End of the Gildered Age

Are you a villain or just naïve?

Question put to George Gilder by

one of his subscribers.

"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 in today's letter, 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.

More to come...

Bill Bonner

END OF THE GILDERED AGE, II

"Over the next 12 to 18 months, investors will look back at current prices of the leading players [telecoms] and wish that they had bought stock at these prices."

Jack Grubman's State of the Union

March 2001

"It's '1985' 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 'Chicken 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 U.S. 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.

Maybe the promise of the Information Revolution will come true at last. Suddenly, late at night when sensible men have taken to their beds and only techies, terrorists and teenagers are still awake, the world's dark fibers will light up with data. Maybe then, the stock will rise to 7 cents.

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? Here at the Daily Reckoning 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.