Out Of Control
“The computer age is over,” writes the John the Baptist of the Internet cult, George Gilder, in “Forbes” magazine.
Good riddance, I thought to myself. The computer era has been a pain in the neck…I will be glad to put it behind me. It is too complicated. Too many things seem to go wrong. Gilder estimates, for example, that there are 200,000 bugs in the new Windows 2000.
Plus, we’ve all been made prisoners of the computer. I spend my whole day working on a laptop computer. And I rarely get from it the sense of satisfaction I get from, say, a chisel or a paintbrush. Instead, it is a source of irritation, anxiety and, lately, a dull pain in the palm of my left hand, where it rests on the edge of the keyboard.
In fact, I held a paintbrush in my hand as these thoughts crossed my mind. The rain had me trapped inside over the weekend. So I took out one of the basement windows, replaced the broken glass and repainted it.
Painting is the perfect occupation for your hands while your mind is cogitating. Laying on a coat of paint takes just enough thought to prevent you from thinking too seriously, but not enough to prevent you from thinking at all.
Besides, there are many things that are easier to see if you don’t look too hard. The superficial view is clearer and often, more accurate.
Gilder says the computer is yesterday’s news. “The action,” he says, “is in the Telecosm,” which he describes as a “new era.”
Gilder puts his faith in bandwidth. He believes that the computer era, just finished, created a surfeit of computing power but a shortage of communication channels. It is a little like a boom in auto production that produces a shortage of paved highways and parking lots.
The companies that make money and headlines in the future will be those that facilitate transmission of information. Gilder, who doesn’t “do prices,” nevertheless mentions a few companies — such as Akamai, Global Crossing (selling at nearly 40 times sales) and Novell — whose prices are lunatic.
Gilder believes these companies are building a new world — a better world. He believes that being able to pass around an infinite quantity of information at the speed of light is a revolutionary development. This, of course, depends on a naive view of information itself — that more is always better…about which I have rambled at length.
But even if it were true, that more information is better, it would only make sense, from an investment point of view, if the investments themselves were properly priced — that is, priced at a level that provided the companies with the capital they needed, allowing them to increase productivity and give investors a decent return on their money. Otherwise, the investment would be uneconomic.
An article by John Dillon, “A Question of Values,” returns to the classics and reminds us of what an economic investment really is. The original Greek word, oikonomia, referred to the “care and management of the household.” People made investments that improved life for themselves and their households. A better irrigation system, for example, required forgoing current consumption in order to invest in greater future prosperity.
But Aristotle used another word to describe the activities of most tech stock buyers. He called it “chrematistics” — financial speculation which produces no net benefit, except for the speculator. He illustrated his point with the story of Thales of Miletus. People chided Thales, saying his philosophy must be useless because he had accumulated no wealth.
Thales took up the challenge. Drawing on his knowledge of astronomy, he guessed that next year’s olive harvest would be bountiful. So, in mid-winter, he leased all the olive presses in the area. Then, when the bumper crop came in, he made high profits.
But Dillon tells us that Thales “saw his activities in their true light — as little more than a cheap trick to extract profit at the expense of others.” He had “planted no olive trees, built no presses, nor made anyone better off except himself.”
Thales was like an investor in Global Crossing, MicroStrategy or eMerge. He was out to make a buck. He was not making an economic investment — but a speculative one.
Alas, Dillon, who is a card-carrying member of something called the Ecumenical Coalition for Economic Justice, is uneasy about speculative capitalism. He would rather have things under control.
“Ultimately, economics is about choices and values,” he writes. “We can choose to let speculative capitalism continue its advance, or we can choose to confront it…we need a vision to guide us to an economics of the future.”
More about this tomorrow…
Paris, France March 27, 2000
P.S. “Economic Justice” is an oxymoronic notion. Like a healthy dessert or a fair wage. Economics has a logic and a justice all its own. In a market where people are free to buy and sell as they choose — people get what they deserve. There is no other meaning to economic justice. People are either free to set prices among themselves — by buying and selling as they choose — or they are not. Justice is what you get when you allow nature to take its course, in other words. As soon as you start monkeying with the outcomes — the results are, by definition, unjust…even though you might like it better.
*** There’s still plenty of juice in the system. Last Thursday the Fed reported an increase in the money supply of $31.5 billion for the preceding week. In the week before, M3 increased $44.7 billion.
*** And the rate hikes, being doled out like crusts of bread in a POW camp, are barely even keeping up with inflation. Stephen Roach makes the case in the current issue of “Barron’s.” The nominal fed funds rate has gone up 1.25 percentage points since July of last year. But inflation has accelerated from 2% to 3.2% during the same time. So the real fed funds rated is about the same. Roach calculates it at 2.8% — a rate low enough to be worthy of dysentery-like looseness.
*** Meanwhile, explains Roach, “margin debt has ballooned by 45% over the four months ending February 2000 and now stands 87% above its year-earlier level — literally three times the average growth pace of the 1997-99 period.”
*** Margin debt is now running about $270 billion…which, “Barron’s” editor, Alan Abelson, reminds us, “doesn’t include the doubtless formidable aggregate of loans taken out by venturesome types on other assets — like their houses — to enable them to get their piece of the booming stock market.”
*** Which is why Alan Greenspan’s paltry rate increases are being mocked by the markets. They’re too little, too late. And it’s why this Bubble has turned into a Super Bubble. The last big bubble was in 1929 — when the value of all stocks equaled about 80% of GDP. Today, stocks traded on NYSE alone are worth more than GDP — at $11.4 trillion. Nasdaq stocks are valued at about $5.85 trillion more. Add in the AMEX stocks and the total is about 200% of GDP.
*** The Fed last lowered rates in 1998. At that time, the Nasdaq was about 1,100. Five rate hikes later and the index is about 4,700.
*** Apparently some of the Fed governors are beginning to feel like schmucks themselves. Many argued for an increase of 50 basis point, rather than 25.
*** But let’s look at what’s really happening in the markets: Friday saw stocks run up in early trading — especially the Internets — and then run back down again in the afternoon.
*** The Dow finished the day down very slightly. The Nasdaq was up slightly. The Nasdaq 100, however, hit a new record.
*** For the week, the Dow was up 4.88%. The S&P was up 4.3%. The Nasdaq went up 3.44%. And the Nasdaq 100 was up 5.66%.
*** The tide was so strong that even Jeff Bezos’ sorry barque, Amazon, rose $5.
*** But Johnson & Johnson, like P&G a couple weeks ago, practically got swept out to sea. The stock lost 10% after a new drug proved a disappointment.
*** The Nasdaq still has life in it — but what is surprising is that the broad market may have gotten a new lease on life, too. The Advance/Decline ratio sank from April `98 until March 14, 2000. Has it turned around? That’s the big question. If so, it will make this market even more bizarre than it was before. For while some stocks had hit bargain levels — I’ve called attention to some of them in the letters — most are still very expensive. Hard to imagine a bull market beginning from such a high perch. But then again, everything about this market has been hard to imagine.
*** The evidence was mixed on Friday. There were slightly fewer rising stocks than falling ones – 1,432 to 1,501. But the number of new highs was considerably higher than the number of new lows — 105 to 38. Let’s see what happens.
*** How about eMerge Interactive? The company rose to be worth about $2 billion. That’s a pretty big price tag for a company that made less than $300,000 profit last year — and whose business plan calls for it to become a leading auction spot for cattle, online of course. It would have to increase its profits by about 1,000% to make sense of the capitalization. Can you really make $200 million per year auctioning cattle via Internet?
*** Another interesting little note in “Barron’s”: Lehman Brothers’ analysts issued a number of “buy” recommendations on the Internet stock, VerticalNet, in January and February. But while its customers were buying the stock, Lehman Brothers was dumping its own formidable inventory of the stock.
*** And here’s a helpful headline from “Investors Business Daily,” describing stock market activity: “Rising on intraday rallies, receding on pullbacks.”
*** Elizabeth celebrated a birthday over the weekend. I’m happy to report, however, that she grows more beautiful with the passage of time.
*** And poor Jules went on an overnight camping trip with the scouts. I say “poor” because it rained all weekend…and Jules came back covered with mud, with soaking wet socks and a bad cold. Jules reports that the scouts — which are somehow connected to the Catholic Church — spend a lot of time praying.