Last week, Lynn Carpenter gave me an insight so paradoxical,
so deep, so cloaked in the mantle of obscurity and profundity that you would be forgiven if you hadn’t noticed.
Yet on this insight — this self-evident jewel of irony found lying like a piece of road gravel on the side of the information highway — proves that the whole New Era is a fraud.
In his speech to the Economic Club of New York last month, Alan Greenspan said the key to the New Era is “information.” Not for nothing is this new era sometimes known by its alias, The Information Age…to distinguish it from the earlier era which might be termed, as James Grant has suggested, “the Age of Ignorance.”
In the Age of Ignorance, Mr. Greenspan told his audience, business decisions were made on the basis of information that was “hours, days or even weeks old.” Since they could not know what the demand for any given product would be at that instant, they had to keep inventories to protect themselves against “the unanticipated and the misjudged.”
Though “large remnants of information void, of course, still persist,” the Chairman of the Fed told his audience, perhaps a bit of playfulness in his voice, “the availability of more times information in recent years” has meant that businesses could reduce inventories as well as “worker redundancies.”
This, then, is the big payoff of the Information Age for the Old Economy companies. Inventories are a thing of the past. So are “redundant workers.” Far be it from me to take issue with the head of the most successful group of price-fixers and colluders in history, but the folks who manage inventories for the oil companies, the gold companies and the companies who use significant amounts of palladium and platinum might wish they had stocked up before prices doubled and trebled.
Beyond that, investors are entitled to ask, if the information era has been such a boon to the companies who make and sell things, why are those industries in such dramatic decline?
More broadly, to whom are the Information Age companies selling their wares? If these products are so revolutionary and so bottom line-enhancing…why are shares in the beneficiary companies going down rather than up? And a further question, asked purely for fun: if the products of the Information Age don’t improve the profits of the Old Economy companies, will they ever do so for those of the new one?
Of course, we DR readers already know the answers. But it is fun to toy with questions.
Take Maytag, for example. If anyone could benefit from inventory and worker reduction, you’d think it would be a big appliance maker with far-flung offices, complex operations and thousands of complex employees. If information cannot help Maytag, who can it help?
Maytag shares topped out last summer at $74. Last week they were trading at $26 — just seven times year 2000 earnings.
Or how about our favorite coffin-nail maker — Philip Morris. A little over a year ago, Philip Morris was one of the great favorites of the Dow. Its shares traded at a healthy, though not spectacular, P/E of 17. Now many people think the sun has already gone down for Big Mo and will never rise again. You can buy the company for five times earnings. And get a 10% dividend yield. Yahoo, meanwhile, is trading at about 600 times earnings.
This, of course, is a special case. Yahoo is a sunrise industry, not a sunset one. As we all know, it has neither threats nor hidden dangers waiting for it. The cigarette maker, meanwhile, has been sued everywhere from Nigeria to the Marshall Islands. Still, where was the information revolution when investors were buying the stock a year ago? Apparently, the fruit of the information era is no greater guarantor of profits than the leaf of the tobacco plant. Why could not superior “information” predict the litigation boom? Lawyers, natural disasters, changing consumer tastes, a collapse of the dollar, politics — none of these things are susceptible to control or management with extra information alone. Instead, it takes judgement and luck.
Lynn Carpenter’s brilliant insight was that judgement was not necessarily enhanced by information. It was made more difficult and more expensive. As information floods into the corporate headquarters, decisions can only be made by disposing of it or ignoring it. A business has to go on and execute a business strategy despite the constant and distracting barrage of new facts. If every bit of new information must be examined and considered before an action can be taken — in the Information Age, no action will be taken. Because the supply of available information is infinite. And who can say if it would be material to your plans or not…unless it is reviewed?
One of the business mottoes of which I am fond is “ready, fire, aim.” It recognizes that you cannot let information and analysis get in your way. Better to simply bull ahead and see what happens.
Tom Phillips, a friendly competitor, has always said that one of the biggest dangers in business was “paralysis by analysis.” A world of free information makes the danger even more grave.
While small tech companies, with big ideas and no profits, have been bid up to preposterous levels, the biggest and highest-tech companies in the country have been wheeled out, like patients in a nursing home, to watch the sun go down. The defense contractors, apparently, are unable to benefit from the New Era technology. Evidently they have no inventories that can be reduced. And no redundant employees. Or maybe times are simply tough because there is no longer any need for a national defense, now that the Evil Empire is defunct. For example, Raytheon, the leading defense supplier in the United States, is selling for one-third of sales and about two-thirds book value. Its market capitalization is less than one-third that of Amazon’s.
And yet a report in “Der Spiegel” quotes a report from China’s military subcommittee: “China is ready to engage in war or even nuclear conflict with the United States should fighting break out over Taiwan. We would have to enter military intervention as early as possible, before the American troops are fully operational.”
Perhaps the sun is setting on the defense industry prematurely? Perhaps it is not a sunset at all, but an eclipse? If national defense really is a thing of the past, has someone informed the Chinese?
And what about companies such as Fleetwood Enterprises? The stock in this mobile home manufacturer has gone nowhere for 20 years. The company has plenty of workers. Some must be redundant. And it has expensive inventory. Is management so hopelessly Luddite that it cannot buy software that would remove it from the “large remnants of information void?” Or has the information era failed to deliver the great benefits that Mr. Greenspan and legions of faithful investors expect?
Fleetwood sells for just seven times earnings. If it spent more on information technology, would its earnings increase? Would it become more efficient and more profitable? Would its stock price go up?
Or how about Newmont Mining. Its stock is no higher today than it was in 1987. Did neither the information age nor the biggest expansion of credit in history bestow of their blessings on this poor, Old Economy company? Why?
At the risk of repeating myself, information does not lead to higher productivity, higher profits or even a better salad dressing. It takes time and effort — judgement, experience and luck…trial and error — all the old-fashioned words, including hard work, to produce a better bottom line. A kiss is still a kiss, in other words, no matter how much time goes by.
Having more information, on a more timely basis, can be a benefit. But it is like the benefit of understanding women better as you get older. The older you are, the more information you have on the subject, but it is not at all clear if you are able to use it effectively.
Paris, France February 22, 2000
P.S. If the sun is setting, my guess is that it is setting for the entire stock market — not just old economy companies. But prices on many of these companies are reaching very attractive levels. It may soon be the time to buy…knowing that the sun will rise again. *** Gosh…a very quiet day yesterday. The markets were closed for Presidents Day. Even the foreign markets were quiet. It’s eerie.
*** Today will be a big day, though. We will see how investors react to Friday’s losses. Expect a bullish morning…as the “buy-the-dips” crowd comes into the market. But the afternoon should be fascinating. It may tell us if the “moment of truth” has come for tech and Net investors. Stay tuned.
*** One of the stocks to watch is GE. It’s been called the World’s Largest Hedge Fund. As GE goes — so goes the Dow. And GE fell below 130 last week — which market technicians regard as a key support level.
*** “[T]he greatest threat not only to U.S. financial markets but to the [U.S.]economy and even to the world economy,” writes Dr. Kurt Richebacher, “lies in the currency markets, particularly with a sharply falling value of the dollar against the euro.” So far, the dollar has held up pretty well. But it depends on the bullishness of foreign investors. When foreign holders of dollars stop wanting to buy U.S. stocks and bonds — the dollar will fall.
*** But so what? Well, all of a sudden, not only would U.S. investment assets fall…so would Americans’ ability to purchase foreign goods. A lower dollar could be the market’s answer to Hawley & Smoot…the deadly duo who almost single-handedly caused the Great Depression.
*** In the collapse of the U.S. bubble of ’29 as well as the Japanese bubble of ’89 — both countries were the world’s leading creditors of the time. They could slash interest rates to try to get their economies rolling again — without worrying about the currency falling. Even that was not enough. It took WWII to get the United States going again. And the Japanese seem to have finally stopped the deflation that has marked their economy for 11 years. The United States, however, will not even have the ability to slash interest rates. It has no cushion of credit. It is the world’s biggest debtor, not the world’s biggest creditor. Cutting interest rates will collapse the dollar and intensify the meltdown of the global trade, U.S. financial assets and the U.S. economy.
*** But why worry? Who knows what will happen? Besides, everything is beautiful in its own way. Even global recession, right?
*** “Barron’s” Alan Abelson cites the work of Alan Newman of “Crosscurrents” newsletter. Newman calculates that the value of stocks would have to reach 486% of GDP by the year 2010 in order for investors’ expectations to be met. Investors think they will realize an annual return of 19% over the next 10 years. No chance.
*** The latest craze, of course, is biotechs. This is not the first time biotechs have excited investors’ imaginations. There were biotech boomlets in ’84, ’87, ’91 and ’95. Each time, investors thought that new drugs would be irresistible to aging baby boomers. The stocks soared. And then they crashed. “I don’t think this time is going to be any different,” opines Ed Owens in “Barron’s.” He points out that the craziest part of the craze is among the human genomics companies. And “they aren’t going to turn a profit for at least 10 years.”
*** The “Wall Street Journal” reports that the National Council of Teachers of English has advised banning the word “English” in course descriptions because it is “exclusionary.” A University of West Virginia professor tells students that anyone who corrects another’s grammar is guilty of “dialect discrimination.” And the Federal government has decreed that the old standard 3.5-gallon toilet is no longer acceptable in the land of the free. So a lot of people seem to have gone underground to meet their flushing needs. They’re buying the forbidden johns on the black market.
*** The kids went back to school yesterday, after a two- week winter holiday. So I’m back in Paris. It was fun working at home. I made a nice crackling fire and sat in front of it all day, working on my laptop computer. Nadiege brought me a cup of coffee and a piece of cake at 4 p.m. At 7 p.m. I got out a bottle of something a little stronger.
*** But it is good to get back to the office. Too many distractions at home. Like the gardener, Mr. DesHais. He showed up one day asking for work. He explained that he was a friend of a guy we knew who had died a few months ago. But the man of our acquaintance had been a notorious drunk. I figured this guy must have been a drinking buddy. In fact, the poor guy lost his driving license and had to get around on a little motorbike. And he talked to himself. So I felt I had to keep an eye on him. But the more I saw of him, the more I liked him. There was a full moon on Saturday night, so Mr. DesHais came on Sunday to plant the garden.