When you’ve got nothing… You’ve got nothing to lose. Bob Dylan
A few days ago, I took up the task of “explaining everything.”
Today, since I have nothing much to say, I will say it. Nothing…that is the subject of this epistle. The flip side of Everything.
Nothing is what you find when you explore a tort lawyer’s conscience. It is the aesthetic value in a Jackson Pollock painting. It is the poetry of Puff Daddy or one of the Ice men. It is the real value, not the present market value, of most Internet companies.
Nothing is what you have to lose when you have nothing. And it is what you have to gain when you already have everything. Ah…but there you have it. I’ve given away my whole point in the opening sentences. Well…almost.
My son, Edward, was trying to learn the concept of nothing this morning. He was coached over breakfast by his grandmother.
“If you have nine of something,” she asked, “and you add zero…how many will you have?”
“I don’t know…”
“Nine…because you didn’t add anything to it.”
No light bulb seemed to go on in the brain of the 6- year-old. “Why would I do that?,” his quizzical look seemed to ask. “If you add nothing…you did not add anything at all!”
The concept of zero is a tough one. It was the last major addition to our number system — an abstraction that took time to understand.
Nothing is hard to imagine. Because we have no experience of it. Even in the farthest reaches of space, there is light…dust…and a faint cosmic hum. Nothing, need I say it, doesn’t exist.
Yet it is in this vacuum that nature abhors that the New Era finds its air, its space and its life. The financial values of the Nasdaq depend on nothing.
What is a business worth that does nothing? In the case reported here a few days ago, it was worth $22 million. A company that used to do next-to-nothing (it had a two- tunnel car wash in Utah…a business it recently sold)…is worth $50 million more.
Earnings, profits, revenue…all are conspicuous by their absence.
And what about the risks on the horizon? There are a number of pins floating around. Any one of them could prick this enormous Nasdaq bubble.
Thirty dollar oil, for example, adds $70 billion in energy costs to the U.S. economy every year. Gasoline at $2 a gallon looks possible, if not likely, for the summer. Could an old-fashioned oil shock administer the coup de grace to the bubble? You bet it could.
Or how about a military shock? Just as Chamberlain could not understand Hitler, nor H.G. Wells understand Stalin, Americans might be surprised to find that the rest of the world does not necessarily share its Mardi Gras-all- year-long attitude.
And there’s a logical, if not necessarily comprehensive, explanation for this. Once again, it has to do with nothing. Americans, Europeans and Japanese have a lot of everything…and little of nothing. War is almost unimaginable, because we have so much to lose…and so little to gain. Capturing the oil pipeline at Grozny or the computer assembly plants at Taipei would add nothing to the nation’s wealth.
But China, India, Indonesia…just to take some of the examples that come readily to mind…are countries where the balance between nothing and everything tends to tilt towards the former rather than the latter. As a result, the popular imagination is perhaps less hostile to the idea of war. China, for example, is thought to have as many as 100 million young, unmarried, underemployed, restless men. What’s more, since families were allowed only one child, and since they tended to choose to have a boy rather than a girl, those young men have very bad marriage prospects. And China’s economy may be on the verge of making them even more underemployed than they are now.
Two weeks ago, China threatened to use force, even nuclear weapons if necessary, to bring Taiwan back under Beijing rule. Americans cannot imagine it. And polls show most wouldn’t care. But surely such a move would be good for Old Economy defense stocks such as Raytheon and Martin Marietta, and profoundly negative for the dreamy, cloud-free values of the Nasdaq.
Or suppose Alan Greespan should suddenly undergo a personality change and decide to become Paul Volcker? Suppose he really meant what he said — that the Fed would target the stock market as a source of future inflation?
The latest data from Grant’s shows that Fed credit growth is shrinking. The Fed’s earning assets jumped at a 20% annual rate in early February — thought to be the hangover from Y2K precautions — but have since dropped to a growth rate of about 13%.
There is also mounting evidence of a business slowdown. Home builders and auto-makers are suffering. Retail stocks are declining. Oil…interest rates…it wouldn’t take much to put the economy into a recession.
But according to New Era speculators — there are no threats to the continued rise of the Nasdaq. They are nothing. They do not exist. Interest rates, oil, recession…not even thermonuclear war…Nothing can stop the New Economy.
The entire world of the Old Economy has been discounted down to nothingness — and beyond! Analyst James A. Bianco calculates that the Nasdaq gained $3.1 trillion last year. But the entire stock market…mostly Old Economy companies…gained only $2.5 trillion. So the rest of the market — everything that was not traded on the Nasdaq — must have added nothing to the nation’s paper wealth last year. In fact, taken together, the non-Nasdaq portion of the stock market universe must have lost $600 billion worth of value.
What happens in the markets as a whole happens even more curiously in individual stocks. Real companies, with real products and real profits, are reduced to nothing – – and then some.
I mentioned a few days ago the strange case of the $32 billion Japanese supermarket chain. The company also owns half of the 7-Eleven franchise, which somehow has made itself into an Internet play — now worth $50 billion. The supermarkets, therefore, are worth less than the zero Edward was trying to add to his nine.
A similar case occurred in the United States last week, as Palm Pilot broke away from its host, 3Com. On Thursday, Palm Pilot was worth $53 billion, $31 billion more than the company that owned 94% of it. Something had been reduced to nothing.
Everything is hard to understand, because there is so much of it — it is hard to make sense out of it all. Additional increments of information in the information era, for example, do not help the situation. They make it worse.
But Nothing presents the opposite problem. It is indescribable. It is unfathomable. It is, ultimately, as impossible as a Nihilist who can change a tire or a tax collector with a warm heart.
You cannot count on it. Nature abhors it and will not tolerate it.
Paris, France March 7, 2000
*** The bear came out of his den on Monday and got back to work. The Dow gave back almost all of Friday’s gains. Hardly any sector made it through the day without a scratch.
*** The Dow fell 199 points. Transportation stocks were down 2%. Utilities were down 3%. MSFT and IBM seem to have become “Old Economy” stocks — they were each down about 5%. Exxon and Mobil were down about 3% each.
*** Many of these dinosaur stocks are now at bargain levels, as I’ve pointed out before. But the market itself shows no sign of being at a bottom. Yields are only about 2%…and volume is much too heavy to be a bottom. So the bargains are likely to become even greater bargains as time goes by.
*** The bear market trend in the A/D ratio reasserted itself…with 1,120 stocks moving up and 1,908 moving down.
*** Sy Harding reports in “Barron’s” that corporate bonds topped out in December 1998. The Dow hit its high on Jan. 14 — 13 months later. This is a familiar pattern. “Corporate paper topped out six months before the crash of 1987,” he writes, “11 months before the start of the bear market of 1990 and nine months before the market top in 1994 — the last year in which the S&P was down.”
*** The Nasdaq rose towards the magic 5,000 number — but then pulled back. Most likely, the team spirit of the investment mob will push the Nasdaq above the 5,000 mark — before it collapses.
*** Oil rose 67 cents. Higher oil prices continue to worry the real economy…as does the renewed threat of interest rate increases. Nothing seems to worry the New Economy…about which, more below.
*** Internet stocks bucked yesterday’s trend. They were up sharply for no good reason I could find — except that they always go up.
*** Even the SEC head, Arthur Levitt, is worried. Yesterday he warned investors against biased advice, flimsy business plans and a “casino mentality.” “Many retail investors,” he said, “do not fully understand how the financial markets work.”
*** Of course, if they did understand…they wouldn’t have made so much money in the last year. The Nasdaq added $3.1 trillion to the nation’s wealth — on paper – – last year. And as far as anyone can tell…this is the kind of paper you can still trade for cash.
*** This trend hasn’t gone unnoticed on the nation’s college campuses. William Fleckenstein reports that students in San Jose, CA, are taking their tuition money…plus running up credit card debt…in order to get in on the bubble. They reason that they can always pay their bills…or even go to school…later. But this may be the best opportunity in their lifetimes to get rich.
*** It was Alan Greenspan’s 74th birthday yesterday. He said he would probably raise interest rates again. But Richard Russell notes that money supply, as measured by M3, is still rising at 13% over the last 12 months. He may be talking about turning out the lights…but he’s still filling the punch bowl. So the party ain’t over yet.
*** Russell, however, offers a prediction, based on his point and figure charts that show a head-and-shoulders pattern in the Dow. If the Dow closes below 9862.12, he says, the Nasdaq will break, too. (Again, I don’t report this because I believe it…but sooner or later one of these predictions will be right!)
*** Here’s something fishy…from the Independent Institute in S.F. comes word that staffers of the Oregon Department of Fish and Wildlife were seen in Fall Creek beating coho salmon with aluminum baseball bats. The unfortunate fish were hatchery-bred, rather than the politically-correct variety of coho salmon, which are bred in the wild. The only other difference between the two fish are that the former are abundant and the latter are endangered.
*** And here’s a shocking story…a man in Florida needed some spark in his life. So he got drunk, climbed a protective fence and mounted an electrical transformer. He got as many as 13,000 volts. He’s suing the bar!
*** And finally, the Clinton Administration announced that it will attempt to clear away the obstacles — such as overtime pay, Social Security and other benefit- related issues — so that low-level employees can be paid in stock options. In effect, businesses are now able to print their own currencies and use them for almost everything — including paying the night watchman.