The Ubiquitous Lies

The Coming Economic Collapse: How You can Thrive When Oil Costs $200 a Barrel
by Stephen Leeb, PhD., Glen Strathy

(Page 4 of 4)

Clearly, much of what the experts said about technology stocks was inaccurate. However, while it might be tempting to create a conspiracy theory to account for what happened, the falsehoods were so widespread that it is impossible to blame a deliberate effort by any one group.

On the one hand, journalism and the media have a traditional obligation to provide accurate and unbiased reporting. For that reason, most people are inclined to trust what they see on television and in the newspapers. During the tech bubble, however, the media appeared to abandon their integrity, as they presented endlessly bullish reports that seemed expressly intended to encourage people to buy stocks. CNBC, for instance, had a birthday cake every time the NASDAQ index went up another thousand points. Thomas Friedman, the well-respected New York Times columnist, unquestioningly accepted the claim by John Chambers, CEO of Cisco Systems, that Cisco would be front and center in solving the country's educational problems.

George Gilder, a would-be prophet for the new religion of technology, predicted that Internet traffic would "soar a thousandfold every three to five years, more than a millionfold in a decade." Certainly, Internet use will increase as computers spread throughout the developing world. But Gilder makes no mention of the fact that Internet expansion will eventually run into some very fixed limits - such as the number of people in the world, the availability of resources, and the amount of time the average person will want to spend online.

However, the media were not solely to blame. Wall Street analysts are supposed to make objective assessments of companies for the aid of investors. Yet they abandoned their objectivity as well. Analysts presented an unending stream of bullish forecasts to the public through television appearances, newspaper interviews, and other media. For major technology stocks, growth rates of 30 percent or more were considered sustainable, even though they defied rational analysis. And Wall Street continued issuing bullish forecasts right up until the bubble popped.

For instance, as late as July 2000, many Wall Street firms still rated Nortel Networks a "strong buy." Canadian Imperial Bank of Commerce (CIBC) estimated Nortel's earnings would grow by 30-35 percent in 2001, and that its stock would reach $110 a share. In the months that followed, as many investors know painfully well, Nortel shares went into free fall. Today, they trade at just over $3.

In September 2000, Salomon Smith Barney raised its target price on shares in Juniper Networks to $310. Less than a year later, they were trading at $25, and they have not budged much since.

There were predictions that Cisco, then a company with about $12 billion in revenues, would reach a market capitalization of a trillion dollars, and that it could support a price/earnings ratio of 105 (at present, its P/E ratio is just over 20, and its share price has fallen from $70 to less than $18).

Our favorite was a projection that Qualcomm stock would reach $1,000. For that to happen, the company would have to sell more cell phones - indeed, many more cell phones - each year by the beginning of the next decade than there were men, women, and children on the planet. It was an outrageous prediction, and even more outrageous was that investors bought it hook, line, and sinker.

Even more astonishing, if technology had inspired mass delusion and religious fervor among Wall Street analysts and the media, the executives who ran technology companies - who had firsthand knowledge of the industry - were as unrealistically bullish as the rest. As a result, massive amounts of capital expenditure went into everything from telephone lines to fabrication plants to server farms. Underlying these enormous building programs was the undying belief that demand for tech would grow by 30 percent a year for an indefinite period.

Over ten years, a compound growth rate of 30 percent would have meant the technology industry would experience a nearly fourteen-fold gain. It implied the NASDAQ would reach a level of 70,000. Exciting, if it were true. But certainly not realistic.

Of course, there was some degree of outright dishonesty. With so much money pouring into technology and the stock market in general, the temptations for morally indifferent people in positions of power were too great to resist. A prime example of such corruption is the Enron debacle, which epitomized the false promises that were rampant.

In the tech bubble, most so-called experts bought into the delusion that technology stocks would soar to unprecedented heights. That attitude nearly destroyed the economy. Today, an equally false attitude states that oil prices will stay perpetually low. Just as, in the tech bubble, the experts kept reinforcing the delusion even as stock prices were falling, so today, as energy prices are hitting new highs, experts continue to reiterate the false claim that prices will soon return to "normal" (meaning the low level that prevailed in the 1990s).

The oil delusion is a mirror image of the technology delusion. While almost everyone in 1999 believed the bull market in technology would endure, almost everyone today believes the bull market in oil is temporary. Yet the consequence of today's delusion may be a far greater disaster than the tech crash. For, as we will see, history is littered with the ashes of societies that refused to cope with similar shortfalls in vital resources. If we wish to avoid their fate, we must understand what causes both crises and the preceding climate of denial. As both investors and citizens, we must resist herd mentality, face the growing energy crisis squarely, and form a plan to deal with it in time.

Copyright © 2006 by Stephen Leeb

About the Author

Stephen Leeb is the president of Leeb Capital Management and editor of the prestigious newsletter The Complete Investor. Renowned for finishing among the leaders in the Wall Street Journal's and Forbes's annual stock-picking contests, Leeb is the author of four previous books. His wife and longtime collaborator, Donna Leeb, has a diversified background in business writing and holds a master's degree in journalism from Columbia University.