1929 . . .2000 Deja vu?

["Jay Moore" <research@xxxxxxxxxxxxxx>]

Too good to be true

Tomorrow the internet goldrush will reach a new pitch of excitement with the
flotation of Lastminute.com. But amid the euphoria and free spending, there
are alarming echoes of past bubbles. Larry Elliot asks if this one is about
to burst

E-finance: special report

The Guardian
Monday March 13, 2000

It's bonanza time.Lastminute. com is coming to the stock market tomorrow and
the world is going share crazy. Everybody, it seems, wants a piece of a
company that at the 11th hour can get you a flight to Spain or two tickets
for the theatre. So much so that by tomorrow night Lastminute.com will be
worth - on paper at least - as much as Manchester United, the world's
richest football club.

The dizzying price tag attached to a company that has been in business for
all of 19 months seems a perfect symbol for the giddy mood of affluence that
has gripped much of Britain since the words dot com became synonymous with
easy money. With a pressure cooker stockmarket fuelling a frenzy of
spending, the signs of an 80s-style boom are all around: soaring house
prices, roaring sales of the most preposterous luxury goods, and the surest
indicator of all, figures for the consumption of champagne that suggest some
people are confusing it with sparkling water.

But as punters sit and dream of the untold riches that Lastminute. com will
bring them, they would do well to ponder four little words - the four most
dangerous words in finance. This time it's different. Of course, speculators
caught up in the frenzy are not doing any pondering at all. They're sticking
to the dreaming. We've had stock market bubbles before, so their argument
goes, but they were based on uncontrollable greed and hysteria. This time
it's different. We've had stock market bubbles before, but back then there
was no Alan Greenspan, the head of America's central bank, to steer us to
safety. This time it's different. We've had stock market bubbles before, but
that was when companies were run by charlatans and deadbeats rather than
dynamic, young entrepreneurs. This time it's different.

But what if it isn't? What if this bubble - this wild speculation in
companies unheard of six months ago - is about to go the way of all the
others, from tulip mania in 17th-century Holland to the Japanese stock
market in the late 80s - and end in a spectacular crash?

If - or rather when - it happens, it will happen suddenly. And the impact
will be savage. Two weeks before the crash of 1929, the New York Times
carried a headline: "Stocks will stay at high level for years to come." A
week later, when the first signs of a problem were emerging, the eminent
Yale economist Irving Fisher, had some soothing words. "Fisher says prices
of stocks are low," declared the stately New York daily. In subheadings it
added: "Quotations have not caught up with real values as yet, he declares.
Sees no cause for slump."

A week later came Black Tuesday, when the floor of the New York Stock
Exchange descended into pandemonium and dealers tried to offload shares at
any price. Stocks that had been previously been the most fashionable - such
as Radio Corporation of America - were among the biggest losers. The pages
of the Times took on a more sombre tone.

Slowly, perhaps too slowly, today's policy makers are starting to wake up to
the idea that it could all happen again, that the laws of economics have not
been rewritten by Bill Gates et al, and that unless investors tread warily,
Lastminute.com could turn into Lastgasp.com. The chancellor, Gordon Brown,
last week urged investors to exercise caution, suggesting "people will want
to look at the performance of each of these individual (high-tech)
companies."

Howard Davies, head of the Financial Services Authority, the City's
watchdog, was even more blunt, saying: "When a company is valued more on
hope than on expectation, then you can expect it to be a volatile stock. We
know from previous experience that many of the companies around at the
moment will not be around in three to five years."

A similar attempt to let the air gently out of the stock market bubble is
underway on the other side of the Atlantic, where Greenspan has been nudging
up interest rates to slow down America's booming economy. He believes that
there has been a renaissance in the US economy, and he's right, but not one
that justifies the extraordinary rise in high-tech stocks on Wall Street. A
year ago, the Nasdaq index of new technology companies stood at around
2,000; it hit 3,000 in November, 4,000 in December and 5,000 last week. Tim
Congdon, one of the City's leading economists calls the valuations on the
Nasdaq index "insane". Greenspan now has the unenviable task on his hand:
how to deflate the bubble without bursting it.

Will he be successful? In all honesty, nobody knows. In financial markets
everybody is blessed with 20:20 hindsight, but anyone who says they can say
precisely when there will be a crash is lying. It could be this year, next
year, sometime, never. What can be stated with some justification is that
the warnings are justified by historical precedent and that the longer the
high-tech frenzy goes on, the shorter the odds on an eventual day of
reckoning.

Some of the valuations of the high-tech companies look - how shall we put
it - somewhat optimistic. Lastminute.com, for example, is expected to have a
notional value of £1bn when its shares go on sale today. Its revenues in the
last quarter, which included the peak Christmas buying season, totalled
£409,000. So far, what the company has going for it is a bright idea and a
good brand, but not that many customers. It is losing money, lots of money.

Those who argue - as did Irving Fisher in 1929 - that the market is not
over-valued would say that there is nothing wrong with that. Plenty of
companies lose money when they are getting the business established, when
building up a customer base takes precedence over profitability. Capital
investment is expensive and so is advertising.

In the end, however, companies that succeed in a market economy are those
that make profits. That may sound brutal, but it's a fact of life. A
company's share price reflects the profits that investors expect it to make
in the future, and eventually they will want to see some signs that those
profits are going to be delivered. And here's the rub: not only have the
vast majority of the dot.com companies never made a profit, but they are
unlikely ever to do so. Why? Because there are too many companies chasing
business at a time when profit margins are being squeezed by intense
competition.

The online market for books is a case in point. Amazon is the market leader
in this field, although it, too, has never made a profit. Yet anybody keen
to buy a book over the net can log on to a website called Bookbrain.co.uk,
which will search all the online booksellers and give a rundown of price,
delivery times and the cost of packaging and postage. Take Delia's second
How to Cook book, for example. This is available for £16.99 from the BBC but
much more cheaply online. According to Bookbrain, Amazon has it at £10.94
including p&p, but two other outlets - Alphabetstreet and Country Bookstore
are churning it out at £8.49. All this is wonderful news for the consumer,
but doesn't do much for the bottom line of Amazon, or any of the other
online bookstores.

The cannier investors are starting to latch on to this inescapable truth.
Last month's stock market darling, Freeserve, saw a third wiped off its
share price last week when it became clear that a price war among internet
service providers was bound to cut revenues and profits.

While all eyes have been on the go-go stocks in the high-tech sector, shares
in so-called old economy companies have been in the doldrums. Brewers,
banks, supermarkets, retailers, power companies have been churning out
healthy profits, but no one has been even remotely interested in fuddy-duddy
companies run by men in suits. For those who believe in happy endings, the
hope is that when the bubble bursts for the high-tech sector, the money will
simply rotate into the old economy stocks again and the technological
revolution - which is for real - will embed itself into the economy without
any of the accompanying hype. If that happens, there will be a short period
of turbulence, but nothing worse.

But there are pessimists who argue that this ignores the factor that has
characterised all post-bubble periods - panic. When sentiment turns, it can
turn so quickly that policy makers cannot respond quickly enough and by the
time remedial measures kick in it is too late. One favourite scenario for
the Cassandras is that the determination of America to live beyond its means
forces Greenspan to continue ratcheting up interest rates. At some point,
companies start reporting that their profits are being affected, leading to
a crash in share prices. Foreign investors - up to their necks in Wall
Street - suffer big losses, leading to knock-on effects on stock markets
around the world. The fall in the stock market then undermines the hitherto
strong dollar, affecting exports from Europe and Asia by making them more
expensive. In these circumstances, there would be a very nasty global
recession, with the strong possibility of falling house prices and the
certainty of sharply rising unemployment.

The worst-case scenario, of course, would be a full-scale 30s-style slump.
This is possible, but still highly improbable unless politicians and central
bankers repeat the serious mistakes made in the aftermath of the 1929 crash,
when they failed to cut interest rates quickly enough and raised taxes to
keep budgets in balance.
Graham Turner, economist at GFC economics, said: "This is not going to be
pleasant. But only if prices come down so quickly that they turn negative
and we get a period of deflation will policy makers be in serious trouble.
Otherwise, we should come out the other side." He added that the likeliest
outcome was that the men in suits at the old economy companies would have
the last laugh. "A lot of internet companies will be swallowed up by
traditional firms, who will be able to cherry pick the best brand names at
the bottom of the market. Let's be honest: there are some good brands out
there but they won't be able to keep going when there is a big correction."

For the rest, the future looks less bright. One of the internet's most
entertaining sites is iTulip.com, which brilliantly lampoons the whole
high-tech bubble. "Now you, too, can enjoy the thrill of owning an
uneconomical internet company's stock certificate without fear of losing all
your money," it says. "Buy an iTulip.com Stock Certificate. Not only does
iTulip.com not have any assets, revenues or profits, it doesn't even exist.
Of course, some internet companies won't exist either after the internet
stock speculative mania ends."

At the moment, iTulip.com is plain funny. Before long, it could seem less
amusing.

Bubble trouble: the tell-tale signs
* It's spend spend spend, as the lucky winners offload their gains.
Champagne and cocaine fuelled the City in the 80s; today the traders blow
their bonuses at lap dancing bars. One Oxfordshire estate agent has a
waiting list of more than 80 for houses in the £2m-plus bracket. For the
super rich, a new age of conspicuous consumption offers retail therapy the
rest of us can only dream of. The timepiece of choice for those with real
money is the Patek Phillippe Calibre 89 - yours for a mere £1.7m.
* Commentators claim that the business cycle has been abolished. In the past
when analysts have declared that the fundamental rule of economics - all
good things come to an end - no longer applies, it's usually been swiftly
followed by the inevitable crash.
* The business pages are the most popular section of the newspaper. The Sun
and the Mirror tipping shares is the equivalent of Joseph Kennedy's
shoeshine boy giving him investment advice - a sign it's time to get out of
the market.
*There is a lemming-like rush to invest in whatever is inflating the bubble.
Thousands of first-time homeowners climbed on board the UK property
bandwagon in the late 80s because they were told prices would always go up,
only to see the value of their investment crash within a few years.