Terminale

The final academic stage of the teenaged years in France is called “Terminale.” It is the last year of the French equivalent of American high school, but typically at a level more closely parallel to the second year of a U.S. community college.

After Terminale, there is a big hurdle for the students to jump – the baccalaureat, a national test so dreaded and so important that people spend years trying to achieve a passing level. Without the “bac,” girls fear they are doomed to be charwomen and boys expect they will spend their lives on the dole.

Still, the Terminale students were in high spirits yesterday — which was, the last day of school for them. Maria reports that a group of girls dressed up in the most abbreviated costumes she had ever seen on the streets of the 16th arrondissement — our conservative, bourgeois neighborhood. To the accompaniment of an impromptu band, they sang Tom Jones’ big hit, “Sex Bomb,” in their Franglais accents, swinging their hips and their arms as though they were about to become unhinged.

Jules, meanwhile, reports that a group of Terminale boys marched through the streets with a live chicken, whose significance Jules failed to detect, throwing eggs. Passers-by ducked into shops and around corners to avoid the missiles.

Ah…the high spirits of youth at the end of its most high-spirited stage.

“A common feature in the terminal phase,” writes Marc Faber, speaking of bubble stocks, rather than bubble- headed teenagers, “is a sharp rise in credit demand (margin debt), huge volume in the most speculative sectors of the market and extreme volatility.”

Volatility, excess, boisterousness — how better to describe the terminal phase — whether of bubbles or teenagers? And don’t forget uncertainty…

“During the terminal phase,” Marc continues, “the advance becomes very narrow and dangerously concentrated…with just a handful of stocks reaching all-time highs, while most stocks are already in well-established downtrends.”

“Investment manias involve a great deal of uncertainty. The discovery and exploitation of natural resources, the opening of new territories, the application of new inventions, or the introduction of new products [or the raising of a child…] all involve a high degree of uncertainty as to their future profitability. Thus, bubbles proliferate particularly among assets and investment themes whose value is almost impossible to establish.”

Marc reminds us of the auto and airline industries. Of the hundreds of U.S. companies that entered the field, only three remain. Those three will not disappear easily — there are huge barriers to entry that keep competitors out. On the other hand, their growth is not likely to surprise the world, either.

Airlines, meanwhile, attracted a lot of competition over the last two decades. But 129 airlines filed for bankruptcy in the period. And according to Warren Buffett, during the entire history of the airline industry, investors — overall — never made a profit.

What will the Internet and other new technologies produce? “Even if one could reliably forecast the growth rate, final market penetration and profitability of the Internet,” Faber writes, “who can know which companies will survive and thrive, and which ones will fail? Possibly the most successful future Internet players have not yet been formed.”

“The uncertainty…” he says, “increases the volatility in the terminal phase.” The stocks could be worth a lot. Or nothing.

And guess what. They will be.

The terminal phase of a bubble marks the transition from infinity to nothingness. Expectations that were nearly limitless are reduced to hopes that are almost negligible. Values that formerly were thought to have no ceilings are discovered to have no floor. Investors who had expected to make a fortune are delighted to get back a fraction of their original capital.

Of course, there is no guarantee that we have reached the terminal phase. This teenaged market could have a year or two left at home — struggling to pass the bac.

But the mania seems to be winding down. The e-tailers certainly seem to have reached the end of their growing years. Drkoop looks terminal. Many other companies still have a pulse but have sustained such brain damage that they will expire as soon as they are taken off life support.

Even overseas, where the bubble has been generally less inflated, Boo.com collapsed in the United Kingdom. WorldOnline, the big Dutch Internet play, has flopped. Softbank and Hikari Tsushin, in Japan, are down so much their executives are considering a one-way visit to the train station…perhaps to reflect on what happened…

But, writes Faber, “it is conceivable that the present bubble will mutate once again…”

“I can only add,” he concludes, “that no bear market beginning was ever perceived as such, but always as a correction that would be followed by new highs.”

So stay tuned…as the greatest, gaudiest, most extravagant and absurd story of our time…continues to be told.

And if you are a teenager at “Terminale…” or have a teenaged heart…go for it. Throw the eggs. Swing the hips. Soon you’ll have to study for the “bac”…or in America, pay your college loans. Soon the infinity of your future will be the reality of your life. And your infinitely rich Internet stocks will be no further cause for celebration.

Your still-adolescent scribbler,

Bill Bonner

Ouzilly, France June 1, 2000

*** “The rally didn’t hold up,” said a director of Wit Soundview in a Reuters report, “because there wasn’t a lot of volume.” Typical of bear market rallies, there weren’t enough people with enough money to sustain Tuesday’s surge in prices. So it petered out yesterday.

*** The Dow fell very slightly — 4.8 points. The Nasdaq registered a 58-point decline.

*** But this is amateur’s market. And the amateurs are on full “data watch” this week. Today the numbers from the purchasing managers come out — showing the increase in prices at the wholesale level. And tomorrow the jobs data arrives. Anything could happen.

*** Home sales fell 6.2% in April. Consumer spending slowed, too…though it is still rising at 7.5%, annualized.

*** “The one truly distinctive feature of the New Economy,” wrote Robert J. Samuelson recently, “is that consumers, as a group, have virtually stopped saving. In 1991, the personal savings rate (savings as a share of after-tax income) was 8.3%; in 1999 it was 2.3%.”

*** Samuelson notes that even with computers, productivity gains were larger in the 1950s than in the 1990s — a point I’ve made to you often. Unemployment, too, was lower in the late-`60s than it is now. So what’s new about the New Economy?

*** Well, Samuelson, goes on: “Every percentage point drop in the savings rate is worth about $66 billion in extra consumer spending. Americans may still make deposits in savings accounts or 401(k) plans. But consumers offset these savings by borrowing or by spending stock profits. It is this spending spree — based heavily on people’s stock wealth — that has expanded the economy, profits and hiring…”

*** But spending money does not create wealth — it destroys it. It creates the illusion of wealth, in the form of economic activity…and consumption. But real wealth is created by saving and investing — not by consuming.

*** But, bulls will reply, billions of dollars ARE being invested in the New Economy. More than ever before, venture capital funds…and ordinary stock buyers…are contributing to the world’s wealth of capital. More entrepreneurs are starting up enterprises. More tech and business innovations are being tested.

*** Alas, when a dead-end dot-com rents office space, buys equipment, hires people with body piercings and orders out for pizzas, capital is not created — it is consumed, just as it is used up by people who take a holiday in Paris. For the world’s wealth to increase, there must be a return on the capital invested. The new companies must produce a benefit that society is willing to pay for…and willing to pay enough for so that the company can clear the “hurdle rate” — returning enough profit to make the whole thing worthwhile. When the hurdle rate goes to zero — as it did for the Nets and techs — the whole thing becomes an exercise in self- deception. Investors pretend to invest. Entrepreneurs pretend to create wealth. And stock market indexes pretend that everyone is getting richer.

*** According to Forrester Research, which keeps track of trends in the Internet business community, most of the e- tailers operating entirely on the Internet will be out of business within 12 months.

*** The whole thing — the boom, the New Era, the New Economy, the explosion of new wealth supposedly created by new technology — is an imposter.

*** When will the counterfeit be exposed? “If the market doesn’t upset consumers,” says Samuelson, “the boom continues. If the market terrifies consumers, the boom stops. Between those two extremes, there are endless possibilities.”

*** The popular press is catching on to many of the themes we’ve been discussing here for months. David Dreman wrote an article in April’s “Forbes,” entitled, “What New Economy?” E-tailers, whose sales are growing strongly, “accounted for only 0.6% of all retail sales in 1999’s fourth quarter,” he says. And, “in the four years that online booksellers have been in operation, Amazon.com and the other Internet sites have captured only 8% of the retail book market. They have accumulated losses in the billions. Hardly…a category-killer…

“At the end of 1999, 400 large Internet-related companies had a market value of $1 trillion (27% of the Dow). This group reported combined revenues of $29 billion; that’s only 2% of the Dow’s revenues. More tellingly, the Internetters will collectively lose $9 billion this year, while the Dow stocks will probably earn close to $150 billion.”

*** Oil went down by $1.34 a barrel after the Saudis let it be known that they, too, would respond to the “automatic” trigger (an oil price over $28) by pumping more crude.

*** And bonds rose. The yield on a 30-year T-bond dropped to almost 6%. Bonds won’t make you rich overnight, but they’re not a bad place to sit out a bear market. A portfolio of bonds could turn the tragedy of high losses into the entertainment of low comedy.

*** While the rally stalled, it also inexplicably broadened out. There were 1,719 advancing stocks yesterday, as opposed to only 1,267 declining ones. And in a remarkable departure from recent custom, 89 stocks hit new highs; 54 hit new lows.

*** The Japanese are throwing themselves in front of trains. Suicide by train is such a problem that they’re putting up mirrors so that, as a railway official put it, “people will reflect before acting.”

*** There is no shortage of distractions in Paris. But even out here in the middle of nowhere — Addison and I have to use iron discipline to keep focused on our work. Our office was invaded by a chicken. There being no representatives of the Animal Rights League present, I booted it out of the window… Then Mr. Deshais insisted upon showing me his latest oeuvre — a row of tomato stakes that looked as though they had been lined up with a laser transit. They were so absolutely straight and true, I marveled at how precise a drunk can be.