The Planet Hollywood Syndrome
In the days when corporate
downsizing was all the rage, Wall Street took a lot of flak for judging
companies too harshly and setting the bar for corporate performance so high
that executives felt their only option was to slash payrolls. Or,
alternatively, Wall Street was praised for its relentless focus on the bottom
line and its insistence that corporations become more productive and more
profitable. Either way, the point was that investors were taskmasters, Marine
drill sergeants whipping corporate America into shape. Now this was never as
true as Wall Street's critics or its supporters wanted it to be, but in any
case, it is somewhat beside the point now. A quick glance at the Street today
makes one thing clear: Boot camp is over.
Take
Planet Hollywood. This is a company that: 1) has been a consistent money loser
for almost its entire existence; 2) has constructed an entire business around
the highly questionable proposition that people will overpay for mediocre food
in order to sit next to the motorcycle that Bruce Willis rode in Pulp
Fiction ; and 3) is spending large sums of money to pay an executive to live
in Hollywood and build relationships with up-and-coming stars. This is a
company, in other words, that should not exist, with "should" implying nothing
about the morality of the burger/movie star alliance and everything about its
business prospects.
Though it has seen its stock price hit
hard--justifiably--by its most recent woes, Planet Hollywood is forging ahead
with plans to build a giant hotel in Times Square that will feature 564
"Hollywood-themed" rooms and suites. ("You can sleep in a bed just like Linda
Blair's in The Exorcist !") In order to build this hotel, Planet
Hollywood announced last week that it will raise $250 million by selling
seven-year bonds. And Bear, Stearns, which is handling the deal, is confident
it will be able to sell them. One analyst told the Wall Street Journal ,
"I think it's going to go all right. After all, it's only $250 million."
Ah, yes.
What's a couple of hundred million dollars among friends?
Or take Pan Am. This isn't the Pan Am whose old
carry-on bags are all the rage with urban hipsters. This is the tiny Florida
airline that owns the Pan Am trademark now, which went bankrupt last month but
now looks as if it's going to be taken over by a soccer team owner from the
former Yugoslavia. Pan Am has never--never, that is--turned a profit, and when
it filed for Chapter 11 it had $50 million in assets, including the value of
the name, and $147 million in liabilities. If Pan Am were a dog, it would be
put to sleep. But the odds are that it will be resurrected and chew up some
more capital.
You can
tell hundreds of similar stories about the real estate market, where a huge
construction boom in suburban office space continues, even though no one seems
to know how the space will be filled in an economy growing as moderately as
ours is. And still more about the market for initial public offerings, which,
after a mild slump last fall, is booming again. We seem to have reached the
point where any company that wants to go public can, even if it has never
reported anything remotely resembling earnings. And if it's an Internet company
going public, fuhgeddaboutit. Go ahead and buy the Ferrari.
As
Slate
's Michael Lewis has
pointed out, Silicon Valley now offers the curious spectacle of capitalism with
too much capital. But the same spectacle seems to be on display throughout the
country. Certainly since the Asian economies collapsed, enormous amounts of
foreign capital have poured into the United States, even as domestic capital
has been more likely to stay at home. Americans are not saving significantly
more. But the flood of money into mutual funds--where all the money is turned
into investment capital, as opposed to savings accounts that require a
percentage to be held in bank reserves--has given fund managers more money than
they know what to do with. With the market on a seemingly unstoppable rise,
fund managers feel the need to stay fully invested, which means that
eventually, even struggling companies will come back into favor. There's just
too much money out there for them not to.
There
are, though, a couple of problems with this picture. First, the concept of "too
much capital" is a kind of macroeconomic impossibility. If the supply of
capital truly exceeds demand, the rate of return will drop until the supply
shrinks. Second, the idea that too much capital can be a bad thing makes little
sense in a world where investment is the key to economic growth. So the image
of lovelorn investors chasing standoffish borrowers can't really be right, at
least not for the economy as a whole. And, in fact, there is no shortage of
would-be borrowers. Consumer debt is nearing all-time highs. The junk bond
market is booming, with companies issuing $109 billion in junk bonds last year.
In the subprime loan market, people pay interest rates of more than 20 percent
and risk their houses to get access to capital. And although government bond
rates have dropped over the past two years, the real interest rate is still
high today relative to the 1970s. There is a demand, then, to match the supply.
The only problem is that this may not be such a good thing.
What an economy really wants, after all, is not
more investment per se but better investment. It wants capital to flow to
companies that will create value--not in the form of a rising stock price but
in the form of more goods for less cost, more jobs, and rising wages--by
enhancing productivity. In the absence of an omniscient central planner,
though, the way to get better investment is to get more investment. The Planet
Hollywoods are the price we pay for the Intels and Gillettes.
In the short term, though,
it's possible to get too many Planet Hollywoods and not enough Intels. This is
why Japanese banks continued to pump money into overbuilt Southeast Asian real
estate and Korean "chaebols," and why a third of all the junk bonds issued in
the late 1980s ended up defaulting. Markets get caught in self-perpetuating
cycles of undue optimism and hysterical panic. The consequences are never
pretty, which is what's so troubling about the ever rising stock market, the
booming junk-bond market, and the real estate boom.
This is an economy, after
all, that is doing well but not great, that is still growing slowly in
historical terms, and that has still not shown significant evidence of a real
boom in productivity (with the notable exception of the manufacturing sector).
Yet investors are acting not simply as if there were only sunny skies ahead but
also as if every company, every investment, were going to enjoy the warmth of
the sun. And this means that capital is not playing its necessary disciplining
role. You can't fuel real economic growth with indiscriminate credit. You can
only fuel it with well-allocated, long-term investment. Unfortunately, that's a
principle that doesn't seem to be at work in a capital market that just can't
say no.
