Google, Dot-Coms, and Recession

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As you may
know, the share price of Google is in free-fall. In November, it
was $750. Today, it’s around $500.

Watching the
shape of Google’s share price, I am reminded of the dot-com boom,
1995—2000. Everyone was going to get rich in 1999. It was a
new era. The price/earnings ratio on the NASDAQ hit 206 in December.
Normally, it should be somewhere between 7 and 15. Not to worry!
It was a new era.

I told my
readers to get out in February and again in March of 2000.

in March, 2000, the stock markets started moving down. All of them
fell in March, but the NASDAQ fell first, fastest, and farthest:
from 5049 (closing price) on March 10 to just over 1,000 in 2003.
ten-year NASDAQ chart
is a lasting testimony to mania, hype,
and the Federal Reserve’s inflationary policies.

Google started
at $100 in August, 2005. It went to $750 last November. Everyone
was going to get rich. It was a new era. Look
at the chart

Even with
this collapse of one-third in three months, its price/earnings ratio
is still 39, over twice as high as the S&P 500. (The S&P is overpriced,
as we shall see as 2008 unfolds.)

The theory
of random walk pricing says that the market price of a stock at
any given time is the best consensus among the best and the brightest
that can be achieved. If true — and I don’t think it is —
then the best minds in November were not well informed regarding

I told my
website’s subscribers to sell the S&P 500 short on November 5. I
was apparently not a major player among the best and the brightest.


In times of
central bank inflation, companies are lured into the debt markets.
Credit is cheap due to the central bank’s policies of fiat money
creation. So, companies use borrowed money to pyramid their operations.

Mergers and
acquisitions become very popular. A company buys up other companies,
related and unrelated, to add to its customer base. It gets into
new areas of production. It justifies this in the name of synergy.

noun. “Mixed apples and oranges that subsequently get squeezed.”

Google has
been acquiring companies like mad. Its big purchase was YouTube.
YouTube had been created by a couple of 20-somethings who wanted
a way to post their home videos on the Web. About 18 months later,
Google paid them (and their venture capitalist backer) $1.6 billion.
Google did this despite the fact that its rival video service, which
was older, Google Video, had been a financial flop.

Maybe this
purchase will work out one of these days, Real Soon Now. But the
company’s share price says otherwise.

The period
of synergy ends when the central bank reverses its monetary policy.
Then, the boom created by the policy of fiat money turns into a

The Federal
Reserve System reversed policy in February, 2006, the month that
Bernanke replaced Greenspan. It tightened money. The result was
the subprime mortgage crisis in August of 2007. That was the shot
fired across the bow of the stock market. But buyers of Google’s
stock apparently did not get the memo. Google stock shot up from
$500 to $750 in the next three months. Then it reversed back to
$500 in the next three months. I guess we could call this a head
and shoulders pattern. It sure looks flaky to me.


Google’s search
engine has been suffering from a major technological breakdown.
Maybe you have noticed. When you search, you get a “sorry” warning.
You are required to type into an empty box letters that are displayed
in another box. This procedure looks like a spam-blocking program.

I started
noticing this about a month ago. It has increased.

On February
7, at 5:08 a.m., CST, I did four searches on Google.

satellite radio
satellite X-M

Every search
was blocked. I
got this message

We’re sorry…
… but your query looks similar to automated requests from a
computer virus or spyware application. To protect our users, we
can’t process your request right now.

We’ll restore
your access as quickly as possible, so try again soon. In the
meantime, if you suspect that your computer or network has been
infected, you might want to run a virus checker or spyware remover
to make sure that your systems are free of viruses and other spurious

If you’re
continually receiving this error, you may be able to resolve the
problem by deleting your Google cookie and revisiting Google.
For browser-specific instructions, please consult your browser’s
online support center.

We apologize
for the inconvenience, and hope we’ll see you again on Google.

Note this
statement from this “sorry” post: “If you’re continually receiving
this error, you may be able to resolve the problem by deleting your
Google cookie and revisiting Google.”

Google offers
the technicians’ universal solution. “We’ve got a problem. It’s
all your fault. Fix it.”

Techies are
generally communications idiots. Really. They are. They think “everyone
knows how to do this.” Hardly anyone knows how. Never tell a person
to alter a computer setting without telling him how. Provide a click-through
to a page that offers instructions — yes, even for more than
one browser. A YouTube screencast is called for. Google owns YouTube
and Google Video. You might think that a Google employee would understand
the power of a screencast. But no. He tells us to use a procedure
in some unidentified help list.

Why would
a senior manager assign the task of writing the “Bug off, bozo”
page to some kid with no marketing experience and no ability to
present a good image to users? I have a suggestion: because the
whole outfit is run by techies. It’s techies all the way up.

I have a program on my computer that deletes the Google cookie with
one click: G-Zapper.
It used to be freeware. It’s $30 these days, but you can download
a trial version.

So, I deleted
the Google cookie. This is bad for Google’s marketing strategy.
It can’t track me now. It must start over. The search worked for
30 minutes. Then I got the same message when searching for “Mike

. . your query looks similar to automated requests from a computer
virus or spyware application.

Does this
mean that Google has been flooded with search requests for “Mike
Bolser”? If so, Mr. Bolser is not getting the number of Google hits
he deserves.

The search
engine is Google’s core business, and it has a major flaw. It requires
that you to type in a code to do every search. The code letters
are in “giggling teenage girl’s diary cutesy cursive.” Sometimes
I cannot read them.

screams to competitors: “Come and get us.” Google has 50% of the
market. Soon, it will be 40%. Companies must fight for market share.
Google is coasting on its laurels.

If I owned
Google stock, I would sell it.

Here is the
message Google ought to provide for its shareholders:

We’re sorry…
… but your investment looks similar to a dot-com investment
in mid-2000. To protect your investment, sell short. We can’t
process your request right now.

We’ll restore
performance as quickly as possible, so buy again soon. In the
meantime, if you suspect that your investment return has been
infected, you might want to run a P/E checker or dog stocks remover
to make sure that your portfolio is free of companies filled with
technicians without solutions and other spurious employees.

If you’re
continually receiving this notice, you may be able to resolve
the problem by firing the financial advisor who put you into Google
in the first place. For advisor-removal specific instructions,
please consult your CPA.

We apologize
for the inconvenience, and hope we’ll see you again on Google.


The entire
U.S. economy was sucked into merger and acquisition mode by Greenspan’s
FED. Beginning in mid-2000, the FED began re-inflating. It lowered
the target Federal Funds rate from 6% to 1% over the next four years.
Nothing like this percentage reduction had ever been attempted by
the FED. The result was a stock market recovery in 2003 — two
years after the recession began. The other result was the housing

The FED did
it. We need not go looking for corporate scapegoats in high places.
Understand, I’m not saying that boards of directors and shareholders
shouldn’t go looking for scapegoats in high places. I recommend
cleaning house on the whole lot of them. They could have told their
boards in 2003, “This boom is a FED-created bubble, and we had better
stay out of the game. No mergers. No acquisitions. No pooling of
financial assets. No slicing and dicing. Our motto should be ‘Stodgy
Is Good!’ This way, our company will survive the bloodletting that
is sure to follow.” All I am saying is that they were responding
to false signals regarding the cost of capital. Greenspan’s FED
sent out those false signals.

We are entering
the corporate slice and dice stage, when the bad purchases made
during the boom phase threaten to drag down the company in a wave
of confusion, red ink, and mismanagement. Call it the unmerger and
disacquisition stage.

They overpaid
in the boom phase. They will undersell in the bust phase. At some
point, companies with cash will be able to buy some real bargains
at fire sale prices. But a survivor with cash or credit lines will
have survived because management paid close attention to the core
business. The buyers in a bust phase buy assets related to their
core business. They are in a position to distinguish a bargain from
a sinking subsidiary that has hit an iceberg.

This is how
you beat the FED. You buy from distressed sellers in the bust phase,
but only when the asset is part of your long-term business plan,
a plan based on specialized services offered to specific customers.

In short,
stick to your knitting.


The recession
phase of the business cycle exposes the extent of the bad decisions.
The cost of capital in relation to the net revenues generated was
too high. The market assesses the new value of this capital. It
is lower than managers believed when they made the acquisition.

The classic
case of this in recent years was the merger of AOL and Time Warner.
Time Warner stock peaked in December, 1999, at $96. It immediately
started falling. Within weeks, it was down to 50. I wrote in my
February issue of Remnant Review,
has to keep people by means of its non-Web services and features
— suspiciously like the local bulletin boards of the late 1980’s
and early 1990’s. But the power of the Web is so great that it overwhelms
anything resembling a bulletin board. The sense of community necessary
to sustain 40 million customers’ interest is difficult to achieve,
precisely because the customer base is so large. Breaking AOL down
into sub-communities is the obvious way to go, but AOL has no powerful
advantage over Yahoo! or other “Web portals.” It has no advantage
at all over specific Web sites — millions of them today —
that offer very tightly focused information and chat forums.
It was clear to
me that the company had no long-term economic model. For AOL to buy
Time Warner was preposterous: Jonah swallowing the whale. So it proved
to be. The stock fell to $10 in mid-2002. It is about $16 today. The
chart serves as a monument
— or tombstone — to mergers
and acquisitions in the bust phase.

Ted Turner
went along with this. He had built an empire in the period of the
stock market boom: August, 1982 to March, 2000. It was clearly over
for Time Warner by March 1, weeks before the NASDAQ peaked. It was
the bellwether of bad mergers. Turner did not see what was about
to happen to his empire. For all his skills as an entrepreneur during
the boom phase, Turner got blindsided just before the bust phase
began for the stock market.

If I could
see it coming, and he couldn’t, this testifies to the blindness
that central bank policies produces in the lives of entrepreneurs.
It was not that I was so smart. I just had a major advantage over
Turner. I had read, understood, and believed Ludwig von Mises’ theory
of the business cycle, which is the result of bad central-banking
policies. I have written a booklet on this. You
can download it here.


We are going
to see a great deal of economic pain in 2008. It has already begun.

you want to minimize it, don’t imitate Google. Pay attention to
your core business. Pay attention to the demands of your customers.
Don’t say “sorry,” and tell them to fix your problems.

If you are
salaried, pay attention to the needs of your department. When it
comes time to hand out pink slips, you had better be on the short
list of protected employees: “Too productive to fire.”

6, 2008

North [send him mail]
is the author of Mises
on Money
. Visit
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible

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