'Net Destinies
>Remembrance of bubbles past foreshadows the fate of this one
>
>By Bob Hoye
>
>
>The recent shakiness of the Internet sector should come as no surprise. In
fact, a steep drop in the group would merely make its behavior conform to
the historical norm for all investment booms linked to powerful new
technologies. For centuries, every major advance in communication and
transportation has translated into a marvel to users, a huge stock-market
celebration and, for the economy, significantly lowered costs. But
ultimately, every distinctive innovation matured and was eclipsed by the
next one.
>
>In the late 1600s, turnpike trusts in England displayed the classic
behavior. Existing roads were narrow and rough. The new toll roads had
well-structured roadways wide enough for two wagons to pass. A pack horse
could carry about 250 pounds, while a turnpike could support a two-ton
wagon load pulled by two horses. The turnpike became the New Paradigm.
>
>
>The jump in efficiency with canals was even more impressive. Instead of
250 pounds for a pack horse or two tons for a turnpike, one horse could tow
a barge carrying 50 tons. Turnpike trusts lost their luster as speculators
frantically chased new canal issues.
>
>Of course, the construction time from stock mania to operating success was
measured in years. A new-issue mania erupted in 1792, and subscriptions
could only be entered with the company in the town where the canal was to
start. Newspapers that winter provided entertaining accounts of speculators
wildly galloping through the night in snowstorms to get to the next village
for the start of business.
>
>But as wondrous as they were, canals had their limitations: drought in
summer and ice in winter. Also, their speed was limited because of bank
erosion from faster "packets" designed for passengers and mail.
>
>The next step was monumental. Horse-drawn freight wagons rolling on wooden
rails had long shown efficiencies superior to roads. All that was needed
was a mobile steam engine to launch another revolution in communications.
>
>Naturally, speculators were in full cry well before commercial success.
"Nothing now is heard of but railroads," said The Quarterly, a London
publication, in March 1825. "The daily papers teem with notices of new
lines in every direction; and pamphlets are thrown before the public eye
recommending nothing short of them general throughout the Kingdom."
>
>During 1824 and 1825, prospectuses were issued for 624 railroad companies
and in March of 1825, the famous merchant banker Francis Baring declared
that a gambling mania had seized "upon all classes and was spreading in all
parts of the country."
>
>That bubble topped out in the summer and, ironically, many companies were
in severe speculative liquidation in late October when the first commercial
railroad began operations. In the U.S., railroads didn't reach saturation
until the 1890s, just as the next New Paradigm in transportation was being
developed.
>
>On the communications side, the boom began in the 1860s with the
telegraph. By 1869, undersea cables provided instantaneous communication
among America, England and continental Europe. In good markets, this was
bullish and in bad markets, the telegraph was both praised for bringing
instantaneous help and blamed for spreading instantaneous panic.
>
>The stock ticker (1867) further encouraged a high-tech bubble in 1873.
Then came the telephone-voice instead of Morse Code.
>
>The next distinctive jump in communications, stimulated by World War I,
was radio, which was integral the great financial boom of the 1920s. That
technology was handed off to RCA, whose business plan in 1920 could not
have envisioned network broadcasting of voice and music, phonographs and
talking pictures by 1929. Saturation in the stock market and the industry
were both reached in 1929, and the subsequent contraction was historical.
>
>At the same time, Henry Ford was putting together another New Paradigm,
the mass-produced automobile, but it also reached saturation despite
efforts by other manufacturers to changing automobile styling and
appearance to create continuous obsolescence.
>
>The Internet bubble, however, is different.
>
>Unlike the classic bubbles from 1864 to 1873, it didn't reach maturity
within the usual run of a great financial boom ending with failure in
lesser exchanges. For major exchanges, such as London and New York, this
has added extra time to the high-tech bubble sectors.
>
>Turnpike trusts matured with the South Sea Bubble in 1720 and again
reached saturation in the 1772 bubble. Canals were the new-issue rage in
1792 and grew to saturation with the 1825 Bubble -- just as the first
steam-powered railway started operating.
>
>In the U.S., both Eastern and transcontinental railroads became overbuilt
and under-capitalized with the great financial boom that ended in 1873.
Vanderbilt wisely observed that "building railroads from nowhere to nowhere
at public expense is not a legitimate undertaking."
>
>A shrewd assessment. It nicely sums up the ability of speculators and
promoters to create wonderful visions well ahead of commercial success, as
they are doing now with cyber stocks. The stock and bond markets, as they
did with each of the revolutions in transportation and communications of
the past, are funding the dream again. That serious financial reverses have
followed each innovation has more to do with the nature of financial
bubbles than with the ultimate worth of the breakthrough in technology.
>
>As represented by the Amex Internet index, the gains in market
capitalization would make this the biggest and most dynamic high-tech mania
in financial history. However, the index's plunging by 30% in six weeks is
typical liquidation of suddenly unsupportable speculative positions. A
technical rebound would be likely.
>
>Of course, the break and rebound could be described as technical. But the
fact is, it -- along with the cooling of the market for initial public
offerings and the biggest percentage jump in margin debt in 50 years --
suggests that the Internet sector is becoming saturated.
>
>If past examples are any guide, this has serious implications for the
bubble's longevity. However, again based on history, innovation could be
further inspired by the demand for efficiencies that attend any financial
contraction. So, technology might march on, even if the stock market goes
into a deep decline.
|
