| …Discrediting Falsehood… THE DAILY RECKONING OUZILLY, FRANCE TUESDAY, 28 December 1999
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In Today's Daily Reckoning:
*** Another fierce storm rips through Europe *** Internets are down *** "The common man is his own enemy" and other nonsense * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** The bear went back to work yesterday after a brief
holiday rest. There were more declining stocks than
advancing ones on the NYSE. And 86 new highs against 340
new lows. *** The Dow and S&P were both down a bit. Nasdaq rose a
little. Nasdaq 100 rose 8 points. *** Gold rose a bit too -- up $1.30 *** Goldman's internet index soared nearly a third in
the first three weeks of December -- hitting a high on
Dec. 23rd (the fullest moon in 133 years). It was down
yesterday by 15.69 points. *** Was that the top? Who knows. But there sure was a
lot of volatility in the nets yesterday. Etoys fell 16%.
And Time's Man of the Year, Jeff Bezos, saw his stock go
down 10%. *** "Sell the news," say the old timers. Bezos' photo on
the cover of TIME had to be one of the biggest sell
signals in history. *** Believe it or not, I was Maryland's "Entrepreneur of
the Year" a couple of years ago. We've been struggling
ever since. This "man of the year" stuff is the kiss
of… well… problems. *** E-sales look good for the year. An AOL official said
they were "going to blow the doors off" this year. *** I don't know what happened figuratively, but a lot
of doors got blown off around here last night. Another
ferocious storm blew through, toppling a couple more
centenarian pines, knocking out electricity to our
house, and generally causing misery. In fact, I'm going
to sign off here early… so I can put back the roof
tiles and cut up some of the fallen trees. *** There is more than twice as much cash in banks'
vaults this year as last -- a Y2K precaution. More than
$100 billion. What's going to happen to that cash after
the new year? *** What troubles me about Y2K now is that everyone
expects it will be no big deal. I'd rather they were
frightened… and then have it prove to be no big deal. *** Russia's Christmas attack on Grozny will continue
"to the end" says Vladimir the Terrible. *** And Ivory Coast has a new ruler, General Robert
Guei, who assured the world that the "rules of
democracy" would be followed. However, he planned to
tidy up a bit first. "I have come to the house with a
broom," he said. *** Gen. Guei came to the job with a gun, not a broom.
But he was aided by the drop in the price of cocoa --
which brought the country to crisis. Coffee, sugar and
cocoa are all at record low prices. *** The editorial page of the Herald Tribune was as
vapid as usual over the weekend. I read it only to be
appalled. Richard Cohen and Ellen Goodman seem to
compete to see who can pack the most puerile comments
into a single column. Cohen compares the U.S. State
Department's hysterical warning to Americans overseas
with the killing of archduke Franz Ferdinand, which
touched off WWI. The villains in both cases, were
terrorists, whom he believes are common people empowered
by modern technology… as opposed to the "heroes" of
our time -- Roosevelt, Mandela, and Einstein, "people
who enrich our lives." He ends with this absurd remark:
"The common person… recognizes his enemy. It is the
common person." I suspected as much -- I'm my enemy. *** Floyd Norris reminds us that things have not always
been as they are now. In 1951 the stock market was such
a bore that the Journal of Commerce dropped its stock
tables. *** Nor was inflation always the gentle lamb it appears
to be today. In 1976, the CEO of the nation's oldest
bank, First Philadelphia, "proved that you can go broke
lending to a borrower with perfect credit." He put more
than $1 billion of the bank's money into T-bonds, and
was nearly wiped out by inflation over the next 4 years. * * * * * * * * * * * * * * * * * * * * * * * * * * * *
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Discrediting Falsehoods Yesterday, I quoted George Soros. "Economic history," he said, "is a never ending series
of episodes based on falsehoods and lies, not truth…
The object is to recognize the trend whose premise is
false, ride the trend, and step off before it is
discredited." There is little doubt that the trend in the leading
sectors -- techs and nets -- is based on falsehoods and
lies. I've been trying to draw them out over the past
few months. The Big Idea is that information technology --
computers, communications, the internet -- are so
effective that they can boost wealth at rates heretofore
never seen. And they can do so without triggering
inflation. No inflation, no interest rate hikes. No interest rate
hikes, no setbacks. No setbacks, no bear markets. There is no doubt that info tech can be useful and
productive. Communications are easier. It is a helpful
sales tool that facilitates ordering, tracking inventory
and shipment and providing follow up customer service. IT is also a source of entertainment… and idle chit
chat… that people seem to value. It can, no doubt make some things more efficient.
Information is more easily accessed and disseminated…
which has to be worth something. Our own business is publishing. It is a business of
ideas and information -- one that should be among the
primary beneficiaries of the new technology. We find
that we can readily spend money on IT… but actually
making the systems more responsive, more accurate and
more efficient is another matter altogether. Our personal business experience is mirrored by the
performance of the economy as a whole. For all the
promise and hoopla concerning information technology in
general, and the internet in particular, there is no
evidence that anything has really changed. Productivity gains are running about 3% -- better than
the 80s, but not as good as the 60s and 70s. Likewise,
economic growth is running at 5%… again, better than
recent history, but not unprecedented. And the growth numbers are unreliable because of the way
the computer industry is handled. The statisticians do
not count the actual dollars involved in the computer
trade, but factor in the power of the computers. This
boosts the growth numbers far beyond the dollars and
cents that are actually spent on them. Properly
deflated, the growth figures are about the same as they
have been through most of the last 50 years. Meanwhile, the stock market has absorbed the falsehoods
and lies of the New Era as though it were a junky
getting a rush. Renaissance Capital provides the figures
on IPOS: There were $93 billion worth of IPOs in '99 -- twice as
many as last year. Half of them were internet start ups.
73% had no profits. But, among the internets, 93% had no
profits. The average sales of the internet start ups was $18.5
million. They were tiny companies, in other words, to be
going to the public markets. But the average one was not
only tiny -- it was unprofitable, losing $17.8 million. Once public, the average internet IPO tripled. Looking
at all IPOs, those that lost money rose twice as fast as
those that did not. Paul Samuelson notes that the mania mentality in the
information technology sector has leached the margin of
safety out of the entire economy. "People are acting as
if economic risk is declining, when it may be rising." People see others making money in the techs and nets.
They sell their Coke and mobile home manufacturers, and
buy the leaders. (Which is why we see the huge gap
between the old economy stocks and those of the new
one.) This momentum propels the market leaders higher.
Yahoo goes to 1,700 times earnings. Investors enter a
kind of fantasy land, where they see themselves getting
rich -- on companies with no earnings! The average
internet IPO investor believes he has made a 200%
profit. Thousands of IT workers hold stock options they
believe to be worth millions and millions of dollars.
The whole economy becomes a "momentum economy" as the
financial effects of this easy money spread out. Soros says the way to make money on this fantasy is to
ride it. That is what speculators are supposed to do. But they have to remember to jump off too -- before the
falsehoods are discredited. From New York comes evidence that the end is near.
Landlords typically ask a 6 month deposit when renting
an apartment. But a friend tells me that they require 24
months if they find out that the rentor is involved in
an internet start up. Landlords are getting savvy. They don't want to be
stiffed by an internet entrepreneur who never makes any
money and can't pay the rent. It is only a matter of time before investors begin to
feel the same way.
My best to you,
Bill Bonner
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