| IMAGINATION TAKES FLIGHT THE DAILY RECKONING BALTIMORE, MARYLAND FRIDAY, DECEMBER 17, 1999 * * * * * * * * * * * * * * * * * * * * * * * * * * *
In Today's Daily Reckoning: *** Just another day on Wall Street… *** Christmas spending spree *** How much could you have made this century?
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*** Just another day on Wall Street… *** The bear punched in before the opening bell and did
his work. He took 1,629 stocks down…while only 1,452
eluded him. *** The Dow managed a small rise -- 19 points -- but
even among the Dow stocks, there were more falling than
rising. *** Four hundred sixteen stocks hit new lows. Only 62
managed new highs. *** Investors retreated into the few stocks that are
still showing progress -- mostly techs and Nets. This
drove the Nasdaq up 93 points to above 3,700. The
Nasdaq, by the way, is up nearly 70% for the year…and
nearly 400% for the last four years. *** After the bear punched out and went to a local bar
to relax, the financial media celebrated the "new
economy" and the never-ending bull market. *** Meanwhile, Americans are on a spending spree. Real
spending is up over 5%. Boats, vacation houses and
other luxury items are booming. Confidence? Never is
heard a discouraging word. *** The spending is showing up in trade deficit
numbers. The shortfall in goods and services hit a new
record in October, $26 billion. Maybe we should forget
about producing altogether. Take the division of labor
one step further. Americans will specialize in
consumption. Let the Asians specialize in production.
The only workers we'll need in America are the Bureau
of Printing and Engraving, who will have to work around
the clock. *** But unemployment is disappearing. The jobless rate
was 5.5% four years ago -- and thought to have hit
bottom. But it just kept going down. Jobless claims
recently fell to their lowest level in more than a
quarter of a century. *** But surveys show that satisfaction levels are
declining…because so many marginal, inexperienced,
barely-sentient workers have been drawn into service-
sector jobs. *** Maybe we could extrapolate this trend indefinitely
too. At present rates, by the year 2010, the
unemployment rate will be negative. Household pets will
be enlisted at airport ticket counters…people with
severe mental problems will tend the security checks.
*** Or maybe…raise the dead? Stalin is running for
office. They're putting him on the ballot, reports the
Saint Petersburg paper. A poll showed that 7% of voters
would cast their votes for Uncle Joe, if he were alive.
*** What has the stock market really done for investors
during this century? Steve Sjuggerud did the math.
About 5.5% per year, he reports, from Dec. 30, 1899 to
today. And that figure is not adjusted for inflation.
Amazingly close to the increase in GDP, in other words.
And not anywhere near what most folks expect. *** Abby Cohen predicts that the Dow will rise about
10% in the year 2000. *** The euro rose against the dollar yesterday. *** And there are only 14 days left until the end of
the world…I mean, the end of the millennium. I don't
know about you, but I'm getting more and more
sentimental about the second millennium as the end
grows near. I was getting used to it. The Bubonic
plague, the Norman Invasion, the War of the Roses, the
Golden Horde, the French Revolution, Buddy Holly, my
first wet, sloppy kiss…my first dog…(it was my
first dog, I think, that gave me my first…). Gosh,
I'm going to miss it.
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IMAGINATION TAKES FLIGHT When the 20th century opened, said Winston Churchill,
"humanity was informed that it could make machines that
would fly through the air… "The whole prospect and outlook of mankind grew
immeasurably larger, and the multiplication of ideas
also proceeded at an incredible rate… "While he nursed the illusion of growing mastery and
exulted in his new trappings, he became the sport and
presently the victim of tides and currents, of
whirlpools and tornadoes amid which he was far more
helpless than he had been for a long time." It was on Dec. 17, not long after the turn of the new
century, that Orville and Wilbur Wright demonstrated
that the promise of air transportation was real. On the
windswept banks of North Carolina, for the first time
in history, an airplane got off the ground and
completed a controlled flight. The promise was very real. Airplanes worked. And three
decades after the birth of airplanes, they were over
Churchill's wartime bunker in London, dropping
explosives on the city.
You may remember an astonishing bit of information in
these letters a few weeks ago. Actually, I was
reporting a comment made by the most successful
investor of our millennium -- Warren Buffett.
Buffett stated the obvious: that investors, as a group,
cannot expect to make more from their stocks than the
companies themselves make in profits. That's all there
is. Steve Sjuggerud confirmed that insight with his
calculation of actual stock market returns over the
century. All investors as a group made was 5.25% --
before inflation. That figure is about the same as the
average level of earnings over the period…and about
same as the average GDP growth…and not too far away
from the average return on debt instruments. No reason
to put too fine a point on it -- investors who expect
to get rich by being "in the market" had better live a
long time. Five percent…before taxes and
inflation…takes a long time to compound into real
money. Most investors are aware of this…so rather than
merely being "in the market," they try to find the
stocks that will beat the market. And one of the
approaches to doing so…about which we hear so much
these days…is investing in new technology. And if
ever there were a new technology that captured the
hearts of investors (their minds escaped untouched), it
is the Internet. Yet Buffett reminded us that new technology does not
necessarily mean higher rates of profit. In fact, the
air travel industry, as great a technological and
commercial success as it was, never made investors a
dime. Instead, the whole industry did to investors'
portfolios roughly what Hermann Goering's planes did to
London. The industry was so competitive that airlines regularly
lost money and went bankrupt. One company, Continental,
when bankrupt twice. Today's airline industry is the Internet. We know it
works -- we can order Christmas toys. But we don't yet
know how much damage it will do. An article in "Forbes" this week shows how hard it is
to make money betting on new technologies. First, it is
almost impossible to know if the technology will
actually work. Second, even if it does work, it may
never find a successful commercial application. And
even if it overcomes that problem, the company you buy
may turn out to be a loser for other reasons. Allen B. Dumont Laboratories pioneered the television.
But it went out of business. In the early '70s, the Wankel engine looked like such a
hit that investors bid up Curtis-Wright's stock from $3
to $13. But the engine still waits to get cranked up. Another engine development, Orbital Engine's direct
fuel injection for two-stroke motors, never caught on.
Nor did the gas turbine, nor the ceramic diesel. Superconductors were supposed to change our lives.
Where are they now? And where's the new flat-panel
display…that quadrupled the price of CopyTele shares
in the early '80s? The price of the stock has fallen by
two-thirds…18 years later. Willis Carrier's air conditioning was certainly a big
hit…at least in the summertime. But the Carrier
Corporation never produced extraordinary profits for
investors. And where's the cure for cancer that Entremed promised?
The stock went from $12 to $51 on the first day of
trading. Now it's $23. At least five major drug companies were on the verge of
a cure for sepsis a few years ago. None was ever able
to make it work. By contrast, the Internet has shown itself to be
capable of doing at least some of the things that it
promised. Like airplanes. But, like airplanes, the more effective a new
technology is…the more damage it can do. And the more
it seizes the human imagination, the more the mind
takes flight. "We took it almost for granted that science would
confer continual boons and blessings upon us,"
Churchill explained. But it "was not accompanied by any
noticeable advance in the stature of man, either in his
mental faculties or his moral character. His brain got
no better, but it buzzed the more…" Nearly every home and office in North America is abuzz
with the wonders and promises of Internet stocks. Who
can hear the approach of the Luftwaffe over all the
noise?
Bill Bonner
P.S. Churchill, clearly not long AMZN, went on to say,
"Our codes of honour, morals and manners, the
passionate convictions which so many hundreds of
millions share together of the principles of freedom
and justice, are far more precious to us than anything
which scientific discoveries could bestow." * * * * * * * * * * * * * * * * * * * * * * * * * * * The Daily Reckoning is a FREE e-mail service of The
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