Collective Action

Collective thinking is not a good way to begin a romance. Few women are swept off their feet by a man who introduces himself:

“Hi, I’m John and I’m like everyone else you’ve ever met.”

Nope, the idea is to be different…to be unlike any man she’s ever met.

This is true in the business world too. The idea in business is not to go along in step with other businesses – but to establish a unique selling proposition. Not only do you need to distinguish yourself with products and services that are different from those of other companies – you also hope to be able to keep other competitors out. You do not want others at your side or at your back – but plenty of open space to develop and distribute your own products.

Artists and musicians rarely do exactly what everyone else does. Each tries to find his own style, or his own particular way of expressing himself. One paints angles…another circles. One splatters paint on a canvas, another oozes it on. One singer does sappy country western songs. Another does violent rap and beats up his girlfriend from time to time – just to keep his name in the news. Everybody has to have his own shtick.

I have been trying to understand collective thinking because it is what holds stocks at absurd levels. Imagine that there were no stock market and no collective thinking about stock investing. Who would pay $450 billion to buy Cisco? The average P/E for the Nasdaq back in March was 260. Imagine that there were no Nasdaq…no CNBC…no analysts…no Wall Street. Who – left to his own analysis and own brain power – would pay 260 times earning for ANY company?

Why would volume on the Nasdaq go up 10 times over the last decade? And why would average p/es go up 7 or 8 times? Why would any compos mentis person think a dollar of earnings in the year 2000 is worth 8 times as much as a dollar of earnings in 1990?

“The Nasdaq used to be dismissed as a home for cats and dogs – small companies engaged in unfathomable businesses that earned them meager, if any profits,” writes Conrad de Aenlle in today’s International Herald Tribune.

“In the last few years,” he goes on, “the Nasdaq has grown into the world’s biggest market…home for enormous companies, [that] still engage in unfathomable businesses that earn them meager, if any, profits.”

No logic can justify it. No individual, independent experience or first-hand observation can explain it. And yet, it is – proof of collective madness.

And to understand it, we have to go into another part of the brain – where collective thinking takes place. There, in the most primitive part of the cerebellum is a pathetic little corner where people decide which candidate for vote for, which team to support, and which Big Tech stock to buy. It is the part of the brain that is switched on when reading the editorial page of the newspaper…or forming up for battle.

I described yesterday how the ancient Greeks fought in tight formation – each soldier completely dependent on his comrades to do his duty.

In this, they fortified themselves, according to “The Western Way of War,” – like voters used to – with strong drink. But not too much – fighting took discipline. The unit had to think as one person and act, as Plutarch put it, “with no confusion in their hearts.” The alcohol must have cleared up some of the confusion.

Once in position, as a number of military historians have pointed out, the sensible thing would have been to plant their spears and their shields in the ground and await the enemy charge. Especially, if they could get a position on the high ground, enemy soldiers would exhaust themselves in the charge against the fixed positions.

Better yet, they could fall back in good order as the enemy charged…making it even more difficult for him to find his mark. The famous leader of the Mongul invasion of Europe, Subedei, perfected this tactic…deliberately retreating on horseback in order to let the enemy follow. Soon, the attacker’s line would be in complete disorder and the attackers themselves worn out. At that point, the Monguls would wheel around and counter-attack.

But collective thinking has a logic of its own. Rarely, could any group of Greek soldiers sit tight while the enemy attacked. They had to act, to advance…to ‘do something.”

Thucydides’ describes the scene of the first battle of Mantineia (418 B.C.):

“The Argives and their allies for their part went forward eagerly and wildly, but the Spartans slowly and in time to the many flute-players who were at their side – not out of any religious custom, but rather so that they might march evenly and their order might not disintegrate – a thing which large armies are prone to do as they march forward to battle.”

Force meets force on the battlefield. The greater the group cohesion, the more likely the victory. In the 4th century B.C., the Greek city states battled each other. In the 20th century A.D., the world’s nation states duked it out.

But victory in investing cannot be had by collective action. When everyone rushes to buy a particular investment – it is soon overpriced, like today’s Big Techs. Collective action turns into a disaster.

Your reporter,

Bill Bonner

Paris, France September 26, 2000

*** Friday was the big day. The world’s governments ‘did something’ about high oil prices and a low euro.

*** Hey, what’s this? The euro is falling again…and oil seems to be stabilizing at more than $31. Maybe the fix was only temporary.

*** And poor Ms. Wu. She was the one demanding that government take action to protect the prices of her tech stocks. Alas, South Korean stocks fell another 1.12% this morning.

*** Stocks throughout Asia fell this morning – led by the techs. The Tokyo average is again below 16,000.

*** “Global Markets,” which expected clear sailing this week, after Friday’s announcements, “on Alert” says one Reuters headline. Another tells us that “Stocks Sink on Earnings Jitters.” The Autumn of Anxiety is underway.

*** The Dow fell 37 points and the Nasdaq dropped 62 as the Big Techs got swamped in the rough seas. Intel lost $2.50, to close a little above $45. Cisco lost $3, bringing it well below $60. Micron lost $6.

*** Have they suffered enough? Has negativity already taken the wind out of their sails? Not even close. They’re all burdened with the albatross of outrageous stock prices. Cisco is still selling at 87 times next year’s earnings. Uniphase is priced at 167 times. Oracle is at 86. Sun Micro at 92. These companies would have to be growing at the speed of light to justify these prices.

*** Instead, they’re stuck in the doldrums of declining growth rates. The WSJ notes that tech spending is slowing down. Not only is this undermining the growth and earnings of tech companies, it also threatens the GDP in a major way. The Journal points out that 30% of GDP growth over the last several years has come from spending on new technology – information technology, to be specific.

*** Of course, you and I know that that GDP figure is a fraud. People didn’t really spend a third of new GDP growth on computers and information technology. Instead, the magicians at the Bureau of Labor Statistics magnified a rather small sum, using ‘hedonic’ measures, and turned it into a major component of the GDP. So, when tech spending goes down, the GDP is going down too. Easy come, easy go.

*** Oil fell yesterday by $1.11 – but seems to be stabilizing in overnight trading. Oil has declined from $37 to nearly $31. But the 4 E’s still cloud the skies of Wall Street – Earnings, Energy, the Economy and the Euro.

*** “The American Petroleum Institute has stated that crude oil supply is NOT the problem,” says Kevin Klombies “so the release of 30 million barrels is simply an attempt to manipulate prices for political gain. In fact, it is refinery capacity that is serving as the bottleneck, with refineries operating at 95% capacity at present.” According to Klombies, the trend towards higher oil prices remains in tact.

*** 1269 stocks advanced on the NYSE yesterday, 1579 declined. 80 hit new highs; 97 hit new lows.

*** Is this really a new era? “In knowledge-based production, in contrast to physical manufacture,” wrote Marc Faber recently, setting up one of the New Era arguments for the purpose of knocking it down, “almost all the costs are incurred at the beginning.”

“According to them,” he continues, summarizing an argument of the New Era apostles, “the marginal costs of production [after the original capital investment] are far below the average.”

Faber goes on to point out that Roman aqueducts, canals, and even the conquest of new territories by the Romans were front-loaded with costs. “In fact,” he writes, “practically every canal or railroad ever built incurred almost all the costs during the initial construction period, while the subsequent marginal costs were minimal…[and] the Romans invented the ‘new economy,’ since they invested heavily in the conquest of territories and then forces those acquired ‘colonies’ to pay for the initial costs of the military campaigns.”

*** Another interesting item from Faber: a chart from Morgan Stanley shows a widening gap between real personal income and consumption. For nearly two years, the growth rate for real personal income has been declining. But the rate of consumption growth has been accelerating. The two have to get in sync. Most likely, consumption – which already shows signs of heading down – will decline to match real income.

*** “The US economy in the 1990s missed one of its four- year cyclical recessions; there had been two in the eighties and two in the seventies; in the nineties there was only one,” writes William Rees-mogg. “…recessions are needed to clear the excesses of a long boom, and a postponed recession may well be a severe one… there will be too much debt to liquidate easily.”

*** The Danes are said to be ‘neck and neck’ on the new euro vote. It could go either way. So, apparently, could the contest between Bush and Gore.

*** T.S. Eliot was born on this day in 1888.