Pigs Get Slaughtered, Part Deux

Harkening back to the glory days of the late 90’s, Bill Bonner describes the demise of a different sort of pig. This DR Classique, originally published on 22 January 2002, inspired themes in Chapter 1 of Financial Reckoning Day.

Have you seen the bigger piggies, In their starched white shirts You will find the bigger piggies, Stirring up the dirt… Always have clean shirts to play around in

In their sties with all their backing They don’t care what goes on around In their eyes there’s something lacking What they need’s a darn good whacking…

– George Harrison, R.I.P

It is the fat pig that feels the butcher’s knife, say the Chinese.

On March 20th of 2000, few pigs were fatter than Michael Saylor. And perhaps none felt the butcher’s knife more sharply…

Of all the messianic madmen of the era, Saylor stood out – perhaps as the maddest…certainly as one of the richest. But, today, we rise to praise Saylor, not to bury him. It is one thing to bring the fat pig down; but it is against the Daily Reckoning code of honor to kick him after he has fallen. Besides, Saylor brought entertainment to millions…and helped separate countless fools from their money.

"We’re purging ignorance from the planet," Saylor once said, setting a lofty goal for himself. He was on a "crusade for intelligence," he claimed; he wanted to make information "free" and have it "run like water." He planned to write a big book on the subject, to be entitled "Intelligence."

We take a little credit for plunging the knife into Saylor, dear reader. In a contest between ignorance and stupidity on the one hand, and information and intelligence on the other, we know how to bet. Purging the planet of ignorance? Only a buffoon or mountebank would say such a dopey thing. Saylor was clearly one or the other – maybe both. We were also suspicious of a man who didn’t waste his time on women. Wasting time and money on women is practically a moral obligation for a straight man. But Saylor saw women as "a time sink" and avoided them. In fact, Saylor didn’t drink, either – at least, not back then.

Michael Saylor: Stark, Raving Mad

We reckoned that Saylor was stark, raving mad. He made a public spectacle of himself every time he opened his mouth. "I think my software is going to become so ubiquitous, so essential, that if it stops working there will be riots," he told New Yorker magazine. A certain level of madness is often an advantage in the business and entertainment world. But as it turned out, Saylor had less visible corruptions, too…he had hidden massive indiscretions in the company’s financial statements.

On March 15, the week before Saylor had his rendez-vous at the abattoir, we ridiculed Saylor’s Information Age pretensions. The following day, too, we made fun of his idea for a "Ivy League Education on the Net." Ivy League educations were already bad enough, we pointed out, even when you attend in person.

Saylor’s company, MicroStrategy, had developed software that helped businesses figure out who was buying their products.

"By using the software," explained a Washington Post story, "McDonald’s could tell if a Chicago franchise was four times more likely to sell Big Macs on a winter Friday than was a franchise in Miami (where customers disproportionately preferred filet-of-fish sandwich.)" Maybe the company would be a big success. We didn’t know.

But we knew the stock market had gone mad over companies such as MicroStrategy. Shares were offered to the public on June 11, 1998. Nearly two years later, the stock hit $333. Saylor made another $1.3 billion that day and $4.5 billion in the preceding week – bringing his personal net worth to $13.6 billion. MicroStrategy, with sales of only $200 million, and a reported profit for 1999 of $12.6 million, was worth more than Dupont.

Michael Saylor: Wealthier than Larry Ellison

Saylor became the richest man in the Washington DC area…wealthier even than Oracle founder, Larry Ellison. At $333, the MicroStrategy stock price was as insane its CEO. But there was no guarantee that either would get his comeuppance anytime soon. (Still, we hope at least a few Daily Reckoning readers went short).

While we were mocking MicroStrategy, its share price and its dizzy CEO, the rest of the financial press was praising them. Hardly a single report failed to find something flattering to say. The English language has thousands of negative words, but before the 20th of March, 2000, the ink-stained hacks, analysts, and TV presenters couldn’t seem to find a single one that applied to Michael Saylor.

Then, on March 20, under pressure from the SEC, MicroStrategy admitted that it had cooked its books for the previous two years. Instead of a profit of $12.6 million in 1999, the company would now should a loss of $34 million to $40 million. Revenue, too, was downsized.

That day, Michael Saylor made history. Never before had a man lost so much money in such a short time. In six hours, his net worth dropped by $6.1 billion.

Michael Saylor: Angry and Suicidal

From that day on, Saylor’s life was different. Instead of being praised by investors and the financial media, he was whacked hard. Investors were out $11 billion. Some of them were angry. Others were suicidal. "I never thought I could lose like this," said one investor on the Yahoo/MicroStrategy message board. He went on to announce that he was going to kill himself.

Before March 20th, Michael Saylor could do no wrong; after, he could do no right. Most prominently, Fortune magazine listed him as #1 in the "Billionaire Losers Club," with total losses of $13 billion.

But a difficult failure does more good for a man than an easy success. On the evidence, Saylor is a better man today than he was a few years ago. "He began to drink," reports the Washington Post. "At least two MicroStrategy officials received calls from people who were concerned that they had seen Saylor drunk in public…"

When he’s not drinking, Saylor is tending to his business. The stock is still overpriced…but a lot less overpriced than it used to be.

Is Saylor still a visionary? Yes, but "maybe an older, wiser visionary," he says.

Your pen-pal in Paris,

Bill Bonner

December 17, 2003

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the NY Times and international best-seller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons).

The Lumps rubbed their eyes and shook off their sudden attack of prudence. Yesterday, it was back to bad habits.

All around them, the noise and distractions were as appealing as ever.

Saddam was behind bars.

November housing numbers were strong.

Industrial production registered its biggest gain in 4 years.

So what’s the problem, the Lumps asked themselves?

"People who are looking at day-to-day events are really missing the forest for the trees," explained an economist interviewed by TheStreet.com.

"The fact is," writes Alan Abelson in Barron’s, "this is still very much a jobless recovery."

While admiring a pretty sapling in the day’s news, they have failed to notice the thicket growing up around them – becoming darker, wilder, and more dangerous every day. It now takes $45 billion per month of foreign capital to make ends meet in the U.S., while foreigners become less and less willing to fly over and drop supplies of new money…which is why the dollar is falling.

Yesterday, the dollar fell again – to a new record low against the euro.

Americans, who keep score in dollars, think their economy is growing…their stocks are becoming more valuable…their wealth is increasing.

But it is all a colossal fraud and a scam. The economy is ‘growing’ only insofar as Americans are ruining themselves at a faster rate – buying things they don’t need with money they don’t have while counting on the kindness of strangers to make up the difference. And in terms of euros or real money – gold – neither the stock market nor the economy nor even real estate is going up. Since the beginning of the year, the value of U.S. assets in global terms has remained unchanged…while Americans have gone deeper into debt.

The underbrush is becoming impassable, inescapable. As the dollar falls, foreigners become even more reluctant to finance Americans’ spending spree – which puts even more pressure on the dollar itself.

Without financing from overseas…Americans will be unable to borrow…and unable to spend. In any direction we turn, the vines of debt and thorny limbs of recession will block the way.

Addison is traveling today, so we’ve taken the liberty of glancing at the financial news ourselves.

*** What’s this? House prices have fallen 25% in Alameda County, CA. Hmmm…

*** And what’s this? Consumer prices are still falling…at least for consumers who live in unheated caves and get their food from hunting and fishing. Last month, energy was rising at a 6% rate. Medical care rose at a 3.5% rate. And the number for food and drink was 3.1%.

*** And this? The Xinhua Financial Network – a partially state-owned news agency – has purchased a Wall Street news organization. They’ll now be broadcasting stories of the Asian miracle direct from Wall Street themselves. Pao Mo! Pao Mo!

*** Daily Reckoning reader Michael Boyd just returned from a three week trip to China. Mr. Boyd sends this note:

"What most people probably don’t know is that China’s current boom is unsustainable because it is based on a massive expansion of credit (i.e. it’s financed by debt). This should sound familiar because the same situation has existed in the U.S., only on a much larger scale. The latest figures show that China’s M2 money supply grew by 21.6% over the past 12 months. At some point over the next year or so China’s government will be forced to take serious steps to curtail the credit expansion. When this happens there will probably be a very sharp downturn in growth.

"In fact, excessive credit creation has already attracted the attention of policymakers in China, who have announced their intention to sharply restrain credit growth. Thus, China’s growth will probably slow down considerably beginning next year, as a result of the government reigning in excessive credit growth. In addition to the slowing domestic demand, China’s growth will further weaken because Chinese exporters are currently shipping next year’s exports ahead of the removal of export tax breaks which will take effect early next year."

*** Everybody knows that education is the key to success in life. And everyone knows that good medical care is the key to health. Which makes us suspicious…

A letter in Barron’s from Dr. Thomas G. Pretlow:

"How many people know that [in the U.S.] our life expectancies are the shortest among the 10 largest industrialized democracies (they were among the longest in the 1950s), that we have the highest mortality rates in the first year of life, that we have the highest maternal mortality rates, that we pay more than twice the average cost per capita for health care?"

*** "Economists are almost unanimous," we read recently, "in believing the dollar will continue to fall."

This makes us suspicious, too. Economists are almost always wrong about important market trends. And yet, the continued decline of the dollar seems inevitable to us, too. How could the dollar decline and still make the economists look like fools?

While economists are nearly unanimous in believing the dollar will fall…they are also nearly unanimous in believing that it will not fall too much nor too fast. Instead, they expect a ‘soft landing’ for the U.S. currency…much like the soft-landing of the late ’80s.

What if the dollar crashed? What if it went down far more than they expected? What if the whole Dollar Standard system collapsed?

Brace yourself, dear reader.

The Daily Reckoning