What Hath God Wrought
Samuel F.B.Morse, inaugurating the telegraph The rabbit jumped out of the grass on the right side of the road. I hit the brakes, and slowed enough so that he could have gotten across the road safely. But, instead of darting to the other side, he feinted to the left.
Rabbits do not run in a straight line to escape predators. They are not as fast as wolves. Over many hundreds of thousands of years, they learned to zig and zag, counting on the momentum of their pursuers to cause them to miss the turn. Those who could not learn to fake out the wolves, were eaten. Unfortunately, the Renault Espace, loaded with luggage, three adults and three children, did not take the feint. Thousands of years of evolutionary programming had failed to prepare the rabbit for the internal combustion engine.
The internal combustion engine was a “first order” innovation, according to Professor Gordon, to whom I introduced you last week. It changed things in a fundamental, revolutionary way. Before it came along, most people lived on farms. Man and beast working together could produce more food than they needed to support themselves. Still, agriculture took up the efforts of 80% to 90% of the working population.
Motorized farming and transportation changed everything. Within a few years, whole populations were moved around – with 90% of the people living in cities and suburbs, and just 10% still on the farm.
In Russia, technology took the place of religion. Instead of naming their children after saints, they named them after farm equipment. Just as Stalin changed his name to something in tune with the times – Stalin means “man of steel” – farmers gave their children names like “tractor” or maybe even “piston,” but probably not “oil pump” or “universal joint.”
Real revolutions don’t come along very often. When they do, the instinctive behavior of hundreds or thousands of years – the institutions that have evolved over the centuries – may become a liability, rather than an asset. Revolutions are dangerous.
The Internet looked like a revolutionary innovation when it first appeared. But it is turning out to be, as Professor Gordon, suggests, much less important than the internal combustion engine. It is not really a “first order” innovation, but a secondary one. The Internet is just an evolved stage of the telecommunications revolution that began with the construction of the French State Telegraph system in May of 1794. It was later greatly improved by Samuel F.B. Morse who officially inaugurated his system in May 1844 when he sent his famous message from the Supreme Court chambers in Washington to his assistant in Baltimore.
What God had wrought was a revolution. The Internet, by contrast, is merely the latest twist in the revolutionary saga.
One of the marks of a true revolution is that it destroys the old ways of doing things. Like rabbits, whose genetic code is unprepared for automobiles, the existing institutions and habits are run down, crushed and forgotten.
That is what was supposed to happen when the Internet Revolution was announced. The newspapers were supposed to go out of business, because the Internet would steal their classified advertising – as well as their content.
The retailers were supposed to be doomed – because people would do their shopping over the Internet.
The music industry, movies, books – all would be out of business or radically transformed. Nothing would be able to stand against the superior, revolutionary new innovation of the World Wide Web!
Automobiles (who would need to commute?) would be hurt. Salesmen could take a hike. Car dealerships would soon be empty lots.
Businesses of all sorts would be ruined as profit margins got thinner and thinner. Second tier manufacturers would be destroyed. Malls would close. Office buildings would be abandoned.
All of these businesses were supposed to end up as road kill. They were thought to be the unavoidable casualties of the Internet Revolution. And yet, the carcasses we are beginning to find on the road are not those of traditional businesses – but those of the new Internet companies! Amazon fell $8 Friday after an analyst noticed that the company was running out of cash and seemed unlikely to develop a ‘category killer’ business in the next 12 months.
Barrons’ reports that there are 50 Internet companies scheduled to run out of money in the next 8 months – among them some of the best known businesses in the industry: drkoop.com, Juno Online, Beyond.com, Salon.com and Value America.
The dot.coms are desperately trying to hold on to their remaining cash, in a very traditional way: they are laying off people. According to Bloomberg, APBnews.com, DEN.com, and toysmart.com took this idea to it’s logical extreme – laying off 100% of their employees. If they can figure out how to operate with no workers, even I will concede that they have developed revolutionary business models.
Meanwhile, share prices continue to drop. Salon was over $25 in January. And drkoop was over $15. Now both are below $5 and trending towards zero.
Overall, Internet stocks are about 50% down from their peak. The industry had a market cap of $1.4 trillion earlier this year… which is down to $693 billion today.
No Internet sector seems to be invulnerable. Just a few months ago, the business-to-business companies enjoyed great popularity, while the e-tailers were considered yesterday’s news. Now they’ve all become last week’s news.
In a few months, you won’t be able to find a single person who ever thought Internet stocks were a good idea. They will have made a full circle – from myth to news to myth again.
The rabbits are safe.
Paris, France June 26, 2000
*** Oh Amazon! You great, big, muddy river of no returns…The big news on Friday was the breakdown in shares of AMZN. The ‘must own’ stock of ’99 has become the ‘must dump’ stock of 2000. Down, down, down, down…to $33.
*** The Dow managed a few points of profit Friday – rising 28 points. But AMZN led the Nasdaq lower – down 91 points.
*** “The growing sentiment,” said one fund manager quoted by Reuters, “is that the best times are behind us.” But if the best times are behind us…what is ahead of us?
*** There were 1221 advancing stocks, 1595 declining ones. Only 25 stocks hit new highs. 62 hit new lows.
*** Tomorrow the Federal Open Market Committee meets. After six rate hikes in 12 months, the overwhelming consensus among bond traders is that Greenspan will not push through another one. “Easy Al” believes in letting the street know what he will do in advance, in order to avoid shocks. So, the traders are probably right.
*** Oil rose $1.58. Eventually, oil price increases work their way into CPI increases. Wall Street analysts worry that even if the Fed does not hike rates this week – they will probably do so later in the summer.
*** Gold fell $2.40. It is hard to reconcile gold price movements with the inflation forecast. This leads many to believe the gold markets are rigged. That is one of the sub-themes entertaining conventioneers at the World Gold Conference here in Paris this week.
*** I had lunch on Friday with Harry Schultz, who is in town for the gold conference. Harry, Richard Russell and Jim Dines are the Grand Old Men of the investment newsletter business. They’ve survived bull markets and bear markets…and a lot of markets in-between.
*** “The 1920’s and today’s bubbles,” he writes in a recent issue of his newsletter, “are both symptoms of a crisis of faith.”
*** Harry reminds us that the post-WWI generation was termed the “lost generation,” in Hemingway’s The Sun Also Rises. “I submit,” he says, “that the irrational exuberance which ended in 1929 was an attempt to find meaning in a post-war age of cynicism and loss of life meaning. God seemed an antiquated myth, and the promise of a better world through 1920’s technology was a pretty good substitute…”
*** Another lost generation arose during the Vietnam War, Harry maintains. This time it was a loss of faith in secular institutions. “As of now,” he continues, “the total value of U.S. stocks is 200% of GDP, so logic also suggests a crash imminent. World GDP is $41 trillion, but there is $300 trillion in financial claims outstanding. Just as a newly-divorced people drown their sense of betrayal/hurt in excess, so a spiritually-bereft generation does with the stock market.”
*** “Mugabe is an institution” said a spokesman for Zimbabwe’s ruling party, explaining why “Comrade Bob” would not step down even if his party were defeated in the weekend election. Mugabe may or may not be an institution, but he should definitely be institutionalized.
*** Sacre Dieu. And what a relief. The school year ends in France this week. All of our children have passed into the next grade. Each one followed a different strategy. Maria studied intensely, but without really paying attention. Sophia eschewed intense study in favor of dumb luck. Jules calculated the minimum needed to get by and got by – minimally. Henry relied on his charm. And Edward, who never goes anywhere unarmed, must have threatened his teacher.
*** This is the anniversary of Kennedy’s “Ich bin ein Berliner” speech. A ‘berliner’ is a pastry.
*** It is also the anniversary of Pearl S. Buck’s birth. The author won the Nobel Prize in literature. According to my usual unreliable sources, she is the only American who was not an alcoholic to do so.