We don't know and neither do they.

Overcapacity Bubble- How will we pay? 

(10/31/00) Stepan N. Stool, PH&D

What are the implications of years of booming capital spending, particularly in technology investments, and weak capacity utilization?

Might not the stock market bubble also have represented an economic bubble? Has virtually free capital not resulted in the development of excess productive capacity? If final consumer demand is insufficient to absorb the excess capacity, how do we pay the bills that are coming due?

I'm a tech savvy person, and I can't use a fraction of the stuff they are coming out with today. The rest either doesn't work very well, is too expensive, or both. How about you? And are you representative of the typical consumer? Can you use this stuff? Can your business?

Our ability to create new technologies has raced way ahead of our ability to use them. The willingness of the market to finance new (worthless?) technologies, without regard to the bottom line, has precedents, and the results have always been disastrous. New supply does not create demand. Corporations can't ultimately cover debt service, or give stockholders a reasonable return on invested capital, with an earnings yield of 1%.

The market, and the economy, were driven by the market's willingness to create capital under false pretenses, just like Japan did in the 1980s. Earnings growth was based on a pyramid scheme, and we've run out of greater fools. For the market to continue rising at double digit rates, earnings would have to grow likewise. Can earnings grow at even 10%. Without real, final demand, ultimately the answer must be no. As that realization continues to creep in, valuations will continue to adjust downward.

And the carnage will not end until historic overvaluation is followed its opposite reaction. The destruction of false value has a long way to go. Credit quality is a serious issue which has yet to be recognized. A financial accident is just around the corner.