Google, Dot-Coms, and Recession

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.

Beginning 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. The 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 Google.

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.

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 bust.

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.

Seriussatellite radiosatellitesatellite X-M

Every search was blocked. I got this message:

Google Error

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 software.

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.

Fortunately, 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 Bolser.”

. . . 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.

Everything 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:

Google Error

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 bubble.

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,

AOL 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.

If 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.”

February 6, 2008

Gary 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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