any future earnings.
So Joe Investor, perhaps in his twenties or thirties -- perhaps older -- sees the current prices as a temporary aberration from normally high valuations, rather than seeing the high valuations as an aberration from normal PE ratios between 10-20. That investor is still expecting those valuations to come back. Perhaps wishing will make it so. But there is no historical precedent that I can think of for a permanently overvalued asset, except maybe insurance.
Posted by Jane Galt at January 13, 2002 10:33 AM | TrackBack | Technorati inbound links