Selected Skirmishes: Tiny Bubbles

Old money and the vision thing

In the mid-1980s, the United States struggled to keep pace with the Japanese industrial juggernaut. The conventional wisdom went something like this: American capitalism was preoccupied with short-term results. We should follow the lead set by the Land of the Rising Sun, where managers were committed to the long haul. Hence, they made better--i.e., more farsighted--investments and routinely offered lifetime employment opportunities. American firms, in contrast, rewarded executives based on quarterly reports, leading them to ignore the long run and to abandon workers at the drop of an investment analyst's downgrade.

Nippon envy, of course, crashed with the Nikkei Index, which struggles to stay airborne at around 18,000 after soaring upwards of 39,000 a decade ago. The very rigidities lauded as the backbone of Japanese capitalism held the country in the consumer electronics epoch just as the world raced to embrace the dawning era of digital networks.

But note the shift in the contemporary conventional wisdom in the United States: Now, say critics, American capital markets are way too speculative, wildly tossing investment dollars at any cockamamie "dot-com" IPO, whether the company makes money or not.

The grumblings about America's "bubble economy," as The Economist likes to call it, are ubiquitous. The old-line pillars at the country club and scruffy intellectuals at sidewalk cafés alike bemoan those wacky Wall Street valuations. "No earnings!" exclaims the clubber. "Paper wealth!" shrieks the intellectual. Both unwittingly point to the most dynamic and progressive element of modern American capitalism: its ability to liquidate obsolete investments at warp speed in favor of promising new ideas. In an era in which so many innovations are being hatched, the transition is awesome to behold.

An online bookstore operated via a Web page? Amazon.com, whose equity value appreciated 966 percent per share in 1998, found itself worth more in January 1999 than all other bookstores in America combined. Wireless telecommunications operator Teligent is worth $4 billion at its NASDAQ share price on July 28, 1999--a staggering 1,681 multiple of sales. Some believe that paying 36 times earnings--the average Standard & Poor's price/earnings ratio--makes stocks outrageously expensive, but others are willing to toss the dice.

This is phenomenal to many, irresponsible to some, the prelude to a crash to others. What is curious is the lack of deference shown toward those brave enough to take risks. Amazon.com may well fail to deliver profits over time, but it has already revolutionized retail markets and driven both online and brick-and-mortar businesses to deliver more to customers. Few critics remember that where financial returns do not ultimately materialize, financiers engage in unintended charitable activity.

Yet this socially useful behavior is mocked and condemned by status guardians in danger of losing their quo. Just offstage, in fact, there is an audible lust for a stock crash. Critics are appalled by Bill Gates and the billionaire boys club of Silicon Valley. Even those who are self-made and bring enormous benefits and wealth to millions of their fellow citizens cannot properly atone for the financial success they enjoy.

Back at the country club, Chauncey and Biff ridicule the fast-buck artists of the New Economy as a bunch of hippies high on capital gains. How dare these pipsqueak upstarts, some without even so much as four generations of landed wealth to their names, surpass the magnificence of Ye Old Money?

It is staggering to observe the rapidity with which capital abandons the crusty old-timers to embrace the daring newbies. Sears is now worth $16 billion and U.S. Steel $2 billion, while Yahoo! is valued at about $28 billion and America Online at $107 billion. These latter companies are considered Internet Blue Chips because they actually have P/E ratios (349 and 171, respectively). Investors are plunking down billions and counting on robust growth--and the luck to survive in the very long run. Investors see a big future in the efficiencies of e-commerce, and if they are right, we will all reap handsome rewards.

Eighty million individual investors in U.S. financial markets will make their mark in dividends and capital gains, and, by doing so, deliver the U.S. Treasury a nice tax bonus (how do you spell surplus?). But the rest of us will gain, too. We will get access to better products and a more efficient economy. The resources piled high on entrepreneurs will sort out the technologies and business plans that make sense, filtering unlimited possibilities into an operational leap forward.

The revolution is on, curiously fueled by the same shortsighted capitalists who cared only about the next quarter's earnings in 1985. Now they care nothing about earnings for 40 quarters into the future. Amazing how visionary these myopic dolts have grown. Incredible how shortsighted the conventional wisdom has become.