Heart Of Truth

“It is only with the heart that one can see rightly. What is essential is invisible to the eye.”

Antoine de Saint-Exupery

No place in America is feeling the downturn in tech stocks more sharply than the San Francisco Bay Area. An article in the San Francisco Chronicle tells how dot-com failures and tech setbacks affect ordinary people:

“Roman Foldr has gone from dot-com gamekeeper to dot-bomb grim reaper in a matter of months,” reports a recent article. “The 40-year-old entrepreneur has made a good living in the past few years renting foosball tables, video games and other cushy amenities to Internet startups. All across the Bay Area, cheers would rise up from the ranks as he rode up in his truck to install old Pac Man games and pool tables in their spanking new offices.”

That was then…when those who “got it” were still were on the receiving end of billions of dollars from those who didn’t.

“But these days, with hundreds of Net firms folding across the country during the past year and even more cutting costs,” reports the Chronicle, “Foldr finds himself repossessing foosball tables on a regular basis. His arrival more often than not sends dot-commers scrambling to update their resumes.”

I have been looking at the consequences of “the pretense of knowledge” and at the way markets become most risky at the very moment when investors come to believe that risk is totally absent. The further the delusion rises above the truth…the further you have to fall, and the harder the concrete of reality.

The trouble is, when you are flying high on fantasy…the cement below is almost invisible. “The truth is hard to see…”

People speak casually about the truth — as if it were something that they could look up in an encyclopedia and zap around the Internet. The “digital men” seemed to think that truth was the same as information…and that the key to success in life was having more of it than the next guy.

And yet, even in the sciences, truth is unreliable.

“Every day,” writes historian Jacques Barzun in Forbes ASAP, “the truths of geology, cosmology, astro-physics, biology and their sister sciences are upset. The earth is older than was thought; the dinosaurs are younger, the starts in huge galaxies have so much space they can’t collide, yet they collide just the same; after being dry as dust, Mars has liquid water. The human bones in Central Africa do not mean what they were said to mean, and a new fossil shows the origin of birds to be entirely different from the view that was thought true yesterday…”

But there are two kinds of truth…just as there are two kinds of knowledge. One may furnish the brain…but the other dresses out the heart. There is the truth that you can find in the sciences, in textbooks and as observable fact: such as the length of a meter, the boiling temperature of water, and what Bill Clinton may have done with Monica Lewinsky.

And there is the truth you get from personal experience — the truth that helps you figure out what the facts really mean and what to do with them. The first kind of truth is cheap. It’s the second kind that is dear. Like a Big Bottom, it doesn’t come along very often — and then, only at great cost and after great suffering.

Smithers and Wright remarked that, “investors who lived through these [downturn] periods would have found that these bear markets had a large negative impact on their living standards.” But at least they would have learned something.

And thus, truth is emerging in San Francisco: “Financial losses associated with the shakeout are rippling through the Bay Area’s service economy like so many aftershocks,” continues the Chronicle report, “affecting everyone from public relations and party planning firms to landlords and vendors.”

San Francisco’s digital industry generated more revenues than its retail sector…with tech workers “pulling in an average income of $78,429.”

“When a dot-com is folding, and they tell you to pick up your equipment, you better be there in half an hour,” said Foldr, who founded his South San Francisco business in 1989. “You never know when they’re shutting the doors.”

Foldr is experiencing the trickle down financial effects of a mania meltdown. “There’s been a bloodbath in our industry,” said James Collins, a Sausalito recruiter for Toronto’s Cyberplex.

“Even commercial real estate, long considered the most visible indicator of dot-com opulence, is cooling off. The once white-hot market has become a renter’s market in areas outside the Financial District, according to Robert Larscheid, a principal at Corporate Real Estate Service Providers, which represents commercial tenants.

“As companies shut down and lay off workers, they give up all or some of their office space. The result is a sudden flood of offices being subleased.”

Meanwhile, on another bay, the Miami Herald records the bewilderment of investors discovering a similar truth. “I got in just a little bit before the peak,” laments Melvin Klahr, a North Miami-Dade investor. “I just saw this stuff going up and up.”

“His biggest regret,” the article tells us, “was not getting timely advice to sell. “Nobody rang the bell for me and told me that was the high point.”

“Few saw it coming,” says the reporter, referring to the approach of the dot-com crash — which anyone who cared to look could not have missed. Bells had been ringing so loud and for so long that those of us listening practically went deaf.Mr. Klahr’s net worth may be impoverished by the experience of a bear market, but his life is enriched by the truth.

Your correspondent, searching for the truth…

Bill Bonner Baltimore, Maryland December 19, 2000

*** The hour cometh, cometh the man. And the man of the hour is Alan Greenspan…to whom the entire world turns its weary eyes today. The Great Helmsman of the Fed is widely expected to save free-market capitalism’s biggest boom ever by rigging interest rates.

*** Few people appreciate the irony of this. And perhaps only those few suspect the futility of it. But we will see…

*** A WSJ story yesterday let out the news that the Fed might be considering more aggressive efforts to avoid a severe business slowdown. The signs of such a slowdown seem to be multiplying.

*** “Profits are falling off a cliff,” says an analyst quoted in the Economist. Estimates for profit growth in the fourth quarter have dropped from 15.6% in October…to less than half that amount now. In the tech sector, analysts have lowered their expectations from 29% (annualized rate of increase for the quarter) to 10%.

*** And the techs keep falling. Cisco lost more than $5 yesterday, for no apparent reason. Sun Micro dropped nearly $2. Microsoft gave up another 3% of its value. And Amazon, our favorite river-of-no-returns stock, fell below $20.

*** The number of profit warnings is up 70% since last year. And Moody’s says, this year, 4 times as many companies have had their credit ratings downgraded as have had them improved.

*** Yesterday, Time Warner alerted investors that profits would not be as expected. Gerald Levin, head of Time Warner, was among many of the rich and powerful on Wall Street who, at the peak of the Internet mania, wanted to be sure he “got it.” So, he decided to buy it — by merging with AOL. Now, he’s getting it. Time Warner stock, $105 in March, fell 13% yesterday to $63. AOL, its merger partner, dropped 14% to close at $42. It was a $95 stock last year.

*** Be careful what you wish for. Once you get it — you might discover that you were better off without it.

*** A lot of people are “losing it” on Wall Street and throughout the nation. And they are hoping that Greenspan has the magic to bring it back.

*** The Dow rose 210 points on that hope – 1,880 stocks advanced on the NYSE; 1,084 declined.

*** Greenspan will surely try to accommodate these hopes. He will do the one thing he knows how to do — he will make money more readily available to those who want to borrow it.

*** But, “for the magic to continue,” opines a piece in yesterday’s New York Times, “that is, for the economy to avoid a nasty recession in the next few years — the borrowers must remain prosperous enough to pay off their bonds, credit cards and mortgages.”

*** Financial commentators — perhaps looking for the Big Bottom — have noticed another anatomical feature: “The unprecedented level of private debt,” continues the NYT article, “could well be the biggest single threat to the soft landing…”

“`This could be the economy’s Achilles Heel,'” the NYT quotes economist Mark Zandi.

*** “The dust behind [Greenspan’s] magic has been debt,” notices the NYT. Consumer debt, at $7.5 trillion, is more than twice the level of 1990. Corporate debt has reached $10.6 trillion.

*** Can you really defuse such a big debt bomb — by making even more debt available? Greenspan can lower only nominal rates — not the real, effective rate of return on borrowed funds. In the last eight months, investors who bought Nasdaq stocks with borrowed money have suffered a loss of 50% on the stocks…plus the interest charge on the debt — for an effective rate of return of nearly MINUS 60%. A quarter- point drop in the Fed funds rate is not going to make that hurt go away…nor is it going to entice borrowers to take on more debt.

*** There’s also a new element in financial discussion: people are beginning to look for someone to blame for their losses. The Miami Herald reflects on the tech mania with this headline: “The boom was too good to be true…was America conned?” The Bay Area’s Mercury News refers to the run-up in tech stocks as a “legal con game.”

*** “Minor manias or bubbles don’t lead to any significant economic disruptions when they burst,” writes Marc Faber, “because they are only based on a relatively small sector of the economy and are usually local in nature. Major manias, by contrast, are significant in the context of the whole economy and are very often of international dimensions and attract a large flow of foreign money.”

*** “The steep slide of the high tech stocks, the broad retreat of the Old Economy stocks…,” writes Dr. Richebacher, “multiplying bank announcements of sharp increases in bad loans, the virtual shut-down of high-yield lending, record-high indebtedness of firms and consumers, an unsustainable negative personal saving rate, an unsustainable, monstrous current-account deficit and countless profit warnings — all these bigger and bigger economic and financial negatives, relentlessly eroding the U.S. economy’s stability and strength, are flatly ignored by Wall Street’s Panglossian economists… What’s more, the markets have readily and unreservedly embraced this shallow approach.”

*** The Web’s many content sites are taking a beating along with everything else. Salon.com has gone from $15 to $1. TheStreet.com from $71 to $2.50. Millionaire.com from $27 to 18 cents…and the Individual Investor Group has collapsed from $7 down to 63 cents.

*** I’ve tried to keep my eye on TheStreet.com — since it is in the same business I am. Recently, the market cap fell below the available cash on hand. Aha, I thought…this might be an opportunity. But TheStreet is still losing money at Internet speed — and seems to be making a death march toward insolvency.

*** How about the Dailyreckoning.com? Well, we’re profitable — thanks to you, dear reader. But then, our expenses are extremely low. Addison and I make up the entire editorial team. And we don’t earn much.

*** But money isn’t everything. My tastes are modest. I just need to buy a few Christmas presents for the kids…and, oh yes, Elizabeth had her eye on a gold necklace. And, well, the car broke down a couple of weeks ago…and there are still five children to put through college. And part of the chateau needs a new roof…and there’s Mr. Deshais, the gardener…and repairing the stone walls…and furniture for the grand salon…and we need a bigger apartment…and…

… For the love of God, please buy something!

The Daily Reckoning