Exodus

The Bible is full of things for which the rational mind finds no ready explanation. But so is the Democratic Party platform.

And, as noted yesterday, so is the stock market generally, and the market in Internet stocks particularly.

Christianity does not rest on a literal, simple minded reading of Genesis. God made man from the dust of the earth, we are told. The ancients, who wrote Genesis, had no reason to lie about it. Darwin came along and described what the process might have looked like if you were able to rerun the tape, fast-forward. You would see the little molecules of ‘dust’ coming together, taking shape, trying out different forms, growing, specializing, (just as human progress depends on an ever-increasing division of labor… so does all of nature), dividing, recombining, mutating, flourishing, dying out… whew! Nothing Darwin said contradicts the Biblical account. His hypothesis, to the extent it proves correct, merely fills in the gaps.

But what if the Red Sea did not part? What if the reporter on the scene decided to make up that part of the story to make it more exciting? What if he exaggerated a little? What difference would it make? The story could be disproved without undermining Christianity’s stock.

The Book of the World Wide Web includes many hyperbolic stories too. But unlike the early Christian martyrs, who were made to suffer for the amusement of Roman mobs, the early ‘true believers’ in the web enjoyed the mob’s approval. Many nerdy Internet pioneers are now very rich. Millions of new disciples have gathered round their banners and bid up their stock.

Our job is to find the trend “whose premise is false.” In this, we are hampered by the fact that we cannot know the future. We can never know, for example, when something will come along that is really new.

Stone Age Pacific islanders got their first glimpse of the outside world during WWII when cargo planes dumped supplies in the jungle. The primitives could only explain this phenomenon in terms they understood — the cargo planes must have been sent by some deity… or were divine themselves. Long after the war was over, the ‘Cargo Cults’ continued to worship the supply planes.

Likewise, when the first water clocks replaced sundials, it was presumed that the water clocks were wrong — because the sundials were the accepted standard of measure.

Since we cannot know which new thing will become the new standard, we merely look for aberrations and assume they will regress to the mean. Usually, they do.

We don’t know what the ultimate impact of the Internet will be. But we do know that the prices paid for Internet stocks are irrational and foolish, by any proven, time-tested measure. Unless there is something going on that is so new and so revolutionary that we cannot possibly understand it… these prices will revert to the mean.

Faith is a necessary ingredient for Christianity, but it is not by faith alone that ye enter investment heaven.

Yesterday’s market suggested that investors might be thinking about an exodus. True believers will still hope for a Moses who will deliver them from the bondage of the non-wired world. They may pray for a miracle that will give them 30% per year capital growth. They may dream of a land across the Jordan, flowing with milk and honey — a land where even current Internet prices may be reasonable.

But money, alas, is agnostic. Fickle. Cynical. Contrarian. It does not deliver up what people want — but what they deserve.

When the Christians faced the lions, Roman mobs would bet on how they would die. With faith enough, perhaps you could have bet on some Daniel and been rewarded. But the smart money was on the lions.

Bill Bonner

Paris, France January 25, 2000

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*** The Rockets sputtered. And the whole market fell backwards yesterday. The Dow fell all last week. But Monday’s drop was larger than usual — down 243 points. The S&P dropped 39 points.

*** The Nasdaq lost most of last week’s gains — falling 3.3% — or 139 points. Techs and nets suffered… but, surprisingly, not Amazon — which rose 8 points. Go figure.

*** There were, not surprisingly, twice as many declining stocks as advancing ones.

*** Is this the start of the long-awaited exodus… the rush for the exits in the Nasdaq market? Who knows. But sooner or later, these stocks are going down. Big time. Because, as Gertrude Stein put it, there’s no there, there.

*** The Fed seems to be mopping up a bit of the Y2k cash, as predicted. During the latest reported week, M3 went down by $57 billion. *** The big news from the latest Fed statistics is that the real median household went nowhere in the three years from 1995 to 1998… up a trifling 2.1% over the period. The Census Bureau, meanwhile, puts the figure at 6.7% — a bit better, but barely enough to repair the family auto, let alone buy a new one.

*** But half the households in America own stock, and the average portfolio went up 105.9% over the 3-yr. period. So call the showroom and tell them to prep their best model.

*** Barron’s passes along a calculation showing that the ‘wealth effect’ has added $3 trillion per year to the nations’ bottom line for each of the last 3 years.

*** As the above figures illustrate, labor and capital have each been going their separate ways. Stockholders get rich… while the working stiff earns barely a penny more. Fortunately, there are enough people who are members of both groups — or hope to be — to prevent an uprising.

*** Still, the trend is astonishing. Marx predicted that labor would be impoverished while capitalists got rich. In 1982, a factory worker could put in one and half days and earn enough to buy one average S&P share. Now, he has to work more than two weeks.

*** Come the revolution — convergence. The gap between labor and capital will be filled in — probably with the bodies of the investors who will get killed when the ‘wealth effect’ becomes the ‘poverty effect.’

*** Barron’s includes an article explaining how e- commerce will help manufacturers save money. They’ll be able to use the Internet to cut out middlemen and lower the cost doing business. The article then assumes that the savings will be realized as profits. Uh… one small problem… lowering costs does not increase profits… unless you’re the only one who can do it. Otherwise, a business is not only a beneficiary of cost- cutting… but a victim too. And while you’re cutting costs, so is the competition. If there are any savings, they get passed along to the consumer, not the shareholder.

*** The bulls’ explanation for high stock prices is that America is on top of the world. But the top of the world is getting crowded. Stocks are up to record highs all over the place. The 10-year average p/e for stocks in the developed world is 21. Now it’s 29. And tech stocks worldwide trade for more than 50 times profits.

*** But while people are willing to pay a lot for nothing, they are unwilling to pay much at all for a whole lot. Suppose you could buy GM’s auto and finance operations — its core business — for almost nothing? Well, you can. GM has a huge stake in Hughes Electronics, worth about $59 per GM share, says Barrons. It also has a couple of other holdings worth about $7 a share. And about $14 per share in cash. Strip it all out, and you get GM — the automaker and auto-financer – – for next to nothing.

*** GM is cheap. But GE is dear. GE is the envy of every conglomerate — and its stock sells for twice the p/e of similar Dow companies. But GE’s stock fell 5 points yesterday. Look for convergence here too. Sell GE; Buy GM.

*** And how about one of the world’s leading suppliers of building materials — at a P/E of 3.6? Great company. Odds are, it made the shingles on your roof and the fiberglass insulation too. But Owens Corning has packs of scurrilous lawyers after it, trying to score big in asbestos cases.

*** Good Lord! I got a letter from the Catholic League complaining about a sentence in our special report on the Internet, “The Real Internet Economy.” Susan Fani, the director of legal research, says that our statement, calling indulgences ‘a kind of stock certificate issued by the Catholic Church that guaranteed investors a place in heaven,’ is “untrue and gratuitous.” How so? Ms. Fani neglects the customary explanation.

*** I am going to make a fortune with a new software program. You know how your computer tells you when you make a spelling error? My new ‘Sensitivity Checker’ will alert you when you are being insensitive. It will soon be a standard feature on all new computers.