End of the Gildered Age

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"Listen
to the technology," Carver Mead, professor of physics at Caltech
advised his famous student. George Gilder listened carefully. If
he strained his ears enough, he believed he could almost hear the
cosmos speaking. "Buy!" he thought he heard.

Gilder
did not usually buy. Judging from the press reports, he has about
the same interest in picking stocks that we do…and the same fashion
sense. But this Ulysses of the Telecosm had forgotten to plug his
ears or have himself lashed to the mast. Thus, the sirens at Global
Crossing got him…and drove him crazy.

An
article in the July issue of Wired chronicles “The Madness
of King George.” Poor George; another hero of the Boom Age is being
recast as a villain. Here in Great Barrington, Massachusetts, says
the Wired report, "One of the tech world's more famous
— and controversial — prophets is contemplating how he could have
been so right over the past half-dozen years and yet seen everything
turn out so terribly wrong."

"Many
of his partisans are calling for tar and feathers," continues
the report.

The
press is full of “the mighty fallen” stories; Gilder's name appears
on a long list. But we will not join in kicking the poor man when
he is down. Still, since we were practically alone in poking fun
at Gilder two years ago, we feel entitled at least to pick up a
stick and prod the corpse.

"A
new economy is emerging," Gilder had written in his book, Telecosm,
"based on a new sphere of cornucopian radiance – reality unmassed
and unmasked, leaving only the promethean light."

We
didn't know what that sentence meant when we quoted it two years
ago. We still don't. But even back then, when Global Crossing was
still a going concern, we worried that Gilder may have stared into
the telecosm for a little too long.

It
was all very well to blather about how Global Crossing helped to
bring "a new epoch of spirit and faith" with its "majestic
cumulative power, truth, and transcendence of contemporary science
and wealth." But with a P/E ratio of NEGATIVE 130, a man would
be a fool to put money on it, we thought at the time.

To
his credit, but not to his benefit, Gilder put his money where his
mouth was. He did not merely mislead investors, like Grubman, Blodget
and Kozlowski. He misled himself; Gilder bought into everything…Global
Crossing, the New Era, his own publishing business.

In
a better world, maybe things might have gone differently. Gilder
was earnestly blathering before large crowds — 350 people paid $4,000
each to attend his Telecosm conference in 1997…thousands heard
his speeches, for which he earned $50,000 each — and making good
money. In 1999, his list of recommended tech stocks averaged more
than 247% return. And by the end of 2000, his newsletter reached
70,000 readers paying $295 a year. At the peak, a word from Gilder
could push a stock up 50% in a single day.

"For
a few years in a row there, I was the best stock picker in the world,"
says Gilder. "But last year you could say…I was the worst."

Gilder
bought out his publishing partners at the peak. Then, techs crashed…and
suddenly, people weren't interested in attending his conferences
or reading his newsletters; they no longer seemed to care how many
bits you could crowd onto the head of a silicon chip. And then,
in January, came the news that his favorite corporation – the
company he thought would "change the world economy" –
had filed for bankruptcy protection.

"You
can be just fabulously flush one moment, and then the next, you
can't make that last million-dollar payment to your partners, and
there's suddenly a lien on your house…" said Gilder, reflecting
on his fortunes over the last few years.

Gilder,
who got very rich when things were going his way, got very unrich
when they changed direction. Poor George — once rich, but still
famous and still hallucinating — is broke. If he were not –
he should be.

“It's
u20181985' all over again!"

So
declares the headline on a subscription offer from George Gilder's
Technology Report. "Buy the right technology stocks now and
before long your skyrocketing profits will make you think it's 1999
all over again," writes Gilder. "Don't let the u2018Chicken
Littles'…keep you from a second chance to grow rich on today's
best technology!"

Unrepentant.
Unreconstructed. Unbelievable.

Gilder
reminds us that 1985 was not a great year for technology stocks.
People thought tech was "dead." But fearless investors
who bought Intel and Microsoft over the next few years made a fortune.
$20,000 invested in Microsoft, for example, would have turned into
$3.6 million over the next 15 years.

People
who think they need to x-ray each other's shoes are ready to believe
anything — even that the US might be on the threshold of a great
new boom.

Buy
low, sell high. We remind ourselves and you, dear reader, of the
traditional rule. George Gilder couldn't get enough of Global Crossing
when it was trading at 33 times sales and $60 per share. The man
must be beside himself with joy today — now that he can buy as many
shares as he wants for only 6 cents apiece.

Investors
have lost 99.9% of their money already. Can they lose more? The
shares are relatively cheap; an analyst would have to look carefully
to find out whether or not they are absolutely cheap. After all,
what is all that glass fiber really worth? Perhaps, when the debts
are settled…Global Crossing might still be in business when it
gets out of the bankruptcy courts.

We
come back again to George Gilder today, dear reader, not to praise
him, nor to bury him, but only to tease him. For Gilder seems like
a decent sort, after all. He put his money where his mouth was…and
lost it fair and square.

Besides,
every revolution needs its intellectuals, its profiteers and its
executioners. Gilder's role was to justify the dreams of masses,
helping persuade the lumpeninvestoriat that they could get rich
buying stocks in technology they couldn't possibly understand. For
what was talk of gigabits of photons flying over glass fiber and
multiplexing, pulsating cransits…other than the information age's
answer to Marxist claptrap about the class struggle, the proletariat,
and dialectical materialism?

And
who can blame Gilder — or Marx — for the excesses of their disciples,
bowdlerizers and exploiters? Gilder was just thinking, after all.
Who can fault a man for that? We rather admire it, not for its utility,
of course, but for its rarity.

As
in every revolution, the real mischief was done by the small cadre
of cynical gun runners who followed in Gilder's visionary footsteps.

Jack
Grubman, for example, did what other Wall Streeters had always done
— he found a way to make revolution pay off. In 1917, when the Bolsheviks
needed money and ammunition, Wall Street sent over a team of 16
financiers (attached to a group of 15 Red Cross volunteers). Like
Armand Hammer's father, who provided the communists with “supplies,”
at a profit, of course, Grubman hustled stocks to investors — ones
that would later blow up. The traffic made Grubman a rich man; he
earned as much as $20 million per year as Salomon Smith Barney's
telecom analyst. And unlike Gilder, he wasn't dizzy enough to believe
in the cause — he realized it was just a way to separate the fools
from their money. Grubman didn't buy telecom stocks — he sold them.

According
to press reports, Grubman worked closely with Global Crossing's
chairman, Gary Winnick…perhaps advising him on his stock selections.
"Winnick used to walk around the office saying he owned Jack
Grubman…" said a former employee, quoted in Fortune.
"Winnick and his cronies are arguably the biggest group of
greedheads in an era of fabled excess," continues the Fortune
article.

Winnick,
like Grubman, made money on Global Crossing — again, by selling
the stock, not by buying it. When the telecoms blew up it cost investors
$2.5 trillion in market value. But Winnick walked away with $730
million before the bomb detonated.

Poor
Klaus "Patsy" Reinisch wasn't so lucky. A refugee from
WWII Europe, Mr. Reinisch retired from a New York city job and invested
some of his $300,000 in savings in Global Crossing, following Mr.
Grubman's advice. Somehow, Mr. Grubman forgot to tell him when to
sell.

Instead,
almost exactly a year ago, Grubman wrote: "There are historic
opportunities to buy world-class assets such as Global Crossing
that are evolving into world-class operating businesses at compelling
value." On that day, Global Crossing shares sold for $7.68.
But if they were compelling then, you'd think the shares would be
absolutely irresistible today. Alas, after the company went bankrupt
in January, Grubman – who owns a $6 million townhouse in Manhattan,
with neither mortgage nor lien – simply "discontinued
coverage" of the stock.

All
of this may not mean much to Gilder. He's still staring at the skies,
thinking about gigabits, and scribbling away…while creditors pull
up in front of his house and wonder how much they could get for
it.

Is
it 1985 all over again? Well, not likely. In 1985, it was “morning
in America.” The Fed funds rate was near 8% – with plenty of room
to come down — and the average P/E was near 15 — with plenty of
room to go up. No matter how many gigabits Gilder thinks he can
squish through a strand of glass, stocks will have a very hard time
going up in the years ahead. Fed funds will find little room to
go down.

June
22, 2002

Bill
Bonner [send
him mail
] is the president and CEO of Agora Publishing
and the author of the daily e-mail The Daily Reckoning. Click
here for your free subscription.

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