Monday, March 27, 2006

Is the New Economy Real?

The Industry Standard, August 20, 2001

This is the fundamental tenet of the new economy: Buy this gizmo and work smarter, faster, cheaper. Technology is supposed to increase productivity. And in recent years, the boom in technology spending led to a bang in productivity increases -- or so it seemed.

From 1973 to 1995, American productivity rose 1 percent annually; from 1996 to 2000, that rate jumped 180 basis points, to 2.8 percent, according to government data. Most believe the increase came from the adoption of PCs and, more recently, the Internet. "We believe that productivity is the promise of the Internet," Cisco Systems CEO John Chambers told investors last Tuesday. "And we are just beginning to see the paybacks of Internet applications and networking technology."

But the same day Cisco offered those encouraging words (and a discouraging no-growth forecast for the third quarter), government economists, who recalibrated their formulas to better reflect the economy, had a different story to tell. The upshot: The remarkable new-economy productivity increases weren't so remarkable after all.

The Bureau of Labor Statistics' revised data erased gains the new economy supposedly chalked up. The annual revision showed average productivity growth at 2.5 percent from 1996 to 2000, 30 basis points worse than originally reported. To new-economy critics, that suggests the gains were merely the product of an economic boom, where workers were pushed to meet rising demand. In other words, they argue, spending on new technology -- rather than the fruits of that technology itself -- may have fueled the dramatic productivity increases.

"It's fairly striking that the new-economy payoff is not nearly as great as people thought," says Robert Gay, Commerzbank Capital economist. "These revisions tone down the euphoria of the productivity miracle."

Worse still were the Bureau of Economic Analysis' revised gross domestic product figures, which were released the previous week. They showed that after-tax, nonfinancial corporate profit margins between 1998 and 2000 got worse, not better, as originally reported. New-economy critics seized on this, too, suggesting tech investments were like trading a cow for magic beans.

That said, things seem to be getting better. The second quarter productivity came in at a strong 2.5 percent. Although manufacturing still looks weak, technology, through the benefits of massive layoffs and cutbacks in hours worked, managed a strong productivity increase, offering signs that the worst pain in techland is over.

The big question posed by these figures is whether the downward revisions will continue. Until they do, most economists will probably remain in Fed Chief Alan Greenspan's camp, expecting the new economy to fuel productivity growth. "The only way the economy grows is through investment," says economist Alexander Paris of Barrington Research. "This is a much more competitive, capitalistic, price-competitive, global economic environment. The only way to remain competitive is to become more efficient, and we're seeing that the best way to do that is through technology."

But we're also seeing that the lag between technology investment and productivity enhancement is greater than first suspected -- and this dramatic, painful investment slowdown will make further enhancement all the more elusive.

Where'd the New Economy Go?
Revised figures debunk tech-
attributed profit margin gains.4
Original Numbers Revised
1998 7.0% 6.5%
1999 7.5% 6.0%
2000 7.6% 5.9%
Source: Bureau of Economic
Analysis, Nonfinancial Corporate
Business Sector.

Fear And Losing in Las Vegas

Industry Standard, April 9, 2001

On Wall Street, when the going gets tough, the tough get going to Las Vegas -- where the gambling is just as gruesome but the pleasures are finer.

Marcus, a New York venture capitalist, had lost money before, but never like this. The stock market was knocking down his public companies left and right. His private companies, mostly biotechs, were taking investments at lower and lower valuations; Marcus had to double down with each round just to stay in the game.

But that was play money -- his funds' money. Las Vegas was all too real.

When our San Francisco contingent showed up at the Mirage early Thursday evening, Marcus (names have been changed to protect the marriages of the innocent) wasn't there to meet us. All around us, slot machines clanged and vacationers strolled through looking for Siegfried and Roy.

"How bad is Marcus?" someone asked.

"Bad," said Trautman. "It's been six hours of bad." Trautman, a staid New York money manager, looked ready for the weekend, festooned in a Hawaiian shirt, khakis and sandals. But he remained Manhattan-tense.

"How bad is bad?" I asked.

"Fifty," he said.

"Fifty thousand dollars?"

Trautman nodded: "We gotta get him out of there." This was as bad as the Nasdaq.

So began our weekend in Vegas, March Madness 2001. Make no mistake about it, this was not a truly celebratory jaunt. The market had punished these guys so unmercifully, a weekend in Vegas was arranged to diversify the portfolio of their lives. It was forced pleasure.

Why gamble in Vegas if you gamble for a living? Why not? The markets have been so punishing of late, these money managers are feeling destroyed anyway. These guys went on CNBC or CNNfn to talk about bargain-hunting and value investing, but in private they seemed more likely to curl into a fetal position to hide from the pummeling of the market.

Our high rollers stayed in opulent suites (gratis, courtesy of their losing streak at the Mirage), where a cocktail party was held that first night. Arkansas vs. Georgetown was on the television, about 20 men milled about, smoking cigars, drinking, shouting at the game and each other. Seven women, noticeably unburdened by gravity, joined the party, as waiters wheeled in $2,100 worth of Cristal, Ketel One, reserve Cabernets and Chinese food.

"Excuse me, sir." The waiter pulled aside Max, an earnest CEO of a small health care dot-com. He looked something like a responsible party. "Typically, we are accustomed to an 18 percent tip."

Max turned serious and reviewed the check, noting the $100 tip already on the tab. "Eighteen percent on $2,100?" asked Max, amazed. "For wheeling it from the elevator?"

"Yes sir, typically we are accustomed to an 18 percent tip," said the waiter.

"Uh, right," said Max, turning his back. The waiter walked away with his $100.

The next morning, one by one, guys stumbled out of bed and made it to the pool. Eighteen holes were scheduled at Shadow Creek in the afternoon, which left a few hours to soak up some sun and talk about stocks.
Murph, a handsome young New York hedge-fund manager, paged through the stock listings of Investors Business Daily, occasionally reading aloud. "Akamai, 52-week high $219.50; today it's $7.22," he said, sipping a Bloody Mary through a straw. "Inktomi, 52-week high $226.94; today it's $6.87. InfoSpace, 52-week high $112.53 ..."

"I'm never selling my InfoSpace!" we all interrupted in unison. Our friend Chas had infamously uttered these words about InfoSpace a year ago, when he held the stock in size. It now trades at $2.25, and Chas' mantra had become our running joke.

That night, the group splintered; some gambled, some hit the sports book at Caesar's Palace. A couple of the guys went to Club Paradise, a strip joint across from the Hard Rock Hotel and Casino. One of the Club Paradise managers was known to be a friend to Wall Street, and Wall Street a friend to him; he'd made a small fortune in recent years by getting in on IPOs and selling shares when the prices popped up.

Many hours later, we were each sitting behind a pile of chips at the blackjack table. I'd gone from up $500 to down $200 -- real money to me. Hell, that's nearly 100 shares of Inktomi.

"Nothing's what it used to be," said Murph.

"Even hindsight isn't 20-20 anymore," I said.

Within minutes, I was down $300. "What are we doing here, Murph?" I asked. "I mean, don't you guys bet on stocks, not cards?"

"Cory," said Murph, "at least in Vegas the odds are better."

COPYRIGHT 2001 Standard Media International