| Down the River Again PARIS, FRANCE TUESDAY, 26 OCTOBER 1999 In Today's Daily Reckoning: *** Dull day for the Dow
*** Will gold fall below $300?
*** Argentina's new president *** Stocks were as dull as dishwater yesterday. Dow down 120. Techs and Nets up a
little. Ho-hum… *** McDonald's got Mc-creamed…just like IBM a week ago. Bad news is starting to
take individual stocks down hard. *** There were 44 new highs…but 288 new lows. It is, after all, a bear market. *** As has been the pattern, the dollar fell with stocks…to 105 yen. *** Meanwhile, gold fell, too. And oil stocks have fallen below their 200-day
moving average. Gold closed barely above $300. Bonds haven't had two back-to-back
up days in a month. They're down more than 17% over the last 13 months. *** Can gold hold above $300? Doesn't look like it. So what's going on? How come
there's a big move in oil and gold…and then they seem to be drifting back? *** There are massive contradictions at work. The world has huge overcapacity in
most things…which tends to lower prices. Also, equities are greatly overpriced
and falling…again lowering prices. (Just since July $1.6 trillion of "wealth"
has been erased from the stock market.) Meanwhile, the most abundant commodity in
the world is dollars. Sooner or later, these dollars have to be marked down…if
they're not wiped out first! Who knows what will happen…but it should be
interesting. *** Today's guess: the bear market will destroy so much buying power, it will
knock the legs out from under inflation. Oil and gold will not see a `70s-style
boom. *** I estimated yesterday that a medium-sized bear market would take as much as
$100,000 off the balance sheets of the average stock-owning households. Turns out
that the average stockholder has only $85,000 in financial assets. Well…there's
always the house. *** Despite what has been billed as the biggest explosion in wealth of all time,
most people don't have very much money. The average income in the United States
is still only $32,000 after tax. *** In 1929 the "Ladies Home Journal" had an article entitled "Everyone Ought to
Be Rich." It advised that investing $15 a month for 20 years would make the
reader wealthy. (Compounding stock market gains at recent rates.) Sound familiar? *** While markets work on the basis of irony and poetry…governments thrive on
lies and brute force. Politicians want to subsidize everything -- or declare it
illegal. Thus, while goofy paintings with elephant dung on them are subsidized in
New York…in Los Angeles an artist was forbidden to complete his painting of the
Statue of Liberty on the side of an office building. Though he had the permission
of the building owner, the city told him that he'd go to jail if he finished his
work. He didn't have a permit. *** Our London office is beginning its campaign to divert Britain from the
European Union. The first in a series of luncheons takes place Nov. 10 at the
Cafe Royal. Michael Gove, columnist and confidante of Michael Portillo, will be
the speaker. If you'd like to attend, contact Barnaby at BarnabyT@f-s-p.co.uk
*** Argentina elected Fernando de la Rua as its new president. Domingo Cavallo,
the free market reformer, got 10% of the vote.
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* * * * * * * * * * * * * * * * * * * * * * * * THE RIVER OF NO RETURN…REVISITED Ned Ludd was an early 19th-century working man in Leicestershire. He noticed that
the new machine-powered looms were putting workingmen like himself out of a job.
So he decided that the best defense was a good offense. He and a group of fellow
displaced workers took up hammers and bars and wrecked the machines that they
blamed for their unemployment. Ludd thereby gave his name to those who sought to destroy new technology…rather
than buying the IPOs. I was reminded of Ned Ludd a while ago when I had dinner with a lawyer. I
explained that I worked via e-mail and Internet. A look of profound disgust…a
look that only a French lawyer or waiter could master after many years of
effort…crossed his face. "I do not even have a fax machine," he announced,
puffing out his chest and raising his chin ever so slightly. "Anything worth
writing is worth putting in the post." Perhaps I should mention…he did not seem to be a very successful lawyer. But
then again, at least he was not an ambulance chaser or shyster, like Hillary
Clinton's brother, Hugh. Most professionals and businesspeople have chosen a different response to the
Internet. They have decided to join it rather than fight it. And most investors
have concluded that the Internet is the best thing to come along since…computer
makers. Well…how about bio-tech? Uh…make that…Boston
Chicken…Uh…no…the Nifty Fifty… Gold mining stocks? The auto makers?
Emerging markets? I give up. Try to find a parallel to the enthusiasm with which investors have
greeted Internet stocks, and you can find no story with a happy ending. Every
torrid love affair, alas, has ended in tears. This will be no different. There is an article in this week's "Forbes" about my favorite Internet stock --
Amazon. I have argued that Amazon is taking investors into the heart of darkness.
The picture of Jeff Bezos, perhaps unintentionally, managed to capture the wide-
eyed, Messianic zeal of Amazon's founder. He reminds me of a cult leader more
than a businessman. Though he is undoubtedly shrewd and universally acclaimed as
a business genius, I have to ask if the Internet wunderkind really has any idea
what he is doing. He says he has a "completely new model" for his business. What
was wrong with the old model…the one which investors valued at $25 billion?
Well, it didn't make any money, for one thing. But the new model fails to address that little detail. The company now has a $29
billion market cap…based on sales of $1 billion. And it still loses 30 cents
for every dollar it takes in revenue. "Lose a little on each sale…but make it
up in volume," is the old joke. But Bezos seems to have missed the punch line.
This recipe for foolishness is, in fact, his business model. He now offers everything except live animals, pornography and contraband on his
website. (I don't know what he's got against them.) But will he make money?
"That's not a significant part of our motivation," he says. He just wants to
"become the place where people can go to buy…anything." I wonder if investors
share his vision. I mean, I wonder if they just want to create one great, big
website that the world can love. Would it be too callous…too pre-Cro Magnon…too paleo-Ludditte…for me to
suggest that maybe investors actually want to make some money? No…I'm sure they
just want to share the vision. Maybe you can make money on the Internet, maybe you can't. But you sure can lose
money. Sales, which used to be made in stores, in catalogs or over the
phone…are slipping away to the Internet. So far, most businessmen have incurred
the costs of getting into the Internet era. They've hired programmers and bought
equipment. They've endured hours of hectoring from investors and employees to
"get on the web"…or be left behind. They have been made to feel like
technological Neanderthals when they fumble the jargon of the Internet era. And they've had to watch Jeff Bezos and thousands of others get rich by doing
things that most business owners wouldn't dare do -- like lose money
indefinitely. But, hey, it's a New Era. This New Era is often compared with the dawn of the Industrial Era. But there is
a major difference. The factories that Ned Ludd wrecked were profitable. They
were profitable in the old fashioned way…by producing things that people wanted
at lower costs (or higher quality) than old methods. In fact, they were so
profitable, so fast, that people all over the world rushed to build them and put
them into service. Workers saw themselves losing jobs…because, at first, they
were. They increased productivity… eliminated jobs…saved money…and made a
profit. Who bothers to wreck the Internet factories? Who sees them as a threat to their
jobs? Where is Ned Ludd? The Internet is something different. It is a threat to the capitalists…not to
the workers. It does not reduce costs…it raises them. In does not necessarily
increase productivity. Nor does it eliminate jobs. In our own business, we're discovering that it is extremely useful. It's just a
fast, cheap and reliable means of staying in touch with customers…and an
opportunity to give them more value for their money than ever before. But it
requires a lot of work and investment to use the Internet properly. Customers now
expect you to be able to deal with them via the Internet. So you have to spend
the money to do so. This does not necessarily increase sales…but it does
increase costs. In that sense, the Internet may be merely a new form of communications. And like
any new communications device, it is not an end in itself…but an enabling
technology…one that enhances and facilitates other forms of business. But those
businesses have to be decent businesses. They have to offer something of real
value at a reasonable price. This takes them out of Bezos' visionary world…and
brings them down to planet Earth where they can be subjected to traditional
measures of value. Personally, I love the Internet. It is perfect for what I do. I will like it even
if I never make a dime on it. Bill Bonner | 
