A DAILY RECKONING GREATEST HIT, First Aired October 5th 1999… one year ago today. (For a little context… when this issue first ran we we’re on the eve of an unprecedented run-up in Internet stocks, fueled in part by an increase in the money supply in preparation for Y2K… Addison)
I was trying to read the “Forbes'” ASAP issue on the topic of convergence on the airplane. There were some good people in the issue – George Gilder, Tom Peters and so forth. But the more I read, the less I found.
The idea of convergence is, from a technological standpoint, the combination of TV, Web, telephone…the idea of putting all the world’s knowledge, entertainment and business together into one seamless communications system. That will take shape, or not, in due course. It is part of the reason that the telecom stocks shot up yesterday (remember, this is a year ago…ad). People think convergence will make them more valuable.
On another level, convergence is the discussion we’ve been having here…about how the virtual and the real come together. The “Forbes'” writers clearly had no idea what to say…or what to think. Even Muhammad Ali was asked his opinion…which he gamely gave, recalling the importance of religion in his life.
Webhead, futurists and “new era” investment advocates believe that this development is of transcendent importance…sort of like the Second Coming or an invasion from space. They seem to think that the real world will come to resemble, more and more, the virtual world. Investors who take up this line of thinking believe that the stock valuations of Internet companies will one day apply to all companies…as they will all become Internet companies or go out of business. If you ask for evidence of this…you are dismissed as an “old fogey” who just doesn’t get it.
There is no denying the Internet is an important innovation. It makes this message possible. Is it as important as the printing press? Air conditioning? The internal combustion engine? I don’t know. I’ve argued in these messages that it will have a big effect on the real world…just not the benign effect that investors seem to expect. Regular companies will not morph into Internet companies and suddenly be worth a lot more money. Instead, Internet companies…those few that survive… will grow up and act more like regular businesses…with stock prices to match.
They will have profit margins to worry about… inventory… employees…competition…and all the other things that make running a business tough work. That is the convergence that has already begun.
The virtual world, on the other hand, will remain virtual. People will not sleep on virtual mattresses. Nor will they eat virtual hamburgers. They will sit in cramped airplane seats…and long for an increase in material comfort, not the virtual kind… 98.2% of the economy is still much like it was 10 years ago. And though almost everyone uses a computer now, productivity is not rising. Indeed, the rate of productivity increase is lower today than it was before Jeff Bezos was born.
Readers will recall from yesterday’s message that the “productivity miracle,” in which productivity began rising in the United States in the last quarter of 1995, is a sham. The statisticians created a new way of measuring output that transformed a real increase of $2.4 billion in computers into $14 billion in chained dollars. In every quarter thereafter, the actual numbers have been replaced by these virtual numbers. And no one seems to notice that it is all phony.
This is not an isolated statistical curiosity. The U.S. financial structure rests on these virtual numbers… stock prices, the dollar, bonds…all amplified by a hundred TRILLION in derivatives. When the virtual numbers converge with reality…there will be hell to pay…
In the Wall Street Journal Dorothy Rabinowitz’ has done superb reporting on the child abuse hysteria that washed over the United States in the `80s.
“Believe the children,” jurors were told…not realizing the children had been prodded, coaxed and pressured into making accusations that, as one judge put it, “no rational person would believe.” The children were not telling the truth…they were telling a virtual truth…the one the prosecutors and abuse specialists asked them to tell.
Today, the only evidence for many of the fantastical child abuse cases is the fact that people are still in jail for them. But now the mania has passed. Innocent people are slowly getting out of prisons. And except for the ambitious prosecutors, child psychologists and Janet Reno, who used the hysteria to benefit their careers, almost everyone has sobered up and realizes it was a mistake.
So, too, will the Internet mania be one day regarded. People will ask themselves, “How could I ever have thought that company was worth so much?”
Well…it virtually was.
Your faithful correspondent,
Las Vegas, Nevada October 5, 2000
*** As Bill is still in Las Vegas, living it up at the Agora Wealth Symposium… Addison is writing the notes today… below you’ll find a Daily Reckoning Greatest Hit…
*** The Nasdaq – home of “one sick-looking tech sector” – was all the news this morning… as she stiffened up a bit, struggled out of bed and rose 67 points. At days end the index was resting at 3,523, up nearly 2%. The previous three sessions had conspired to knock 8.5% off her top…
*** Still, as anyone who’s been laid up for 3 days knows… the flu is hard to shake. And sure enough, late in the day, Dell threatened to take the index down with a fresh round of earning shivers.
*** Dell warned investors that “weak demand in Europe would lead to softer-than-expected revenues.” Dell traded down $3 after hours, coming to rest at $25.
*** William Fleckenstein: “First Intel, then Apple and now Dell pre-announces. In Dell’s case, the most significant part of the announcement is a rather large revenue shortfall for Q4. The question isn’t what’s happening. [Regular readers already know that.] The question is whether any of the dead fish will be able to connect the dots tomorrow, or will they try to maintain that all three are company-specific and therefore we should buy Compaq and Gateway.”
*** Company-specific? Well let’s see… “we had another 12 negative pre-announcements overnight…” Larry Wachtel an analyst with Prudential Securities told Reuters. “It’s very unnerving.”
*** Oracle, too, fought negative territory. Again, Bill Fleckenstein, “Taking a page out of the duffer golfing handbook and take a Mulligan, Oracle said it wasn’t trying to issue a sales or profit warning yesterday, it hadn’t changed any guidance and it didn’t think its margins would contract. I guess seeing the stock drop 20 bucks was too much for Larry Ellison, so the company had to attempt a rewrite – after being down about eight bucks, Oracle closed down only a buck and a half.”
*** The Dow climbed 64 points, closing higher for the third straight session at 10,784. The Dow was helped, in part, by gains at Boeing, Dupont, IBM and Home Depot, but remains down 6.2% for the year.
*** The S&P 500 gained almost 8 points to close at 1,434.
*** The dollar held steady at 114. Gold was down $1.60 to $273. Oil… fell 60 cents to $31.43.
*** In a speech to the Energy Institute of the Americas in Oklahoma City this past Monday, Matthew Simmons noted:
“I feared we would face an Oil Shock. I was wrong. We are now facing a true Energy Crisis…” He went on to say, “Let me be clear. The world has not run out of oil and North America has not run our of natural gas…What we have run short of is any way to grow the supply of each.”
*** “Mr. Simmons went on to point out,” says IMRA’s Kevin Klombies, “that there are only a handful of major new supply projects on the go at present with little chance of a meaningful increase in supply until perhaps 2005.”
*** Meanwhile, “the largest commodity market in the U.S. is not oil… but electricity,” says Real Asset Investor Dan Ferris. “The United States spends more than $220 billion a year on electricity. Crude oil might be our number one import, but only because we can’t import electric power.” Right now, Ferris contends, “this market ought to be on every investor’s mind. It’s one of the top few markets to search for the biggest and best opportunities in.”
*** “No matter how good the next report on consumer prices [due out October 18th],” writes Jim Grant, “It will likely pale before the previous one, which featured the first monthly decline in 14 years… a revelation government statistics keepers partially explained by noting a seasonally adjusted FALL in energy prices.” (All-caps added…Addison)
*** As “virtually everything we do in the economy depends on the CPI,” it’s worth looking at some of the adjustments the government bean counters have implemented in the last decade – in effect to combat an upward bias on the inflation rate. Grant’s list:
1991: Hedonic pricing introduced for apparel; greater recognition of discounted air fares.
1992: Improved imputation methods for new product models
1994: Quality improvement recognized for reformulated gasoline
1995: Generic pricing recognized when drugs lose patent protection; “seasoning” procedures introduced for food to eliminate upward bias.
1996: “Seasoning” extended to other products.
1997: New procedures for pricing hospital services.
1998: Hedonic pricing of home computers.
*** “One of these days,” muses Grant, “it will be interesting to learn what share of the inflation rate has been assumed away by the calculations.”
*** By the way, as Bill noted earlier this week, we’ve signed an agreement with the good folks at Grant’s. As part of it, you gentle reader, have been invited to receive a one month subscription to GrantsInvestor.com – free.
*** In other fascinating news, Ray Kroc… American entrepreneur, inventor of the Big Mac, and purveyor of clean bathrooms along the nation’s interstates… was born today.