Stock Market TheoriesYou’ve probably heard just about as much as you can stand about the New Paradigm theory, but we’ll give it the briefest run-through we can get away with, just to be on the safe side. As you doubtless know, Americans sincerely believe that new technology has lifted their economy onto a new plane of existence in which the traditional economic cycle doesn’t apply any more, and that from now on there’ll be no need for the economy to slow down - ever. That’s why US investors are prepared to pay so much more than usual for their US shares, which they sincerely believe are now safer and more predictable at any time in history, and that’s why they won’t buy bonds at any price. Believe it or not, a recent survey of US private investors revealed that more than half were expecting to see 25 per cent annual equity growth per annum for the next ten years. Stock Market Theories - Better Keep Your Fingers CrossedBetter keep your fingers crossed, guys. A quick back-of-envelope calculation suggests that for this fond hope to come true, American p/e ratios would have to hit 175 within ten years, even assuming that US companies manage to raise their profits by 8 per cent a year in the interim. But before we conclude that America is simply walking on air (a sure prelude to crashing to earth, we might think), perhaps we ought to examine this lunatic theory for signs of intelligent life. Alarmingly, there are some. Any economics textbook will tell you about the boom-and-bust economic cycle which America now claims to have abolished. It starts with a spell of strong industrial growth which leads to labour shortages. Wages are forced up, incomes rise, consumers start to spend more, product shortages start to happen, and retailers increase their prices to take advantage of the situation. Then the central bank starts to worry that the currency will be weakened by the rising inflation, and it raises the bank rate, thus forcing manufacturers to rein in their expansion plans. The boom slows and eventually stops, unemployment rises, wages fall and consumption drops until the central bank reduces interest rates so as to pump new demand into the system. The cycle starts again. Stock Market Theories & Fundamentalist ExpertsThe awkward thing, as far as our fundamentalist experts are concerned, is that America’s industries are indeed working flat out and that wages are rising fairly fast, but that inflation hasn’t made an appearance even though people are spending vast amounts on consumer goods. On the face of it, the New Paradigmers seem to have a point, but it gets a little more difficult when they try to present their reasons. Essentially, when the New Paradigmers talk about new technology as the source of the new affluence, what they mean is that companies are using new data-based business techniques (just-in-time planning, intelligent distribution networks, faster response times) to cut their costs and increase efficiency. Hence the fact that consumer prices aren’t rising. Stock Market Theories - ArgumentThis argument is all very well, but it doesn’t look terribly sustainable. Surely, if every company in America manages to cut its costs by 5 per cent, then that’s just a one-off 5 per cent step-change in the pricing system, and not a permanent structural improvement that will work year after year. Next year the supply shortages and the inflationary pressures may be back. 
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