End of the Gildered Age
Are you a villain or just naive?
– Question put to George Gilder by
one of his subscribers.
"Listen to the technology," Carver Mead, professor of physics at Caltech advised his famous student. George Gilder listened carefully. If he strained his ears enough, he believed he could almost hear the cosmos speaking. "Buy!" he thought he heard.
Gilder did not usually buy. Judging from the press reports, he has about the same interest in picking stocks that we do…and the same fashion sense. But this Ulysses of the Telecosm had forgotten to plug his ears or have himself lashed to the mast. Thus, the sirens at Global Crossing got him…and drove him crazy.
An article in the July issue of Wired chronicles "The Madness of King George." Poor George; another hero of the Boom Age is being recast as a villain. Here in Great Barrington, Massachusetts, says the Wired report, "One of the tech world’s more famous – and controversial – prophets is contemplating how he could have been so right over the past half-dozen years and yet seen everything turn out so terribly wrong."
"Many of his partisans are calling for tar and feathers," continues the report.
The press is full of "the mighty fallen" stories; Gilder’s name appears on a long list. But in today’s letter, we will not join in kicking the poor man when he is down. Still, since we were practically alone in poking fun at Gilder two years ago, we feel entitled at least to pick up a stick and prod the corpse.
"A new economy is emerging," Gilder had written in his book, Telecosm, "based on a new sphere of cornucopian radiance – reality unmassed and unmasked, leaving only the promethean light."
We didn’t know what that sentence meant when we quoted it two years ago. We still don’t. But even back then, when Global Crossing was still a going concern, we worried that Gilder may have stared into the telecosm for a little too long.
It was all very well to blather about how Global Crossing helped to bring "a new epoch of spirit and faith" with its "majestic cumulative power, truth, and transcendence of contemporary science and wealth." But with a P/E ratio of NEGATIVE 130, a man would be a fool to put money on it, we thought at the time.
To his credit, but not to his benefit, Gilder put his money where his mouth was. He did not merely mislead investors, like Grubman, Blodget and Kozlowski. He misled himself; Gilder bought into everything…Global Crossing, the New Era, his own publishing business.
In a better world, maybe things might have gone differently. Gilder was earnestly blathering before large crowds – 350 people paid $4,000 each to attend his Telecosm conference in 1997…thousands heard his speeches, for which he earned $50,000 each – and making good money. In 1999, his list of recommended tech stocks averaged more than 247% return. And by the end of 2000, his newsletter reached 70,000 readers paying $295 a year. At the peak, a word from Gilder could push a stock up 50% in a single day.
"For a few years in a row there, I was the best stock picker in the world," says Gilder. "But last year you could say…I was the worst."
Gilder bought out his publishing partners at the peak. Then, techs crashed…and suddenly, people weren’t interested in attending his conferences or reading his newsletters; they no longer seemed to care how many bits you could crowd onto the head of a silicon chip. And then, in January, came the news that his favorite corporation…the company he thought would "change the world economy"…had filed for bankruptcy protection. "You can be just fabulously flush one moment, and then the next, you can’t make that last million-dollar payment to your partners, and there’s suddenly a lien on your house…" said Gilder, reflecting on his fortunes over the last few years.
Gilder, who got very rich when things were going his way, got very unrich when they changed direction. Poor George – once rich, but still famous and still hallucinating – is broke. If he were not – he should be.
More…as the Daily Reckoning continues tomorrow…
June 20, 2002
"It’s time to put politics aside and do the right thing for the country," said America’s Secretary of the Treasury, recently returned from a trip around Africa with Bono. For the benefit of Daily Reckoning readers as out of touch with popular culture as their editor, Bono is neither a dog nor a monkey. Nor is it a guy who was once married to another person with only a single name, Cher. Sonny Bono, it grieves us to report, is dead…following an unfortunate encounter with an immoveable object that presented itself in precisely the same place at precisely the same time as the entertainer-turned-entertainer, as he was skiing downhill. In the present case, Bono is an Irish singer, whose interest in African poverty is at least as sincere and as helpful as the late Congressman’s…and whose skiing might be better.
The right thing for the country, according to Paul O’Neill, is for Congress to raise the debt ceiling by ó of a trillion dollars. Or else, he warns, the U.S. government will run out of dead presidents next week.
This news came upon us a bit like the news of Sonny Bono’s death a few years ago. Who can forget those timeless lyrics – "I got you, Babe"…and "?" And who can forget the momentous declaration…was it only a couple of years ago?…that there would be federal budget surpluses from here to eternity? All of it – though simpleminded and wishful thinking – was music to our ears.
For it was only a few years after the Sonny & Cher team made the top of the charts that Cher went off on her own and Sonny had her no more. And now this. While there are dead congressmen at the foot of nearly every tree… there is a shortage of dead presidents. Now the surpluses have run off too. All over the country… state, local, and national governments are running out of cash.
O’Neill offers to print up some more. If U.S. follows the Japanese plan, the $750 billion will be just the beginning. In 1991, Japan’s national debt was about the same percentage of its GDP – 61% – as America’s today. Then years later, the national debt had doubled, to the point where debt rating agencies warn of a default.
In related news, the euro rose to a 17-month high against the dollar.
Little by little, day after day, all that was so good a few years earlier…turns bad.
Eric, what’s your take on all of this?
Eric Fry, reporting from New York:
– Tech stocks are melting like ice cream on a hot sidewalk…and they’re looking just about as appetizing. Another 46 scoops of "Nasdaq Delight" hit the sidewalk yesterday as the tech-heavy index fell to 1,496. And another 144 Dow points melted away as the blue chips dropped to 9,561…Just like that, Monday’s rebound rally is no more.
– Likewise, earnings growth in the tech sector is but a distant memory. Most technology companies now measure "success" in terms of how much sales and earnings are FALLING – i.e. a small decline is the mark of a true winner.
– Oracle, therefore, scored a huge success by announcing that it sales declined ONLY 16% in the latest quarter. That’s "way" better than chipmaker AMD’s projected 34% revenue decline and "way, way" better than the precipitous 80% sales drop reported by optical component maker Ciena…Never mind that Oracle CFO Jeff Henley warned that the company’s revenues and earnings would fall again next quarter.
– "Certainly the greatest irony of all," observes Dr. Kurt Richebacher, "is that the worst profit numbers by far have been coming from the one sector for which Wall Street was trumpeting unprecedented miracles of profit and productivity growth." The good doctor is referring, of course, to the high tech sector.
– Based on his reading of the national income accounts, profits in the "electronic and other electric equipment" sector peaked in 1997 at $22.8 billion. "From then on," he says, "they went steeply downward: $7.6 billion in 1998, $6.2 billion in 1999, $3.7 billion in 2000. In 2001, the sector plunged $7.2 billion into the red for the year as a whole…
"Weighing this profits disaster in high-tech, it should be considered that even at the height of the boom, in 2000, the electronic and electrical equipment sector provided barely 0.75% of total not financial profits…[Yet]during the final run of the late bull market, the tech-heavy NASDAQ came to account for over a third of U.S. market capitalization.
"…[Yet]during the final run of the late bull market, the tech-heavy NASDAQ came to account for over a third of U.S. market capitalization."
[Editor’s note:] In a recent interview with Dr. Richebacher, the Daily Reckoning discovered why the good doctor believes that almost every American economist is wrong. It’s a "bogus recovery" he says. And the fallout could be disastrous for average investors who believe the prevailing wisdom.
– Obviously, the valuations of many tech stocks veered far away from underlying economic realities. And in fact, price and value in the tech sector have yet to become reacquainted with one another. Despite the Nasdaq’s colossal collapse, many tech stocks continue to sport sky-high valuations that bear little relation to their earnings prospects.
– "If Cisco’s stock wasn’t still so expensive," says Fred Hickey, "I would buy it. Unfortunately, there’s that little matter of price. Despite losing nearly 80% of its peak market valuation, Cisco still carries a market cap of $118 billion, more than six times sales and 39 times earnings."
– Evidently, the legions of true-believer investors have not yet forsaken their blind faith. But that day may be quickly approaching, according to Andrew Kashdan of Apogee Research.
-"Is buy-and-hold about to become buy-and-fold?" muses Kashdan. "That’s starting to look like a distinct possibility, as there are probably a growing number of ‘losing hands’ among the nation’s mutual fund investors." Investors have been steadfastly "buying the dip" ever since the stock market peaked in early 2000; the result being that the losses are mounting on these relatively recent purchases.
– "We can’t help but wonder if the public might finally capitulate and dump a significant portion of its holdings," says Kashdan. "Not only are individuals remaining heavily invested, mutual fund managers are making darn sure they remain heavily invested in tech stocks. ContraryInvestor.com points out that, on average, technology accounts for about 27.5% of holdings in Morningstar’s list of top growth funds with over $1 billion in assets." And that may not be a great place to be sector-wise. See: Apogee Research
– "The combination of the grinding bear market coupled with dashed hopes for a second half rebound in earnings may be enough to cause investors to finally give up on the tech sector by early fall," warns Fred Hickey, proprietor of The High Tech Strategist. "I don’t think investors can take many more disappointments (or losses) before they capitulate."
– So what will they do with their money? John Myers of Outstanding Investments thinks he knows: "Investor psychology is undergoing a fundamental shift towards hard assets, he says, "not only for safety but also for potential profits…the natural resource sector bull market is just getting under way, and like any bull market, it will attract more and more investors the higher it goes."
Back in Paris…
*** I asked Porter Stansberry to keep me up-to-date on the Pirates’ $1,000 stock recommendation:
"Bill, our research appears to be paying off," he writes. "The company’s prospects are improving dramatically along the lines we predicted in May. The stock was up 12.6% today alone, closing at $8.50…which is a lot higher than the $6.50 the stock was trading for when we drafted our report. Plus, folks who bought back in May got the dividend.
"It gets even better. The company just put out a press release saying that the Russian deal has closed. The company now says it will receive an extra $50 million in positive cash flow next year (our estimate was $60 million) – which gives the company $200 million in cash flow for 2003. The deal should give the company $100 million in extra cash flow per year until 2013 – about $1 billion. When we bought the stock, the company was worth $500 million. Everything our source told us to expect happened."
*** Meanwhile, one of Porter’s analysts sends this remarkable note:
"Strangest thing…I was waiting in line for my flight to Ft. Lauderdale today (at around 1:00 PM) when I overheard someone 2 or 3 spots behind me talking on his cell phone about [the company they had recommended].
"The guy was fairly loud and – judging by what he was saying – I kind of figured that the deal must have gone through or been announced. He said something to the effect of, ‘Yeah, but I don’t know if the price will go up because a bunch of Internet &$*holes drove it up a few weeks ago before everything could fall into place… some idiot named McDaniel…bunch of &$*holes who shouldn’t be shooting their mouths off.’"
*** Meanwhile, a friend at dinner last night, updates us on the state of Western culture, anno dominus 2002:
"I couldn’t believe it. On [French] television last night they had some kind of talk show. But it was unbelievable. A weasely little guy was there with his wife. On the show, live, he told her he had been having an affair for the last 3 years. And then he told her that his mistress was with him…and then she came out…a real slut…and they described all the details of their cheating. It turned out the wife knew the woman….she saw her around a lot. But the husband had told her the woman was his cousin! Can you believe it? I mean…these people…have they no dignity whatsoever?"