Bad Information

“In five years,” writes Jim Davidson in the most recent

issue of “Strategic Investment,” “you will have not 80 channels, but 80,000 channels of information…which will deliver any information you desire.”

I’ve been attacking the New Era from almost every conceivable angle. And, almost anyway you look at it, it looks like a fraud. But now I’m ready to strike at the very heart of the monster.

But first, let’s take a short tour around the beast.

The New Era is supposed to be driving up productivity and GDP growth. But the figures show ordinary growth at best. And even these figures lie. The bean counters count beans that do not exist. They assume that a more powerful computer is worth more — even though its price is falling. Thus, a small expenditure on computers and information processing technology is magnified to the point where it is a large component of economic growth.

Another feature of the New Era is that it is said to permit rapid economic growth without inflation. But again, the figures are not to be believed. The bean counters take the non-existent beans and use them to gauge consumer prices. Per unit of computing power, computers are getting much cheaper. They weight the CPI towards computers — not on the basis of how much money consumers actually spend on them, but on the basis of computing power per dollar.

We are told that New Era businesses can be extraordinarily profitable…and can grow at extraordinary rates. And yet, when the numbers are examined, it is clear that many will never be profitable — and most others will never be profitable enough to justify current stock prices.

Even the most profitable and best established of the New Era businesses — such as Microsoft — often disguise employee expenses as capital transactions. Stocks are repurchased, for example, in order to give them to employees. Shareholders get the impression that additional demand for shares is boosting share prices. What is really happening is that the capital of the company is being given away. Properly accounting for stock options, even Microsoft would be unprofitable.

Still another New Era idea is that the U.S. economy is special. It is said to be so flexible and so efficient that it can grow at high rates without fear of recession or financial crisis. And yet, the same argument could have been made — and was — for Japan in the `80s. Or America in the `60s. What’s more, as Dr. Richebacher points out — the German economy has actually outperformed the United States by nearly every measure, except job creation, over the past 10 years.

Internet-based, New Era businesses are supposed to be a lot cheaper to operate than brick and mortar businesses. Yet, our experience — and that of a lot of other businesses — is that Internet sales can cost as much or more than traditional sales.

What’s more, technology evolves, competition enters the picture and there is a constant need to repair, revise and re-invent the systems — at great expense. New Era enterprises are not immune from the process of creative destruction — in fact, they are more vulnerable…since the Internet “territory” is impossible to defend. A business can only stay ahead by racing ahead.

Failing to find any proof of the New Era in the numbers, I have tried to understand the New Era as a religious phenomenon or a political mania.

I have also wondered, in print, whether the Internet actually does change anything. Is the world really so different thanks to the Great Digital Dumpster?

Which brings me to my point. Recently, I checked my e- mail and found that I had more than 300 messages waiting to be read, answered or discarded. This is despite the fact that I work fairly diligently to try to keep up with it. I am stuck in traffic on the Internet highway.

One of the cornerstones of the New Era is the idea known as Metcalfe’s Law. It is based on an insight from the telephone system. The first phone is useless, because you can’t call anyone. As more and more people get phones, the more useful each one becomes. But Metcalfe’s Law does not overrule the Law of Diminishing Returns. When the freeways were built in Southern California, they represented a new era of automobile transportation. But soon they were clogged with traffic. Though the system became more useful as it was built out…it attracted more and more traffic and average speeds fell.

Internet enthusiasts (which probably include nearly the entire world’s sentient population) believe that the heart of the New Era is the fact that Information Technology makes information available for free to anyone.

It used to be, they say, that valuable information was hoarded, carefully guarded by giant corporations and the government — and dispensed frugally, giving each worker/citizen just what he needed to do his job and nothing more.

Now everyone has access to as much information as he could possibly want. This is the essence, the heart, of the new paradigm. With access to the information, everyone can start his own business; invent something new; publish his own ideas and make them available to millions.

The New Era, in short, makes it possible for Everyman to be as a God. A Creator.

John Forde showed me the paradox of information in the Information Age: when it is given away free — it loses all its value. It is like air — available for nothing over the Internet.

Now Lynn Carpenter has provided a further insight: not only is information worthless; it’s expensive to get rid of. It’s like the manure produced by Elizabeth’s horses. A little of it is valuable — we use it in the garden. A lot of it is worthless. An infinite supply is a major problem; it piles up in the yard like the e-mail messages on my computer. We have to pay someone to haul it off.

Information is only useful to the extent it can be absorbed, understood and put to use. Anything additional is not only wasted — it must be carted off.

The whole idea of the Information Age is a fraud.

Your correspondent,

Bill Bonner

Paris, France February 15, 2000

*** The Dow rose 1.9% yesterday — led by a very strong move in the oil stocks. Oil is above $30 — and the oil companies are beginning to show higher profits.

*** A rising oil price is not good for most businesses, however. Most companies consume oil; they don’t sell it. So even though the Dow rose sharply, advancing stocks barely beat out declining ones.

*** And the Nasdaq couldn’t seem to get its booster rockets to fire. It was up a little, but with four stocks going down for every three that went up.

*** Thus, nothing has changed. It is a bear market and has been one for a long time. But it is a very wily bear that is stalking this market. He mauls a few tourists…and then disappears. The campers scarcely notice — because the Park Rangers don’t mention it and the weather is beautiful.

*** Gold fell $6.90 yesterday. shot up $49. Clearly, something funny is going on in the palladium and platinum markets. These markets are dominated by the Russians — who often do funny things.

*** Buffett is buying retail. Well, he’s buying retailers at after-Christmas sale prices. He bought Dun & Bradstreet, too. It was at $37 in July. Now it’s $26.

*** My guess is that a business slowdown and a bear market will make the timing of Buffett’s purchases less than ideal. But Buffett doesn’t believe in timing the market. He buys good companies at “fair” prices.

*** AOL fell another $2 — to $54. It was $90 at its high.

*** The Greatest Period of Wealth Creation in History. I’m not talking about the new economy; I mean the old one. The undeveloped world is still about 100 years behind the United States. Which means a lot of steel, oil and electric appliances need to be manufactured and sold. “The Fleet Street Letter’s” Lynn Carpenter saw her one of her foreign steel picks go up 57%.

*** “The Net stocks are probably at exactly the same juncture the junior mining stocks were in 1996,” writes Doug Casey ( in his latest newsletter, “at the peak and about to enter a bear market that will deflate the prices of the few that survive by 95%. They’re remarkably similar businesses, in that both are extraordinarily volatile, both are driven by the wildest emotions and both are bottomless pits for capital.”

*** They actually had to cancel one of Vienna’s biggest balls because of fears of protest against the political pariah, Joerg Haider. Officials are also worried that tourists will boycott the country.

*** A group of Chinese peasants seems to have captured the creature that sat next to me on my recent flight from Miami to Paris. They put him in chains and led him through a central Chinese town, describing him as a “yeti.” Police say it was just another peasant dressed in black fur.

*** A DR reader reminded me that “one out of three people born in the world is Chinese.” Statistically, two of my children, therefore, are Chinese.

*** Eric Hoffer, explaining why yetis and pre-teens do well in a manic market: “To the child, the savage and the Wall Street operator, everything seems possible.”

*** The Y2K scare seems long gone. But Gary North does not think we have heard the last word. “Call me clueless,” he suggests. “Call me a big, fat idiot. I don’t think we’re through with Y2K.” Why? He cites Kathy Adams, who ran the repair project for the Social Security Administration. She worried that the biggest danger was not a shutdown…but that bad information would gradually corrupt the system.

*** Gary also points out that the Federal Reserve pumped the money supply at the highest annual rate in history during the last quarter of last year in preparation for Y2K. If Y2K didn’t bust the financial system, the Fed’s defense measures still could.

*** Dr. Richebacher adds that since 1996 credit has expanded three times faster than GDP.