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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Competition Among Digital Men

In Today's Daily Reckoning:
*** Internets go bankrupt
*** Cash on the rise...another bullish signal
*** But the dollar slipped...and insiders are selling at 
twice the normal rate

*** The Internets continue to suffer. Yesterday, the digital 
humans at announced that they were filing for 
bankruptcy. is one of's partners and 
had been named the "best on-line furniture store" by 
research group,

*** If the best on-line store can't make it, who can? But 
Amazon drifts along, through the jungle of competition and 
the merciless alligators in the venture capital community. 
AMZN sold off yesterday - but is still well above the 
critical $30 mark.

*** During the 2nd quarter of this year, AMZN lost $110 
million on its investments in companies such as 

*** The Internets owe a big debt to Henry Blodgett, the 
analyst who made a name for himself by being so bullish on 
the sector. As reported here a few weeks ago, Henry set 
target prices for stocks such as Amazon at hallucinatory 
levels. And then he held his bullish stance - even as the 
whole group collapsed.

*** But last week, Henry downgraded 11 of his net favorites 
- after they had declined 80.34% from their highs. Rumor has 
it that Henry - who surely 'gets it' - has been offered a 
job piloting Russian submarines.

*** The Dow gave back some of its gains yesterday. The index 
retreated 109 points in very light trading. The Nasdaq went 
nowhere - gaining just two points in the session.

*** The number of stocks making progress fell sharply 
yesterday - just 1161, vs. 1690 falling back. Still, new 
highs were impressive - three times as many as the new lows.

*** Here's another bullish signal - the St. Louis Fed 
reports that cash, as measured by MZM (money of zero 
maturity), is rising at an accelerating rate. MZM often 
seems directly connected to stock prices. When cash 
increases, so do stock prices. Over the last quarter, MZM 
rose at a 5.6% rate.

*** The dollar slipped. Once again, the greenback approached 
its May highs against the euro but could not go all the way. 
A euro is now priced at more than 91 cents. 

*** The battle between the dollar and the euro is probably 
the most important one we're watching. Neither side has much 
room for maneuver - with the euro backed up against the 
rocks of 9% unemployment rates...and the dollar with a sea 
of current account deficits behind it. Neither side can 
raise interest rates easily. So, re-enforcements and retreat 
may be out of the question. It's a fight to the finish. 
Which will win? 

*** You may not know what a "dol" is. I didn't either. But 
it is a unit of pain. Will the "dollar," though, continue to 
be the unit of joy that it has been for so long? We'll see.

*** Steve Leuthold reports that insiders are now selling 
stock at twice the rate of the last two years. And bond 
yields are now 8 times the yield of the S&P - a record. The 
pros, the insiders, the smart investors cannot resist - 
they're moving to the yield.

*** Gold and oil did nothing yesterday. But platinum rose 

*** A price increase in paper came yesterday - with major 
producers announcing an 8% hike. 

*** DR reader VN opines: "Addison is right." [Addison, you 
may recall, informed me that the Daily Reckoning itself was 
proof that the Internet was not increasing productivity, but 
decreasing it. People spent time reading DR instead of 
working.] VN continues: "Productivity is crushed by the 
Internet. Countless hours are left undone, flitted away 
searching for the "Holy Grail" of benefits in a dream-like 
state believing there is a pot of gold just over the 
rainbow, one more click-through and the brass ring will 
appear. The silicon valley yuppies spend 16 hours a day 
working at their computers believing it is efficient when 
actually it is the post-modern version of the seventies when 
executives whined "how can I get any work done when I'm in 
meetings all day?" It's all idea researching and praying the 
buried treasure is just around the next website."

*** Another DR reader, who was kind enough to say he read it 
anyway: "Quite right, Addison is, quite right, indeed. I 
think every day of all the projects to complete, work to do, 
books to finish, to read, but I sit here totally addicted to 
the Daily Reckoning. Sometimes, like today, I sat down to 
read three issues, when I should have been in my vegetable 
garden doing what Mr. Deshais does. This is nuts, I think 
sometimes. Think of the terrible drain on output there!"

*** Does time spent reading really depress output? Should we 

12-step program for DR readers Information may be = not. It takes time. And effort. You have to 
think, as Heisenberg put it, "until your brain hurts." And 
even then, you're almost as likely to be wrong as right.

*** So much for privacy on the Internet. The U.K. government 
has just been granted the power to poke into any email 
message it chooses. "Under the provisions of the RIP bill," 
comes the news report from London, "the U.K. government... 
can demand encryption keys to any and all data 
communications. Those not complying with the order could 
face a prison sentence of two years." 

*** Yesterday was Napoleon's birthday. 

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What manner of men are these? I mean this new race - these 
'Digital Men' whom Ed Yardeni has discovered. 

"I will put my jobs anywhere in the world where the right 
infrastructure is with the right educated workforce, with 
the right supportive government." So declares the CEO of the 
company which is acknowledged as the greatest company in the 
history of mankind, Cisco. 

"I can do that today with the technology we have," said John 
Chambers, Homo Digitalis (and a credit to his race), 
heralding the new super-competitive and footloose economy, 
"but I can't do it socially. I don't know how to manage that 

'Tis a pity. Analog humans get in the way. We are the 
stumbling blocks of "progress"!

But Chambers is optimistic. "You give me a decade and I will 
be able to do it extremely well."

And then, finally, Mr. Chambers identified the all-important 
'it' that we Homo Analogians do not get. "That's what people 
haven't gotten yet," he said, "This is global competition 
like we've never seen before. The Internet is not just a 
nice productive tool. This is about survival."

Today's letter will take a quick look at this "it" - to see 
what it is that we don't get about it. Competition is 
certainly not new. In fact, its presence in the New Era is 
reassuring. The New Era cannot be that different from the 
old one. Whichever era it is, and whether companies are run 
by digital humans or analog ones, competition will force 
down profit margins. That's what competition does.

Long-term Daily Reckoning sufferers may recall that I made 
Mr. Chamber's point nearly a year ago. Referring to the 
intersection between Moore's law - which describes the 
increase in computer processing at an exponential rate - and 
Metcalfe's law - which describes how collective systems, 
such as markets (and the Internet), become more bountiful as 
they grow - I dub, dub, dubbed it territory where Bonner's 
Law ruled. Bonner's Law holds that Moore + Metcalfe = 
creative destruction squared.

It may be presumptuous of me to point this out to Mr. 
Digital Man, but the arrival of turbo charged competition is 
hardly good news for Cisco, Amazon, Qualcomm, Nextel, or any 
other of today's tech and net favorites. 

"The New Era's stocks are far more vulnerable to competition 
that the Old Economy's factories," writes Gary North in his 
latest letter. "A century ago, J.P. Morgan put together the 
United States Steel trust. His consortium bought Carnegie 
Steel, which had kept lowering prices. The trust hoped to 
create a cartel that would call a halt too 'ruinous 
competition.' ...But the price of steel kept falling."

Not only did the price of steel rails fall - so did the 
price of the railroad traffic that ran upon them. "The iron 
horse," says the August 5 issue of Grant's Interest Rate 
Observer, "changed the way people lived and worked, just as 
the Internet-enabled cell phone has done (and continues to 
do). Yet, although wondrous, the service the railroads 
provided soon became a largely undifferentiated commodity."

Railroads were the Big Thing a century ago. So sure were 
investors that they would be a big financial success that, 
as Arthur Stone put it, they "might be expected to absorb 
any ordinary burden of fixed charges [that is, debt] that 
might be placed on a railroad." Even "an extraordinary 
burden could be carried, provided drastic competition could 
be, for the moment alleviated."

But competition was not alleviated. It was aggravated. When 
investors get excited about something they do not stop at 
putting ordinary burdens upon it. Nor do their expectations 
stop at ordinary levels. They go all the way. And they are 
not put off by the heat of competition and the hope of 
fireball success. Instead, they are drawn in - like moths to 
a flame. 

"In a nutshell," Grants summarizes, "the railroads ran up 
more indebtedness than their cash flow could service." 
Hundreds of railroads went belly up. And, again quoting 
Grants, "in 1916, the evident peak of the railroad 
industry's fortunes, [after hundreds of the weaker companies 
had been destroyed in bankruptcy] the combined return on 
equity was 7%."

As Gary North puts it, "New Era companies cannot stop the 
forces of competition. The closer they are to digital 
wealth, the more vulnerable are any expected streams of 
income that they may throw off. The heart of a New Era 
company's profit is its ability to create value for 
consumers while holding off the competition. The greater the 
value created, the faster the competition shows up. There 
are no huge factories to build. There are only digits and 

What was true of steel and railroads is also true, even in a 
new millennium, of routers and switches. Chambers is right. 
The Internet stretches the competitive horizon. But in doing 
so, it speeds up the process of creative destruction in 
which even the best ideas and world's best businesses are 
brought down - first to average levels of growth and 
profitability... and later to destruction. 

Still analog, after all these years.

Bill Bonner
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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Last modified: April 01, 2001

Published By Tulips and Bears LLC