to Bubble, Dust to Dust
by Bill Bonner: Another
So far, this
century has been a delight. From tech bubble to tech bubble in scarcely
On our recent
trip to China, all of a sudden we felt 10 years younger. For in
the coffee bars of Chinas futuristic cities were entrepreneurs,
dreamers and lunatics who still thought it was 1999. A group of
young techies filled us in: We dont worry about profitability.
We can worry about that later. We want traffic. Because we know
we can monetize the traffic on the stock market. Here were
people who still believed they could take eyeballs to the bank.
And they were
right; once again, investors react to the Internet as though it
were a toxic mushroom. Just look at Youku. Its a Chinese version
of YouTube. It had revenues of only $60 million last year. Yet,
investors drove the stock up so high the company was valued at $7
billion. Renren, billed as Chinas Facebook, produced
similar hallucinatory effects. With revenues not profits
of just $76 million, its value rose to $9 billion.
In the Occident
too, the “social media wave is making financial history, if
not profits. Last week, Pandora, a loss-making on-line music site,
rose more than 60%, before falling back.
with edgy technology is that something edgier comes along soon after.
So capitalizing a tech company at more than a few times earnings
is usually a mistake. But the conceits of the worldwide web go far
beyond p/e ratios. Ten years ago, people had such high hopes they
could barely talk about it without running out of oxygen. George
Gilder, in his book Telecosm
announced a new economy based on a new sphere of cornucopian
radiance reality unmassed and unmasked, leaving only the
he could see the promethian light shining through the undersea cables
laid by a company called Global Crossing. He urged investors to
buy. The stock had traded over $60 during the tech bubble of the
late 90s. By the middle of 2002, you could buy it for 6 cents.
visionary, Michael Saylor, chairman of MicroStrategy, said he was
on a mission to purge ignorance from the planet. He
said his company was leading a crusade for intelligence.
In a contest between intelligence and ignorance, we know how to
bet. On March 20, 2000, Saylor admitted that he had cooked his companys
books. Investors lost $11 billion. Saylor, personally, lost $6.1
billion more than anyone had ever lost in a single days
huge losses were cosmic delusions. Digitized knowledge was supposed
to make us all smarter and richer. Computing power doubled every
18 months; true believers thought the rate of innovation and GDP
growth should speed up too. But did it?
Just the opposite.
For starters, the promethean light was harmful to jobs. Larry Summers
explained, in The Financial Times, what the Internet did
to the book trade. First, Amazon undermined bookstores. And then,
e-books undermined the kind made of trees. Between writing a word
and reading it there were fewer middlemen. Thousands of jobs disappeared.
In other industries too productivity rose, but fewer employees were
needed. In 2000, America had 113,899,000 full time jobs. Ten years
later it had 112,618, 000.
Real GDP growth
declined too. The US government accumulated $8 trillion in deficits,
but GDP only rose $4 trillion. Adjust for inflation properly and
Americas real GDP per capita went backwards for the entire
decade the first time ever recorded. In real terms, house
prices and stock prices too, both declined.
What went wrong?
Why didnt computer-equipped Wall Street allocate capital to
businesses that could grow wealth and create jobs? Why didnt
entrepreneurs and scientists use the worldwide web to invent new
technology and new sources of prosperity? Why didnt investors
use the knowledge at their fingertips to avoid dead-end investment
in mortgage backed derivatives and housing?
is not the same as real progress. And digital knowledge is a far
cry from actually knowing anything useful. Besides, its not
knowledge that makes the world go around, anyway. Its ignorance.
How many people would have bought Global Crossing if they had known
what would happen? How many innovations would be aborted if people
knew how they would work out? How many marriages would be cancelled;
how many movie tickets would go unsold? If you could look into the
future and know your whole life in every intimate detail
many people would blow their brains out rather than sit through
a re-run? People hustle and take chances only because they dont
know how it will turn out.
As for making
people smarter, a report in last weeks press tells us that
the typical teenager spends 13 hours a day on some form of electronic
device. Another report tells us that his IQ will go down if he watches
dumb programming. Today, there are 600 million people on Facebook
and 175 million on Twitter. Knowledge is there aplenty. You can
go there, if you like, and find out what a congressmans crotch
Twitter have not yet gone public. But secondary market trading suggests
that Facebook would fetch a price of more than $75 billion and Twitter
as much as $8 billion. As for their real value to the human race,
theyre probably not worth a damn.
with permission from the Daily
Bonner is the author, with Addison Wiggin, of Financial
Reckoning Day: Surviving the Soft Depression of The 21st
The New Empire of Debt: The Rise Of An Epic Financial Crisis
and the co-author with Lila Rajiva of Mobs,
Messiahs and Markets (Wiley, 2007). His
latest book is Dice
Have No Memory.
Since 1999, Bill has been a daily contributor and the driving force
behind The Daily Reckoning.
© 2011 Daily Reckoning
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