Wealth Of Information

“I am reading a book by Vladimir Poutine,” writes my friend Michel, “which explains how the USSR fell apart. … In about three years the Russians went from having no information they could believe – only rumors – to having all the information they could ever want. The result: whether they are underinformed or overinformed, the Russians continue to believe absolutely anything…and to know nothing.”

Is all this information making the Russians rich? And what is it doing to Americans?

Americans seemed to think they were getting rich – at least until recently. Information itself was believed to have put the U.S. economy into a new phase…a New Economy…where things worked differently. And much better. Savings were no longer necessary – because information technology needed little capital. And information was supposed to have boosted productivity to the point where inflation was no longer a concern: metaphorically, or perhaps literally, information allowed people to build new wealth faster than then the Bureau of Printing and Engraving could print new money.

“The new information revolution has been sold to investors,” writes Dr. Kurt Richebacher, “as a technology that will do the greatest wonders to productivity, profits and wealth, far more than the industrial revolution has done… The general idea behind the unfolding euphoria was and still is that this technology is able to deliver almost limitless growth and productivity effects because its implementation requires very little input of capital and resources.”

In the last couple of letters, we’ve observed that the whole idea was a fraud. There really has been no `information revolution’ of the 1990s. The cost of communication has been dropping sharply for the last 200 years.

“If you go back to the 1800s,” said Greg Blonder in Barron’s, “sending a message across the ocean was a several-week process, and it involved dozens of people.” Then came the telegraph, and that cut the time from a few weeks to a day. But you still had to go to the telegraph office, someone had to key it in, and it had to be keyed out on the other end… Then we went to a phone, which reduced the process to minutes from hours… Now you can send a message in milliseconds, at the speed of light, between here and England.”

Of course, even the telegraph messages of 100 years ago traveled at the speed of light. But the cost of transmitting data has fallen dramatically, to the point where Blonder believes long-distance service in the future will be essentially free.

But as access to information increased, something unexpected happened – the actual effect of the information glut was to force people to accept group-think interpretations offered by the media, pundits and demagogues rather than to reason things out for themselves from personal experience and observation. There is simply too much information available on too many different subjects.

Ideas, and the institutions that depended on them, became simplified, hollowed out, and mass-marketed. Wherever mass audiences were involved – such as elections, mass entertainments, and the stock market – things had to be taken down to a lower and lower common denominator – to the point where every blockhead could understand…and still believe what he wanted to believe. National elections, to use an example on people’s minds, were reduced to the intellectual subtlety of heavyweight wrestling.

The mass media provided not only intellectual short-cuts, but emotional ones. Genuine, personal feelings – sadness, joy, sympathy – were hollowed out as the mob learned to cry and cheer in unison.

But as we noted yesterday, mass-emotion and group-think is not without its hazards. Blonder, as noted by Barron’s, “sees a clear downside to technology. One of the greatest dangers he sees comes from an increase in uniformity…”

Blonder is worried about the dangers of a computer virus… attaching a uniform system of communications software. But there is also the danger of an intellectual virus – a malignant idea, such as National Socialism, attacking a population which is overwhelmed by information and choices and yearns for a simple, and even final, solution.

Thus it was that the idea of the New Economy and Information Age fell upon the U.S. financial markets a few years ago. Awash in information – from the WSJ to Bloomberg to the reports of thousands of analysts and commentators – investors were delighted to discover that the hard work of investment analysis was no longer necessary. The Information Revolution would make them all rich. All they had to do was to buy the names they heard on CNBC and wait.

Meanwhile, the managers of publicly-held companies had their own experience with group-think. Building a successful business is hard work. It takes sacrifice, time, luck. Now, all of a sudden, it no longer seemed to matter, because investors no longer cared about building strong businesses; they just wanted stocks that would go up in price!

This is, of course, just what the Information Age seemed to deliver. “The Internet has created more value more quickly than any other technology trend we know of,” said a Merrill Lynch analyst, quoted by Dr. Richebacher. “According to another argument,” Richebacher continues, “even after the stock market decline, the market value of the U.S. Internet sector is still $800 billion.”

Thanks to the new information technology, the last five years produced “colossal gains in household net worth in the U.S.,” writes Jim Davidson, “of 2.8 trillion in 1995, $2.6 trillion in 1996, $3.8 trillion in 1997, $3.3 trillion in 1998 and an astonishing $4.7 trillion in 1999…”

And now, dear reader, I come to the burden of this letter and the climax of this line of thinking:

Were these gains real, the results of the Information Revolution? Or were they paper profits – the products of a mass-delusion, aided and abetted by the information glut?

I think you already know the answer.

But I will return tomorrow to belabor the point – and develop a slightly new one:

Just as group-thinking hollowed out ideas and emotions, so has it hollowed out American businesses. Tomorrow – more on Dr. Kurt Richebacher’s “late, degenerate capitalism” in America…and how the information glut made people poorer, not richer.

Your correspondent…late, but not completely degenerate,

Bill Bonner

Paris, France November 29, 2000

*** Today’s TheStreet.com website says the “Annus Horribilus Continues.” This has nothing to do with a certain NYTIMES reporter, however. Instead, TheStreet.com refers to the year 2000AD…being suffered by Nasdaq investors.

*** “Where’s Festivus when you need it?” asks the reporter. Festivus? I looked in the dictionary. There’s festival, festivity, festive – but no Festivus.

*** Hmmm…apart from me, the only one I have ever seen use the term is the French philosopher Philippe Muray, who uses it to describe the way the politics of western democracies have been hollowed out, reduced to meaningless slogans and empty celebrations. I don’t know if Muray has mentioned it or not – but American capitalism has also suffered from the Festivus effect. More below…

*** Festivus or no…the Nasdaq had nothing to celebrate yesterday. A few companies were the subjects of analysts’ warnings…and fair-weather investors decided to abandon them. Juniper Networks, for example, lost $17…Sun Microsystems dropped almost $7.

*** The Nasdaq itself was down 145 points – or about 5% – to 2,734. Three stocks fell on the Nasdaq for every one that rose, and 505 hit new lows.

*** Yahoo! sank $3. And Amazon almost as much, a loss of about 10%, after a Banc of America Securities analyst said he would “avoid” the stock. In typical Wall Street euphemism, he gave AMZN a “market performer” rating.

*** Compaq fell 7% and Dell fell 8% as investors realized that computer inventories have been growing and demand has been falling.

*** And Broadcom drifted even further from analysts’ $200 `target price’ – it closed yesterday at $85.

*** The Dow also lost ground yesterday – down 38 points. The economic news was bad. The government reported that durable goods sales fell 5.5% in October. Durable goods include large items such as cars, airplanes and furniture. Lower durable goods sales mean lower business investment – which can be taken as more evidence for a recession in the making.

*** Meanwhile, the Conference Board reported the consumer confidence fell again in October to its lowest point this year. It is now at 133 – but still high compared to the 1985 benchmark of 100.

*** GDP growth will be nipped and tucked a little today. It was reported at 2.7% in the latest quarter…and is expected to be revised downward to 2.2% today.

*** If you want to lose money on the Dow, I suggest a simple and obvious stock: GE, the world’s largest company. It is a conglomerate of businesses…priced as though the whole were worth nearly twice the sum of its parts. Over the last 5 years its P/E has risen from 15 to 33.8. But now GE’s CEO, Jack Welch, is retiring…and the bull market is over. A modest prediction: GE will soon be back at a P/E of 15.

*** Goldman Sachs estimated profits for the 4th quarter are down 36.4% from a year ago. And 8,789 dot.com workers got pink slips in November.

*** More signs of deflation: bonds rose yesterday, and the spread between 10-year Treasuries and 10-year inflation- adjusted TIPS fell from 1.9% recently, to below 1.8%.

*** Credit bubbles never end in inflation, says Dr. Richebacher, but always in deflation, as paper assets are marked down and wealth disappears.

*** The danger with U.S. bonds is the U.S. dollar. The euro rose against the dollar yesterday. So did yen. As I keep saying (and sooner or later I will be right): The dollar may have finally topped out. If so, it won’t be long before the foreigners holding $2 trillion worth of U.S. dollar denominated assets decide that they are better off in another currency. When that happens, the dollar will do what the Nadaq has been doing. As Marc Faber suggested yesterday – buy quality euro bonds.

*** Gold fell 50 cents yesterday, but Newmont and Homestake shares were both up.

*** Al Gore accidentally spoke the truth on Monday. In the International Herald Tribune, he’s quoted as saying: “The integrity of our democracy depends on the consent of the government…” He meant, no doubt, the governed.

*** Elsewhere, David Broder, editorializing in the Washington Post, gives “41 Fresh Reasons for Faith in Politics.” The reasons are incarnate in the persons of the new members elected to the House of Representatives. But one would need the faith of Job for it to be restored by this mob of hacks, wonks and busy-bodies. Few have ever had honest jobs – and two seem to have some genetic defect predisposing them to a life of slime: they are the children of politicians. One graduated from the University of Florida…and scarcely two years later was a member of the Florida legislature. One has the dubious distinction of being “the first Latino woman elected to the California senate.” Another earns Broder’s approval for having won a “four-year fight to tax smokeless tobacco.” One specializes in the environment. Another in “children’s and youth’s programs” …one was a CIA snoop…and another messed around with “major tax policies.” What impressed Broder about them was precisely the point that should be cause for alarm: “The most striking thing,” he says, “is the depth of their governmental experience. These are not, for the most part, rookies.”

*** This recalls my proposal to select members of Congress by national lottery: that is to replace fraud with chance. No counts. No recounts. No elections…no campaign finance reform. A Congress selected at random would be far more representative of the American people. Jurors – with the power of life and death – are selected by chance. Why not Members of Congress? And once selected – treat them like jurors: feed them chicken salad sandwiches and keep them quiet.

*** And from the Toledo Public schools comes more evidence that mankind grows ever more dim even in the Promethean light of the New Era: The school’s Jefferson-Madison Leadership Camp has voted to change its name. “The recent enlightenment that both Jefferson and Madison were slave owners puts a negative light on things,” declared Ralph Schade, a school principal. Apparently, Mr. Schade had been in the dark, or perhaps the penumbra, on the slaveholding issue, until modern information technology somehow got the news to him.