Are You Rich Yet?

Steve Case is the hero of the moment. He is a figure something like Rockefeller, or Jay Gould, or Ted Turner. An American original — coming in from the frontier of technology like a backwoodsman who has struck oil.

He has definitely struck upon something that Gerald Levin, Warner’s CEO, believes is as good as oil. Maybe better. AOL’s stock is worth less today than it was yesterday. But, nothing is permanent in this life. In any event, it has made him very rich. And now he is spending his lucre on one of the brightest bubbles on both coasts.

This is, after all, the American way. You eat at Pizza Hut one day… then next day, it’s Pizza Mansion.

And so, many Americans must be asking themselves… if Steve Case can do it, why can’t I? It is widely believed that many people, maybe even most people, are getting rich. The euphoria of prosperity is contagious. People begin to feel like they’re getting wealthy — even if they aren’t.

The actual figures do not show a huge number of mini- Steve Cases. I have cited the figures before. Wages — despite a record low unemployment level — are actually rising at a slower rate than a few years ago. Around 4%. The GDP, too, stripped of its inflated computer sector fictions, is growing at a feeble rate. And productivity increases are lower than they were in the 60s.

While this has been going on, however, people have felt that they were getting rich and spent accordingly. The level of consumer household debt has been soaring at 25% per year. And according to the Consumers Federation the average household has a net worth of just $35,000 and cannot even raise $1,000 in cash.

So, where are all the rich people?

Stocks have gone up. So have prices for real estate in certain areas. But relatively few people have gotten rich from these trends. If you were invested in the S&P since 1981 — throughout the entire bull market — you would have seen a total real growth of 570%. That’s good money. But it’s not exactly going to make many people rich. If you’d put $100,000 in stocks 20 years ago, today you’d have $570,000. Big deal. Few people actually did buy stocks at the beginning of the Reagan years. Stocks were dead and everyone knew it.

And even if you did buy stocks, chances are slim that you bought the index stocks. As the bull market progressed, the upward motion narrowed to fewer and fewer shares. And, as also reported here many times, the great bulk of stocks began going in the opposite direction in late spring of 1998. Since then, most stocks have lost value — and some have lost a lot of value.

So, it does not look as though many Americans will have trouble getting through the eye of the needle. They may be barred from heaven, but probably not on the basis of net worth.

If neither investors nor wage earners have gotten rich – – who has? And how?

The people who have gotten rich — the Steve Cases and the Bill Gateses — have done so not by buying stock but by selling it. They’ve created companies which caught the fancy of the lumpen investorati — the great, seething mass of investors — in much the same manner as the nifty fifty caught their fancy in ’68… silver in ’79… Japan in ’89… emerging markets in ’91… and so on. Looking back on it, their fancy must not be very fast on its feet.

But none of these infatuations match the torrid pace and viagran agitation of today’s tech and net mania. Which is why the entrepreneurs and stock promoters have done such a feverish business. And why hardly a week passes without a new 20 something whiz kid becoming a billionaire.

The money is flowing from the investors to the entrepreneurs, their customers, their suppliers, and their employees — not the other way around.

There is a fair amount of wishful thinking, self deception, and old fashioned conniving involved in this huge transfer scheme. We are often told, for example, that one quarter of Microsoft’s employees are millionaires. And yet, where is the appropriate employee expense item on the debit side of MSFT’s ledger?

You will search in vain to find it. Dan Denning reveals more of the slick accounting behind the scenes at MSFT in next month’s Fleet Street Letter. He shows that while MSFT records the expense of the options it gives employees on its tax return… it makes no deduction for them on its financial statement. The company thus transforms a loss of some $3 billion for ’99 into a profit. Stockholders are hoodwinked coming and going. They buy the shares believing the company to be profitable… and they bid up the shares to levels that enable the MSFT employees to exercise their options and become millionaires., meanwhile, sells books and other products over the Internet for less than it costs the company to offer them. In the language of international trade, this is called “dumping.” It is a faux pas on world markets, and forbidden — especially when the dumping is done at government expense and with taxpayer money.

Amazon does its dumping at investor expense. When I buy a book, I love it. As a customer, I am grateful to the AMZN shareholders for subsidizing my purchase.

Most Internet companies could be accused of engaging in some form of dumping. They are operating in the red in order to build market share. But the whole theory of dumping only makes sense when applied to large, capital intensive businesses. If the Japanese can dump steel and thereby drive Bethlehem and Weirton and the other American producers out of business, the Japanese know that then the coast will be clear to raise prices. It would take their former competitors a great deal of time and money to get back into the competition.

But what is Amazon going to do? Raise prices on baby strollers? Forget it… the logic doesn’t work. Investors have no hope of ever getting their money back.

In short, if you have not gotten rich… don’t be too hard on yourself. Few people have. And of those few, fewer still have done so by investing.

Until tomorrow,

Bill Bonner

Paris, France January 12, 2000

P.S. More on this tomorrow… including some ideas for getting (modestly, not vulgarly) rich in the next 10 years.

*** If you had trouble accessing the report on the “Real InternetEconomy” I sent earlier, try this link

*** This market is a killer. The Dow was down 61 points yesterday. The S&P was down 19.

*** But it was the Rocket Chips that suffered most. The Nasdaq was down 128 points in furious trading. And the Nasdaq 100 was down, a big 173 points. What the day traders — and George Soros — thought they made on Monday, they gave back on Tuesday.

*** With all the hype surrounding the AOL/Warner deal you’d think AOL stock would have gone to the moon. But, true to the old maxim, buy the rumor – sell the news, AOL fell. Gerald Levin, Time Warner chairman, announced that “the new media stock market valuations are real.” Real, yes, but not certain. AOL stock is now down nearly 30% from its high.

*** But what a great country! A few years ago, Steve Case was testing pizza toppings. Now he’s on top of the world. He owns the largest chunk of the largest and most successful entertainment business. His face is in practically every newspaper and magazine in the world. He’s super rich.

*** And he was smart enough to buy Time Warner with bits of paper of very questionable value. No, I’m not talking about dollars… I’m talking about something even more dubious… AOL stock.

*** I kicked myself all the way home yesterday… realizing that the pizza topping taster was as much a genius as I am a fool. More on that, below…

*** What was especially interesting yesterday was that the bearish habits of the last 20 months had returned. More stocks fell than advanced — 2080 compared to 1015. There were more new lows than new highs (slightly) — 73 to 67. And the gap between the Rocket Chips and other stocks narrowed… as all of them headed down, just at different rates.

*** Yahoo fell $27. AMZN went down $2.

*** “I have never before experienced the kind of euphoria and speculative activity I see at present”, wrote Marc Faber last month. He compared today’s mania to silver in ’79, which went almost straight up, before falling over 90%, beginning in January of 1980.

*** Marc is astonished that so much money is going into “unproven” companies. But it’s worse than that. Many of these companies have tested their business models. And they’ve proven they don’t work. Amazon was going to dominate the on-line book business. When that didn’t work… it switched to selling anything and everything. was going to sell financial news and opinions on-line. That didn’t work. So now Cramer is trying something new. Many of these companies are nothing more than big pools of money… with shareholders hoping that the whiz-kids will think of some business that will work.

*** Here’s another prediction. The Financial Times notes that Mr. Greenspan is widely thought to “walk on water.” John McCain commented that a lifetime reappointment of the Fed chief was not enough. He should be asked to serve in the afterlife too. The FT asked, “what are that chances that even [Greenspan’s] hallowed feet will become wet.” My answer: almost 100%.

*** A central banker cannot really create prosperity. Despite the press reports, he cannot personally multiply the loaves and fishes. All he can do is avoid sending out false financial signals. And that is the one thing he has failed to do. Thanks to Mr. Greenspan the average businessman and investor believes they have a lot more resources than they actually have. They have spent too much, saved too little, and believed too naively in the promises of the New Era. When the promises do not work out as expected — Mr. Greenspan’s feet will get wet.

*** I had lunch yesterday with an old friend of mine who just returned from a month in Cuba. “Life in Cuba is not the way it appears to tourists,” he told me. “It’s pretty grim.” The official rations are not enough to live on — so everyone has to have an angle. They either get handouts from relatives in America. Or they steal from the government.

*** Penalties are harsh in Cuba. My friend told of an acquaintance who got a two-year prison sentence for taking a block of cheese into Havana. She wasn’t supposed to be in Havana. And wasn’t supposed to have that much cheese.

*** When quitting time comes in America, people often go out to a bar for a beer. In London, they stand on streetcorners and drink beer. But yesterday in my office in Paris, Marie-Laure, Vincent, and Rafael decided to break out the pate foie gras and white wine. No special occasion.

*** It looks like General Pinochet will not have to stand trial. Doctors say he’s unfit.

*** And the Russians are recalling the lessons of 70 years of politics — once you start using force it’s hard to stop. They have announced that they will round up all males between the ages of 10 and 60 and put them in concentration camps.