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The "New" Economy??
by Professor von Braun

March 12th, 2000

Ever since the Nasdaq started to outperform the DJIA we have been hearing, by way of explanation of this absurdity, about the new economy and the old economy. This latest "catch" phrase is being used increasingly by the new age financial news presenters. But what does it actually mean?

We are of course living in the age of "buzz" words, were certain phrases are used in presentations to make everybody feel good. The Clinton administration has perfected this to a degree we have not seen before. The British Prime Minister, Tony Blair has also gotten good at this technique. Anybody watching the Presidential candidates perform would have noticed the use of key word phrases in every speech, often repeated several times. Some of these keyword phrases are repeated so often that the term ad nauseum comes to mind.

Now we have the "feel good" phrases being used to explain why the DJIA goes down and the Nasdaq goes up. It's the new economy of course. When Proctor & Gamble announces that its earnings will be less than analysts' predictions, its share price gets trashed. This event was explained as an old economy stock not performing in the new economy environment. Shame on you Mr. Proctor and Mr. Gamble.

But before we all rush off and embrace this new economy that seems to have appeared out of nowhere, we should take a look at what it consists of. Why has the Nasdaq, the apparent home for the new economy's members, stock prices outperformed the DJIA and the Dow Jones transport index?

To be a member of the new economy it seems that certain requirements are necessary. To begin with you have to be part of the high tech age, either as a contributor manufacturing a required portion, or you need to be a dot com, have a website and provide some service that used to be obtained from somewhere else. This "somewhere else" obviously had a location in the old economy. In case most of you have not noticed, according to the new economists, main street USA has been moved and now resides just behind your computer screen.

Once you meet the basic requirements for membership the world is your oyster as they say. In the days of the old economy companies were supposed to do certain things, like produce something tangible, sell it at a profit, pay dividends, produce only one set of quarterly reports and contribute to the local economy by employing people, who in turn spent their income mostly within the local community.

In the new economy companies are not required to make profits. All they are required to do is provide the illusion of dubious potential profitability. To encourage people to use their services they even sell things at a loss. For most of them the greater the turnover, the greater the loss actually is. But these new age bubblevision presenters regard this as good. Reported losses are rewarded with rocketing share prices.

Rocketing share prices are very important to the new economy. It could even be said that a rising share price is the most important ingredient. We also have the phrase "alternative" financing being used as part of the "explanations" of the new economy's performance. I suspect this really means find more "greater fools", an activity that may be becoming increasingly difficult to do.

After all the new economy is where the action is. The new age investors have of course, since mid-January, been selling their old economy stocks as quickly as possible (which is why the DJIA is down from its peak) so they can partake in the new economy boom, (which is why the Nasdaq keeps going up). The ratios of mutual fund assets now heavily favor the new economy "darlings" and suggest that most mutual fund managers have subscribed to the new economy club as well. Out with the old, in with new?

The shift has been dramatic to say the least. A chart of the Nasdaq's recent performance now looks like it came from NASA and has something to do with the next Mars space probe.

Another ingredient of the new economy is the blessing of the chief wizard, Sir Aldot Com. This was given (and gratefully received) in a speech by his Lordship at a recent new technology conference, which itself seemed to resemble a born again revivalist meeting.

We are told that all old economy participants will need to convert to the new economy way of doing business. Examples are given of some that have, for instance General Motors now sells autos via its website. No doubt auto dealers are thrilled with this latest development. Caterpillar will obviously have a tough time ahead as the demand from internet users for D8 bulldozers, road graders and excavators may not be all that great. Boeing may have the same problem selling 747's. The new economy apparently needs little by way of actual infrastructure, preferring to deal with virtual reality, which it can, apparently, create at will.

Old regulated accounting standards are no longer deemed to be necessary either. Quarterly reports filed with the SEC are not the same as the ones issued to new economy analysts. A new procedure has allowed some new economy companies to produce figures that are in line with analyst's forecasts. Perfect.

We even have a money supply that can no longer be defined. Sir Aldot Com, the chief wizard and lead definer, admitted this himself. Old money is not a requirement of the new economy it seems. That in and of itself is interesting. How, one could ask, do you practice the art of value investing when you don't have a definition of the unit you are using to invest with? Any comments Mr. Buffet? Or are you too busy appearing on television game shows these days?

Several years ago I attended an air show. Apart from all the latest planes, both commercial and military, there was an exhibition of model planes put on by a group of enthusiasts. The commentator of the day was explaining to the crowd how the latest technology allowed the owners of these craft to exert perfect control over the flight paths. We witnessed one such craft perform a series of rolls, loop de loops and, as it began a dive towards the ground, once again the commentator informed us of the superb control the operator had. The small craft promptly dived into the earth and shattered into a thousand pieces. Obviously the commentator and the owner of that particular craft were not communicating with each other at the time.

The promoters of the new economy, fresh from their latest "buzzword" convention and armed with renewed employment contracts, need to remember that the old economy is the one that is responsible for feeding them, housing them and transporting them around their imaginary universe. Trashing the old economy while extolling the virtues of the new may bring about a result not too dissimilar as to what happened to the model plane.

Alternatively, it may be time to wake the captain and inform him that the good ship lollipop is taking on water.

The Prof can be contacted by email at

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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