Making Progress

“Human reason can neither predict nor deliberately shape its own future. Its advances consist in finding out where it has been wrong.”

Friedrich Hayek“I don’t get it,” said one of the participants, after spending almost three days talking about the Internet with colleagues from around the world. “How have they been so wrong?”

The ‘they’ he referred to were the Early Proto-Digital men, who believed that the Internet would cause people to behave differently. For example, they believed that you could not use sales hype to sell things over the Internet, because people would “hit the delete button so fast that sparks would fly.”

“You should see how fast I can throw junk mail in the trash,” he continued. “But that didn’t stop direct mail advertising from becoming a ubiquitous, multi-billion industry.”

The pioneers on the Internet had hoped for something different. They had the idea that they were ushering in a whole new world, populated by a new race of humans – Digital Man, free from emotionalism, sin and hype. It seemed logical to them.

They longed for a world of pure reason – where bits of data could simply stack up, like a staircase of 1’s and 0’s – free information that would mount upward forever. All the problems of the Internet were discreet, bounded problems that could be solved by mathematical algorithms and engineering logic. It was not only a world of never- ended progress, but also a world in which they were comfortable. A world without a devil…a world where only computing power mattered. A world that would be dominated by smart, Digital people. A world where young women in bars would be attracted to software programmers rather than baseball players.

Technological progress is cumulative, as I’ve pointed out many times. It just gets better and better. But how?

The Internet seemed to liberate information from cost restraints – turning the staircase of technological improvement into an escalator of uninterrupted progress. All you have to do was get on board. The Internet would make us all rich.

Jim Davidson recently explained: “Ideas are what allow us to take the finite resource available on earth and rearrange them in ways that make them more valuable.” Davidson, who believes in the New Era, but recently declared himself a bear on the stock market, continued: “In other words, ideas are the recipes of progress.”

“The Internet,” which brings the ideas and information of millions of the world’s smartest people directly to your home computer at virtually no cost, Davidson went on, “makes the information economy much more like the ideal economy of theory, in which perfect information and perfect competition erode local monopolies upon which many Industrial-era firms have depended for their profits.”

In an ideal economy, advertising disappears. Mistakes disappear. And so do profit margins. People have the information they need – free – to make the most rational decision. There is no need to try to persuade anyone of anything. There is no need to ever buy a second-rate product, theoretically, nor to ever embrace a second-rate idea. People who “should have known” or could have known, now have no excuse. The information is there, available at no cost.

Of course, the Internet is filling up with advertising, frauds, bad ideas, wrong information and hype. One thing that has emerged from our three-day conference on the Internet is that the Internet is not so different from every other medium – TV, telephone, newspapers, magazines…direct mail. For every line from Socrates or Shakespeare making its way around the Internet universe, there are thousands of dumb jokes, dopey ideas and pictures that you wouldn’t want you wife to find in your briefcase.

People have not changed. Just as in the print media, an Internet publisher is not likely to go broke from underestimating the taste of the American public.

The idea of perfect information is nonsense. There is no such thing. There is certainly more information on the Internet – but it is far from perfect.

As Gary North points out, “perfect information wipes out profits and losses, according to economic theory.”

Has the Internet wiped out either profits or losses? Nope. There are still many companies making money and many losing it. Curiously, the most Digital companies – that is, the most completely Internet firms – seem to be taking the biggest losses.

“The Forrester Review forecasts,” said an email I received designed to sell me consulting services, “the retail marketplace will generate up to $185 billion by 2004…” But…

“On-line stores entertain many visitors, but convert less than 2% to buyers. Without higher conversion rates, companies will continue to reap painful results such as poor customer retention, low margins, and revenue loss.”

Another report from Forrester noted that fewer than 40 percent of dot.coms were aiming to be profitable before 2002. Many would not commit to any timetable. And as recently as this past April, the people running these businesses thought that even trying to make a profit was a mistake. They thought it was more important to dominate their “space.” If they were not going to make money – how were they going to pay to stay in business? A third of the companies surveyed by Forrester said they didn’t know.

Technological improvements are a fact of life. But even they do not result from a simple process of accumulated information. The ideas and information so methodically and rationally stacked up by the Digital Men are being knocked down. Economic progress is what you have left over when the failures are eliminated.

Your correspondent out in the French countryside…

Bill Bonner

Ouzilly, France August 24, 2000

P.S. Polls of Internet geeks a few years ago showed them to be just about the only group in America to favor the Libertarian Party candidate. Small wonder. Libertarianism is the only political strain in America with any logical integrity – thus appealing to the prejudice of smart people with limited imagination.

*** The Dow rose 5 points yesterday. The Nasdaq did a little better – up 52.

*** Both Big Tech giants – Intel and Cisco – fattened up a little more…by the time they looked at the scales at the end of the day, each had gained more than $2.

*** “Technology stocks,” said Barton Biggs, Morgan Stanley’s chief economic strategist, “have become a worldwide obsession.” And he further added “I think the game is mostly over in tech and that the marvelous tech sacred cows that create the Internet infrastructure build-out are vulnerable because they are priced for absolute utter perfection, and in the end technology is a high-growth but somewhat cyclical and unstable business.”

*** But “Sun, Cisco and Oracle are holding up,” said one soothsayer quoted by Reuters, “because investors believe there is safety in them.”

*** There may be a lot of things in the big techs – but safety ain’t one of them. Just the opposite. The ‘crowded trade’ feels safe because it is crowded with investors – all seeking safety, validation, and confirmation in the middle of the great herd. But the big assembly of fat investors merely attracts the hungry bear.

*** The bear doesn’t just come up and announce that he’s going to eat you. He works the edge of the crowd – picking off stragglers and weaklings. He doesn’t want to panic the herd. He just wants to go about his business.

*** So, investors crowd toward the center – toward the most popular stocks…the big techs. But are the safe just because investors think they are safe – and boost up the price? Not at all – as the prices rise, the more dangerous they become. Because, sooner or later, the bear gets to them. Either quietly, one by one…or in a sudden panic…eventually, he takes them down.

*** Albertson’s got mauled yesterday. The food store chain fell from $32 to $23. It’s now down to the point where it yields 3% and has a P/E barely in the double digits.

*** But Albertson’s is far from a tech company. It’s an Old Economy company – one that provides something even Digital Man cannot live without – food. Analysts said yesterday that the techs rose because they were not vulnerable – as Albertson’s was – to increases in the oil price.

*** Oil shot up by $1.25 a barrel yesterday, after investors discovered that there isn’t much of it around. U.S. crude inventories are near a 24-year low. And heating oil is at its highest levels since the Gulf War.

*** President Clinton, eager to help elect his #2 to the White House, urged OPEC nations to get to work on their pumps and bring more of the crude to the surface. And the Saudis, moved by the spirit of cooperation…and perhaps other things, said they would be happy to pump more oil. Alas, some killjoy pointed out that pumping wasn’t the problem. Shipping is the problem. There is no extra tanker space.

*** Meanwhile, the battle between the dollar and the euro continues to hang in the balance. The euro bounced back up yesterday, after coming very near to its May low. The outcome of this battle, I believe, will determine the direction of the oil price, gold and the Big Techs.

*** “Predicting that some day the international community will make a portfolio decision to liquidate dollar- denominated assets,” says Bill King, “is like predicting snow in the Rockies. It’s inevitable.” When that happens, the dollar will fall…and so will the Big Techs. Gold will rise. But will it be a gentle dusting of the white stuff – like a Miami highway after a drug smuggler has an auto accident? Or a real blizzard?

Stay tuned.

*** The markets are full of mysterious contradictions. Bonds and oil are going up. That’s not supposed to happen. Along with labor, the price of oil – despite was the BLS says – is the key ingredient of consumer price inflation. And nothing is worse for the bond market than inflation.

*** Speaking of inflation, here’s a letter sent to Silicon Investor’s William Fleckenstein:

I am an executive at a small home building company – we employ 20 people. Last year, our health insurance premiums rose 14 percent at our renewal date. Just last week, I received a notice from our carrier informing us that our rates would skyrocket by 57 percent at this renewal. They were gracious enough to offer a more restrictive managed care program, and if we chose this plan, our rates would increase by only 40 percent. … Boy am I glad inflation is less than 3 percent as the government tells us!

Also, our receptionist came to me today, requesting a 20-percent raise because “that is what people in my position are now making,” based upon resumes we recently received for a similar position. Lastly, at annual review time, if I offer an average employee a 3- percent raise they just laugh, stating that they deserve more and can get it elsewhere if I do not ante up… I am also glad that the BLS says that wages are not a problem because all of my employees are so productive!

*** Well, our Internet Conference came to an end yesterday afternoon, so it’s business as usual here in the Ouzilly office of the Daily Reckoning.

*** I was very impressed by the participants – especially the English. The English were the worst singers, but the best drinkers. I woke up at 4 AM and heard them still laughing and singing on the veranda. Then, at 8:30 the next day, they were back at work…at least they appeared to be awake.