The Gildered Age

The history of the New Era will record that it was Metcalfe and Moore who, like Moses and Aaron, led their followers out of the bondage of the Old Economy and into the land of stock options and caf? lattes.

Metcalfe and Moore handed down the laws by which the sons and daughters of Silicon Valley live their lives. You can find both described in our Contrarian’s Glossary at the DR website (

Metcalfe described a well-known phenomenon: that each element of a system or collectivity becomes more valuable as it expands. You can see this by thinking about the phone system. When the Bell Telephone Company was founded in May 1877, its products were almost useless. You couldn’t call anyone because no one had a telephone. But three years later there were 30,000 phones in use.

This led to the further insight that you could afford to spend a lot of money selling and installing telephones, realizing that you would make your money later on. What’s more, it was critical that people get your telephones rather than a competitor’s. Ultimately, the most valuable, and presumably most profitable, service will be the one that is most ubiquitous.

This insight, of course, cleared the way for the current Internet investment mantra: don’t worry about profits…fight for market share. I have made the point previously, but will repeat it (it is so good I’m sure you would like to hear it again): A telephone system was a quasi-monopoly. It made sense to pay a lot of money to put it in place, because you could expect monopoly-level profits for a long, long time. Bell Telephone and its derivatives are still in business. But has no hope of ever getting a monopoly or anything close to it. Metcalfe’s insight doesn’t help justify AMZN’s price.

Moore, meanwhile, handed down his own law: he noted that computational power would double every 18 months — which it has. This growth rate astonishes everyone and leads to the other major delusion of Internet investors — that just because computer power increases exponentially, so should Internet businesses and stock prices.

Moore’s law only applies to the speed at which computers process information. Government quants assume, wrongly, that this is equivalent to an increase in the nation’s wealth — as expressed by GDP. This in turn leads to distortions in other measures — such as productivity and inflation levels.

This statistical mess has become a poster child for what I will now style as “Michel’s Law”: the more information we have available to us, the dumber we become. Government statisticians, for example, so impressed with the speed of information processing, have turned into idiots — unable to make any sense at all of the nation’s financial condition. The figures mean nothing.

But the protagonist of today’s drama is neither Moore, Metcalfe nor Michel. It is George Gilder.

Gilder is described in an article (from which I borrowed today’s title) by Michael Malone printed in “Forbes ASAP,” as the “John the Baptist of the Digital Age.”

Gilder was a speech writer for Romney, Rockefeller and Nixon. He authored several well-read books, including “Wealth & Poverty” and “The Spirit of Enterprise.” He was quoted more often by Ronald Reagan, the record shows, than any other writer.

His book, “Microcosm,” took him farther than anyone had ever gone into the distant reaches of new technology and the enterprising spirit. Since then, some would say he has drifted a bit too far. I find it difficult to read his “ASAP” pieces — they are simply beyond anything that makes sense to me.

Never mind. He’s a genius and he’s been right about a great many things. He has gotten himself into a state of rapture over the possibilities of the Internet and never ceases to rhapsodize about it. His rap has been followed by many of the shrewdest investors of our time…to such an extent that this “pale, nervous Yankee” is seen as a demi-god himself.

But “I don’t do price,” says Gilder. Too bad. Because prices are important information. A technology may be spectacular. The company that owns it may be a great company. But the stock is only a good investment at the right price.

Malone, himself, got rich in Silicon Valley — by accident. He got founders’ shares from both Tom Siebel and Pierre Omidyar. He had no idea what they were worth and was astonished to find himself a rich man. But he lacks faith and sold his shares as soon as he could.

Malone reflects on the difference between himself and his father:

“It had taken him 60 years. An abandoned child, passed from family to family, razor blade swallower in an sideshow, 30 missions in a B-17, 20 years in espionage, under fire crossing the Polish border, a dozen years at NASA, two heart attacks, he and my mother eating hamburger in order to make down payments on income property. He had bled for every penny… And in the end it killed him.”

“Now I had traversed the same rugged path as if on an airplane, a distracted traveler thumbing through a magazine, rarely glancing at the landscape below, I hadn’t even kept track of my portfolio.”

It doesn’t seem real. It doesn’t seem right. “Most of us know,” writes Malone, “intuitively, that these young web companies minted by the hour, will not survive and prosper. In the coming reckoning, investors will lose money, retirement funds will be erased and the valuations that rule the stock market will become rational.”

That seems to be the sentiment of Metcalfe and Moore too. It is as if they had come back to the Valley and found their tribemen had turned the Internet Age into an absurd parody of the land of milk and honey they sought.

Instead of using the power of the silicon chip and the Internet to launch real businesses and create real wealth, they find investors dancing recklessly around the graven image of enterprise — the IPO.

Says Metcalfe: “I’m currently hung up on the stock market bubble, which I’m watching distort, or causing things to happen, in a way I’m not comfortable with. I’m worried that this distortion is going to all blow up. I’ve predicted that blowup for Nov. 8, 1999. So I missed, so maybe it’s tomorrow instead of Nov. 8, 1999. It’s part of my being freaked out. There’s stuff going on out there that I just don’t get yet, and I’m worried.”

“I love entrepreneurs,” he continues, “I try to hang out with them. And I’m frequently asking the question, `So, what’s your company going to be?’ The answer these days usually contains the letters I-P-O. That’s the wrong phrase to have in the first five sentences explaining what your new business is going to be about. If you’re thinking IPO, you’ve got your eye on the wrong ball. But it’s common now. It’s sad. These people think that an IPO is a significant event. I view it as a minor financial event. They view it as what life is all about.”

Is there a day of reckoning coming?

“The [venture capitalists] get in on the ground floor,” Metcalfe says, “and they get out early. [But]… these poor schmucks in the public markets. They are going to start looking for profits and they’re not going to find them. It’s all going to come crashing down. Maybe I’m just out of step with the modern world and I just don’t get it, but it looks to me like it’s all going to explode.”

Your correspondent,

Bill Bonner

Paris, France March 10, 2000

*** Well, what do you know, the Nasdaq did burst through the 5,000 mark yesterday just as I imagined. There was a buying panic on Wall Street yesterday. Everyone wanted to own a piece of the techs and Nets on this historic occasion.

*** Cisco hit a new high. The IIX, the Internet average, was up 22.47. Even, still drifting hopelessly in the New Era jungle, rose $5.

*** The thinking of the Nasdaq speculators is that you should go for the big gain — even if it entails a bit of risk. What the heck? If a stock rises 70,000% — as is the case with CMGI since its debut in 1994 — who cares if it falls back 10%…or even 50%? CMGI, known to friends as “The Creature,” was in the news because its “losses narrowed” more than expected in the last quarter. But don’t worry, the CEO says he has no plans to make money right away. “We don’t want to move into profitability too early,” he says. “It’s important for us to grab market share.”

*** But now that the 5,000 mark has been breached — what next? On to 6,000? Will the Nasdaq rise above the Dow, as Mark Skousen predicts? Or is the upward momentum exhausted? Has the greatest fool of all just pointed his browser to “buy” and then clicked “yes”?

*** Of course, I don’t know…and neither does anyone else. But I can’t help but think that the moment of truth is approaching. The Nasdaq currently has earnings — not dividend yield — of less than 1%. And I see more and more signs in the press that the New Era is becoming a joke. The tide of fashion may be turning against it. See below.

*** Want to know the real cause of the Nasdaq boom? Economist Sung Won Sohn: “In 1970 debt in America was $1.5 trillion, in 1990 it was $12.3 trillion and as we began 2000 it was over $25 trillion.”

*** The Dow, meanwhile, rose 154 points — turning Wednesday’s tentative bounce into a respectable rally. Even the A/D trend reversed for the day — with 1,687 stocks moving up and 1,267 moving down. But there were still not enough good things happening to reverse the trend in the Highs and Lows; there were 63 of the former…170 of the latter.

*** March gold rose $2.30. The dollar weakened. McCain and Bradley announced that they had better things to do with their time than continue their ill-fated campaigns for America’s highest elected office. And what else? Nothing I can think of…Oh yes, Greenspan is going to explain the Internet revolution today — in a speech in Boston.

*** Kaufman & Broad, the largest homebuilder in the United States, is down nearly 50% from July ’98. Fannie Mae is down, too — despite a big increase in activity. What gives? These look like more signs of approaching recession to me.

*** Sooner or later there has to be an economic slowdown — the effects of which could be far-reaching. America is the world’s largest importer — with the biggest trade deficit the world has ever seen. Robert Wade, professor at Brown University and expert on the economics of East Asia, believes that “the situation in China is really dire,” and that a U.S. recession would reduce global demand and cause “some very serious trouble.”

*** Among the possible trouble to which Mr. Wade refers is war with and over Taiwan. Chinese authorities may find war abroad preferable to losing power at home.

*** Elizabeth and I had dinner last night with my friend Francois, who is trying to undermine the French government all by himself. He started a taxpayers’ group…and then a group of retirees…each now lobbying to get control over a little more of their money. It is an uphill battle, at best, but Francois seems to relish every minute of it.

We ate at a restaurant on the Isle St. Louis, Au Gourmet de l’Isle. Very good wild boar. The bottle of Cahors wine was good, too. So was the late night stroll after dinner. Paris is a beautiful city. I am always impressed. I thought it was beautiful when I first saw it in 1969. It is no less beautiful today.

*** This warm weather makes me restless. I note that a group of subscribers and investors are taking a trip to Chile next week. I wish I were going with them. I don’t know if there are any places left…but if you’re interested, call Barb at 800-926-6571.

*** If you’re making plans for the summer and feel like coming to France, Pierre and I have a farmhouse we rent out. It’s not fancy…but comfortable and makes an ideal place from which to explore the surrounding countryside. Send an e-mail.

*** My friend Michel makes a good point. He notes that Jack Lang, the functionary who stirred up the French on behalf of convicted killer Odell Barnes, is a “guignol” — a clown. But Edouard Herriot, who was duped by Stalin, was not. Herriot was a smart man with impressive credentials. How could he have failed to see a famine that killed 6 million people, when it took place right under his own nose?

Well, the point Michel makes is that information — even the evidence of your own eyes and ears — is extremely unreliable. We see what we want to see. Herriot was misled because he wanted to be.

Good grief! If we can’t count on our own eyes and ears…how can additional units of information, from sources we don’t know, about things we’ve never seen and often about things no one has ever seen, often having to do with compound abstractions…such as the headline in today’s “International Herald Tribune” (“Beijing is Proposing a Fresh Start with Taiwan”)…how could this avalanche of information possibly help us understand the world? “It makes us dumber,” says Michel, we lose our footing and get buried beneath it. More about Michel’s Law, below: