Still Whiter Shades Of Pale

The present generation, writes John Dvorak in “PC Magazine,” “will become the worst investors and the worst managers in the history of business and will take the country to ruination when times change…”

“The result,” he continues with boldness bordering on recklessness, “will be a depression that will rival ’29.”

Mr. Dvorak knows nothing about the future that we don’t know. He has no crystal ball. Like the rest of us, he gets today’s paper today…not a year in advance. The Information Age has flooded in on us all…with information flowing like water…over spilling from gutters, seeping into basements and leaking through roofs. But it has given him no extra edge in predicting the price of pork bellies tomorrow.

Damp to the bone with information…sloshing around in it…Mr. Dvorak is not a bit more certain about the future.

The future, like love and the disappearance of pens and socks, will always be a mystery.

Yet the future is the only part of your life you can do anything about. And if character is fate, the future is not a matter of pure chance. “As you sow, so shall ye reap” is the well-known biblical quotation.

From a distance, we have examined the statistics — GDP growth, productivity, inflation, investment and so on. This has led to the opinion that there really is no new era…no real boom…no extraordinary gains in productivity…nor in economic growth.

If the seed of out-sized prosperity has been planted — there is no evidence of it in the numbers.

But Mr. Dvorak is not talking about statistics. He’s talking about character. It is hard to say if a GDP number is real. But we all think we can spot a nincompoop when we meet one.

Examined up close and personal — the actual “New Era” businesses and the people who run them turn out to be like trumped-up modern “artists” — people with a great sense of showmanship…and little actual skill or expertise at painting or sculpting.

“A year ago, we were infallible,” says one insider at the Wal-Mart of the Internet, Value America. “Now it’s a complete crash and burn.”

Crash and burn is exactly what happened at Value America. The stock traded at $55 after its IPO a year ago. Now the stock can be bought for about $2.

Is this just an isolated, quirky company in the Virginia mountains? Or does it reveal the character of the whole crop of new era companies?

Value America was begun and run by Craig Winn…whose only real experience was bankrupting another business. Beyond that, all he had going for him was one bad idea…and a flair for spending money.

But in the heady business climate of the late `90s, a bad idea was all you needed. Mr. Winn’s idea was that he could become a pure Internet middleman. Value America would sell anything via the Web…and merely forward orders to manufacturers for fulfillment. Clean and simple — the perfect Information Age business. Value America’s only product was information. It could tell you what you could buy at what price. This was what Winn called a “frictionless” business model. It had none of the costs associated with traditional businesses. That is, it didn’t have to pay people to make, sell or ship products.

Of course, it was also a profitless business model. Of Winn, “Everyone figured he was more a genius than crazy,” said a former senior executive at Value America, quoted on Businessweek Online. “As time went on, everybody got more concerned.”

Winn called his e-tailing venture “the marketplace of the millennium.” He talked of “alliances of consumption with alliances of production.”

Did anyone notice that it was nonsense?

Apparently not. Except for Winn himself. As the company attracted investment, Winn took his own money out. “During one investment round,” reports John Byrne in the “Businessweek” article, “in the summer of 1998, when Microsoft founder Paul Allen put in $15 million, Winn sold some of his own holdings, pocketing some $5.7 million.”

Now the company is almost out of cash, but says Byrne, “Winn is set for life. He lives just three minutes from the company’s Charlottesville headquarters on a 150-acre estate, where he has built a Greek Revival mansion modeled on George Washington’s Mount Vernon….Winn has personally realized cash gains of about $53.7 million and still has an additional $15.5 million worth of stock.”

Typical of the company’s marketing efforts, Value America paid Yahoo Inc. more than $4 million for website ads. Yet, according to Byrne, the ads brought in less than $100,000 in revenue. Meanwhile, the computer system for ordering and getting products out to customers functioned poorly. Customers were leaving. So the company tried to sweeten the deals it offered. It lowered prices and offered discount coupons so freely that it was impossible to make money.

And now it is almost over. Winn was kicked out. The company is trying to stabilize itself. But no matter what happens, millions of dollars of time and money have been lost. This money was wasted on ads that didn’t work, corporate jets and a business model that really didn’t make sense.

The money will never be recovered. It represents a net loss of wealth.

Value America could be unique. There are bound to be some evolutionary dead ends among the many mutations that occur in the business world. And many good seeds are bound to fall on barren soil.

But what if Value America is the rule, not the exception? What if the whole society is actually getting poorer as a result of the Information Age? Is the future still unknowable…or unavoidable? Bill Bonner Paris, France April 28, 2000 Best wishes for the weekend. May 1 is a national holiday in socialist-dominated Europe. So we will get to spend three days in the country. I’ll still write on Monday…if I can think of something to say.

*** Up…down…up…down…the Nasdaq can’t decide which direction to go. But it’s still well below its high of 5,048 from March 10.

*** Stocks reacted in a normal way to the news — at first. Specifically, the GDP didn’t grow as much last quarter as anticipated. The economy is slowing down. Meanwhile, inflation grew at a higher-than-expected rate.

*** The cost of labor jumped by the largest amount in a decade. And everyone knows Greenspan worries about the cost of labor. This increases the likelihood of a 50 basis point rate hike by the Fed on May 16, rather than the 25 basis point increases to which we’ve become accustomed.

*** Stocks went down — anticipating higher rates. Then, tech, Internet and telecom stock buyers must have said to themselves, “Wait a minute…these stocks are trading at 70 to 200 times earnings. They get capital almost for free. What difference would an interest rate increase mean?”

*** These TNT companies operate in the ether, not the real world. Labor rates? Heck, they don’t have any labor. The cost of money? No problem…they get all the money they need from the stock market. A slowing economy? Don’t make me laugh…the TNT sector is growing so fast even the accounting rules can’t keep up. At least, that’s what the TNT gamblers must be saying to themselves.

*** “You must get fully invested now,” says the headline from a Michael Murphy letter. “I do not want you to miss this unique chance to buy great stocks at great prices.” Murphy is not talking about Philip Morris. He’s talking about TNT stocks — widely thought to be at bargain levels.

*** But everyone knows the “Old Economy” is vulnerable to interest rate hikes. The Dow fell 57 points.

*** Lynn Carpenter tells me that — like Warren Buffett – – her Old Economy stocks are doing just fine. She named four retail companies early this year. They’ve risen an average of 122% in less than two months — compared to a negative 17% return on the Nasdaq and a flat Dow.

*** More stocks fell yesterday than rose — 1,588 to 1,312. More stocks hit new lows than hit new highs — 69 to 44.

*** Bonds fell — but not by as much as you might have expected. Bond investors may be looking further ahead. Greenspan can raise rates…but if they really start to do their job…that is, letting the air out of the bubble…he probably won’t be able to sustain them. Real rates in the United States are already higher than those in Japan or Europe. And Americans are much more vulnerable to a bear market. They have little in savings and a lot invested in stocks. If stocks were to turn down in a major way — they’d be in trouble. Interest rates would come down…fast. Bonds would rise in value.

*** While U.S. stocks dither…the euro has no doubt about where it is going — down. It hit a low yesterday just a little above 90 cents. The French franc, in which I pay my bills, now trades at 7.2 to the dollar. William Duisenberg, head of the European Central Bank, has a tough job. But at least he has a nice head of hair.

*** Let’s see, our four-bedroom apartment (we have five children living with us) cost about $3,000 per month when we rented it in August. Now it costs only about $2,500.

*** “We are pleased to give you some preliminary information,” wrote Zurich’s Union Bank of Switzerland to a friend. What they were pleased to pass along were the largely incomprehensible regulations regarding Swiss bank accounts held by Americans. The U.S. government is tightening its grip on money held overseas by American citizens.

*** Black iron — this is the kind of business that will really benefit from the Internet. A friend reports on a tiny metal shop in Ireland where a guy makes lighting fixtures out of black iron. He put up a website and now has customers all over the world — so much business he can’t keep up with it.

*** Evidence that men and women investors behave differently: A study by Barber and Odean looked at 35,000 trading accounts from 1991 to 1997. They found that men traded 45% more often and earned 1.4% less profit. Single men were even worse — they traded 67% more actively than single women and earned 2.3% less.

*** This week marks the anniversary of the beginning of the 20th century’s butchery. Two hundred Armenian intellectuals were rounded up in Constantinople in 1915. In the terror that followed, approximately 1.5 million Armenians were killed.

*** But today’s big news is from the “Journal of Science.” Researchers at Advanced Cell Technology report that cloned cells may age more slowly than regular ones. A cloned human, they say, may live to be 180 years old.

*** I would have guessed that one of the women at the auction at Drouot last night was at least 180 years old already. Drouot is Paris’ answer to Sotheby’s. Elizabeth and I attended an auction of Dutch paintings from the 15th to 18th centuries. We went for entertainment.

*** The auction was not at all like the farm equipment auctions I remember…where weather-beaten farmers stand out in the rain while the auctioneer yells into a microphone and jokes with the crowd…

“C’mon, Slim, I know you can afford $10 for this…what the hell is this thing anyway?…Okay, the ol’ boy there in the blue overalls says it’s a seed cleaner…and he says it still works. And if it don’t work, you can put in front of the house and plant flowers in it…right next to the tractor tire you painted white… Take this home with you today and yer wife will be mighty happy, Slim. She’s likely to give you somethin’ you don’t expect…”

“Yeah,” comes a voice from the crowd, “she’ll give him a kick in the butt.”

*** No, the Drouot auction was different. The crowd sat in upholstered chairs and bid with discreet nods. The auctioneer never raised his voice and barely cracked a smile. The paintings sold for $20,000 to $40,000 each. And the old woman…the dowager art collector might have known the artists personally.

The Daily Reckoning