Virtual tulipomania in New York City

The tulips planted all along Park Avenue were in full bloom in a kaleidoscope of colors as I read that the share price of one particular firm reached the skies in New York. Both things conspired to remind me of a book by John Kenneth Galbraith, A Short History of Financial Euphoria.

In the chapter “Tulipomania,” we read: “Speculation, it has been noted, comes when popular imagination settles on something seemingly new in the field of commerce or finance.” “. . . by 1636, a bulb of no previously apparent worth might be exchanged for ‘a new carriage, two grey horses and a complete harness.’” The value of one particular bulb, the Semper Augustus, would be the equivalent of US$ 50,000 at today’s prices! Everyone, from nobles to servants, speculated, cashing in their property and investing in flowers. Capital inflow inundated Holland. “In 1637, came the end.”

Now, April 1999, in New York, the share price of a company which initiated operations in 1995, has never registered a profit, has (according to management itself) no short-term possibility of doing so either, does not possess any major tangible assets, and has issued a management report in accordance to SEC rules and regulations in which it makes known a series of risks that would make any investor’s hair stand on end, trades at US$ 200 per share, up from US$ 10, only a year ago.

Evidently, the company that I believe has joined the rank and files of the “tulipomanias” sells books through Internet and to conclude as much it should suffice to analyze some of the risks the firm itself has enumerated in various reports.

The Internet is above all else a medium for the transfer of information and in this context, developing technology known as “shopping agents” will permit clients to quickly compare one company’s prices to those of its competition. This would seem to presage an eventual but fierce price war, an environment that is not exactly the breeding ground for profits that back the market valuation we are observing. The low cost of entry and the probability that sooner or later some efforts will be aimed at prohibiting any monopolistic controls of the Web are also factors which can make the advantages created by an early incursion disappear in a flash. 

All this has nothing to do with the company itself and all that I’ve read about it makes me believe it is well managed and that it most probably has a brilliant future. The problem lies solely in the market’s irrational expectations. The company reported in 1998 total sales of US$ 610 million, a net loss of US$ 124 million and a book value (assets less liabilities) as of the 31st of December 1998 of only US$ 139 million. Today’s market value of the firm, equivalent to the share price times the amount of the shares issued surpasses US$ 33 billion.

Let us now have a look at its potential. Total book sales in the United States during 1998 were worth close to US$ 23 billion. If we assume that a profit margin of 8% would be reasonable, this would mean that there would be US$ 1.8 billion available to reimburse capital invested, both equity as well as debt financing. If we then, for the sake of simplicity assume an overall return of 10%, we can estimate the global value of companies that sell books in the United States in the order of US$ 18 billion. If our company that today commands less than 3% of market share eventually attains a whooping 20%, its value could then reach US$ 3.6 billion. Now double that to take into account the rest of the world and then double that again to take into account of its declared intention of adding other products to its line of products, and we will still reach only about a third of its current value.

As this Financial Euphoria seems to have infected many firms associated with the Internet, I conclude that this must be a modern version of the speculative Dutch tulips. I also conclude that both these and the real tulips thrive in New York in spring.

From The Daily Journal, Caracas, April 30, 1999

PS. And I gave this article the following introduction in my 2006 book  "Voice and Noise"

My book, Amazon’s profits and the value of its shares

I am including below “Virtual Tulipomania in New York City,” an article that I wrote in April 1999 for the following reasons:

When I started to write this book in 2004, I fretted over having to invest tremendous efforts in getting a publisher interested and, if successful, then having to negotiate lengthily in order to defend my copyright interests. Then I discovered the existence of some new publishing facilities that allow a rookie book writer like me to outsource. As these new facilities print the book “on demand,” there is no need to invest piles of money in printing too many copies that would reflect the author’s general sense of optimism and that could only later end up as tombstones in memory of shattered dreams. Well, it so happens that the new-wave publisher I chose was recently acquired by Amazon and as the article has to do with that company, I also found the perfect excuse to include it … for a very worthy reason … that of shameless self-promotion.

As a financial analyst (which is what an economist frequently does for a living) I am especially proud of this article since it evidences how I managed and dared to question the whole dot.com boom, at its peak, just by doing some thinking on my own. Of course, now, with the profits Amazon should expect from its new investment … and my book, I guess that once again the sky should be the limit for them.

One brief note though about these new “on demand” one-at-a-time printing methods. With them it seems that what we know as “editions” first, second, third, will in fact disappear and this might negatively impact book collectors and rare-book stores. Will they disappear?

Not necessarily, since this method could make collection even more challenging as you could view each individual book as an individual edition and therefore be able to improve your collection by moving up few slots at the time, perhaps from the 12.834th to the 235th edition. Whatever, just in case, you better hedge your bets and rush out and buy a second copy of an early edition of this book. 

Given that it is so easy and inexpensive to make changes to the book by using this publishing system, we could also have an incredible amount of different editions which might make debates about the book much more interesting—in one, I would write in yellow, and in another, in blue, and so I might finally reach the green I am looking for— by seeding confusion. Then rare-book stores would have unlimited access to rarities.

A New English Language Empire

I have often harbored reservations about the possibility of success of the European Union. In particular my worry is about its new currency, the euro, the bases of which I believe are rather weak. I recently heard that there is still much debate going on which, even when new to me, leads me to rethink many of today’s geopolitical aspects.

I refer to the thesis that the United Kingdom is finding it extremely difficult to get used to the idea that it must forgo much of its autonomy in favor of an entity formed by other nations which are geographically close, but still very mystifying, and therefore could possibly abandon the idea altogether, forging instead an alliance with the English speaking world. Among the sponsors of this line of thought, I find the Canadian newspaper owner Conrad Black and the well renowned historian Paul Johnson.

Having observed how much time and effort the UK and the United States spend coordinating their foreign policy and considering how tempting it must be to unite cultures of the same origin that speak the same language and share the same legal system into one global superpower, it should not really be surprising if we were all of a sudden presented with the creation of an English Language Union, or ELU. Considering the recent impact of Shakespeare in Hollywood it might be a lot closer than we think.

The possible implications of a NAFTA expanded to include the UK plus perhaps even other nations such as Australia and New Zealand (both disillusioned by the Asian crisis) lead me to reflect on other issues in addition to the importance of the English language. The first issue that occurs to me is that any pact of this sort would effectively wipe out any aspiration Europe may nurture of going head to head with the United States unless it undertakes internal expansion (Russia or its former satellites, maybe?).

Another important thought is the fact that in a globalized and computerized world, geographical proximity seems to be losing its importance. The truth is that once you have incurred the cost of loading merchandise on an airplane or ship, the marginal cost of transporting it a few thousand miles further is not really that great. This could be of importance to Venezuela, especially when it owns so much oil.

The Andean Pact, is basically a commercial agreement with Colombia. This makes a lot of sense if we are trying to create bigger markets with their corresponding economies of scale for our respective industrialists. It does not make much sense as far as real complementary economics are concerned.

It is possible that Venezuela, while not abandoning its policy of creating larger markets, should be intensifying its efforts of negotiating commercial agreements with countries very different from itself, in which we can maintain our competitive advantages. Let me explain.

While oil prices remain low, our currency will be sufficiently weak so as to allow industries heavily dependent on labor, such as the textile confection sector to compete with Colombia. Evidently, if oil prices were to spike upwards, the bolívar would become stronger and would make survival of industries such as these difficult, obligating the country to impose protective duties.

If, however, our agreements would be based more on real complementary issues and economics, then it would be possible to create sustainable results. A simple theoretical example would be a negotiation of an commercial agreement with one of the Nordic states, with a wintry climate, allowing them preferential access to our market, with the establishment of the beaches of Margarita as the preferred winter tourist attraction for its citizens. Chile, for one, has made a lot of this, in for instance promoting fruit exports, taking advantage of the fact that their seasons are opposite to those of the Northern Hemisphere.

There is no doubt that we are in a fluid and rapidly changing environment in which it is of extreme importance to be alert to the possibilities that are presented to us. Personally, I feel that Venezuela should not hurry into commercial agreements, simply because it is the thing to do, the flavor of the month. What’s more, with the sole exception of Colombia, with which we share a permeable border which in turn makes the negotiation of agreements a must, I believe Venezuela has not signed one single agreement in which it comes out ahead in practical terms as a country.

Published in The Daily Journal, Caracas, April 1999

PS. Oops! Does Brexit now reignite this alternative? How much should the English language proprietors now charge the remainder EU for the use of it… so as to avoid a war between Germans, French and Spaniards on which should now de facto be its official language? Or will EU go for Esperanto?

Some –isms are still alive and kicking

I recently read an article published in The Daily Journal by a frequent contributor to these pages, Michael Rowan. I do not know Mr. Rowan, but I often envy his capacity for analysis and of expression. The article in question was titled “An End to the Age of Isms”, and it contained a few phrases which compel me to reply.

Specifically, Mr. Rowan wrote: “Yet there are still pockets of resistance to market democracy in the world. There are the nationalists who believe in protectionism and are afraid of globalization, ..... . In those places, one finds the old media, propaganda, hierarchies and also, deeply entrenched poverty. That is their tragedy. The world has passed them by ... . What work is freedom. Freedom in the market .... . For those with the responsibility of writing a new Constitution for Venezuela, this is the truth which can set them, and their country, free at last.”

I cannot agree more with the concept of freedom as expounded by Mr. Rowan in his article. However, when he attempts to segment or divide the world into right and wrong, into those that behave and those that sin, I have no other option as a Venezuelan but to cry “Foul”.

I do not believe there is any reason to, either directly or indirectly, label Venezuela as a country of protectionists afraid of globalization. On the contrary, Venezuela’s borders, both commercial as well as cultural, are among the most permeable and open in the world.

There are no limits as to what goods and services can be imported into the country. On top of this, the limited duties imposed are more than often not even paid at the ports of entry. In addition, few could question the eagerness and openness with which Venezuelans accept any type of external influence.

Champagne is charged a duty of 26%, quasi-monopolistic services such as those of international auditors and law firms are marketed with ease, patent and intellectual property right agreements are applied quickly, as in the case of laboratories, and finally, our early morning radio broadcasts allow us to hear all types of debate about matters typical of the globalized world such as oral sex.

What does Venezuela obtain in return for this extraordinarily good behavior as a citizen of the globalized world?

We know very well that the worth of something is what the consumer is willing to ultimately pay for it. Today, for each 100 units a European consumer pays for a tank of gasoline, the producer of the latter receives 10 units, the distributor 5 units and the taxman of the country it is pumped in receives 85 units. The fact that the taxman receives 85 units and the producer only 10 units means they are applying an effective commercial duty or tax of 850%.

The experts, very able at managing the percentages in order to defend their interests, frequently refer to taxes on oil as being “only 85%” and never as a duty on the product. If, for example, we were talking about a Mercedes Benz which goes for US$ 100,000, I am sure Daimler Benz would not be talking about “only 85%” if this sale would be broken down into a sales commission of US$ 5,000, a payment to the manufacturer of US$ 10,000 and a transfer to the taxman of US$ 85,000.

It is not true that prices of oil are low, since for the consumer the prices have never been as high. Our only problem as a producing nation is that on the income side, we have never received less. The taxmen in the consumer nations receive more, a lot more, income from each barrel of oil commercialized than the producer of the same.

This is what Venezuela got. A system of free trade that only pays it a meager 10% of the value of the non-renewable asset that it liquidates. Just like any Little Red Riding Hood, we readily swallow the stories about the freedom of markets when in reality they hide the evil, bad wolf of protectionism, environmentalism and fiscalism, three “isms” that are very much alive and kicking, thank you!

I agree in no uncertain terms with Mr. Rowan that the Constituent Assembly has much work to do, but in my wish list I have not included his recommendations with regards to increased global aperture. My rather long wish list includes, for example, ensuring that the citizens of the country can access adequate information pertaining to the government’s management of its affairs, more effective limitations on new public indebtedness and finally (something inspired by Mr. Rowan) the banning of ingenuousness as a basis for our commercial policies.

https://petropolitan.blogspot.com/1999/04/some-isms-are-still-alive-and-kicking.html

The telecom ombudsman

As we rapidly approach the next millennium, there is no doubt that the Internet world with all its facets, communication, information and commerce, will most surely evolve into one of the most important elements in the development of any country. The way we can take advantage of it will depend on how it is commercially regulated.

In Venezuela we are today at a crossroads. Either we allow access to the Internet to be the main business, to the benefit of the telecommunication companies and the national government who ultimately issues the corresponding concessions, or we allow the users, our children and future entrepreneurs to capitalize on the opportunities by way of free and cheap access.

Recent efforts at privatization seem to not have favored the end users of the services. CANTV was sold on the basis that it generated high income for the Nation and expectations of high returns for the investors. Evidently, the only outcome of this equation are high tariffs. Likewise, Margarita knows more than well that the price to be paid for success in the sale of its power sector is just that, high tariffs.

With frequency, the State, due to conflicts of interests, cannot adequately manage its role as representative or defender of the public’s rights, or in this case in particular, the end users rights. It is precisely because of this that all around the world, the figure of the Ombudsman becomes important. The Ombudsman is an independent, capable and responsible person. Adequately provided with the resources necessary to fulfill his role, he dedicates his time to the users interest.

One prime example of this is the TIO in Australia. Its initials come from the words Telecommunications, Industry and Ombudsman and it is an independent entity established in 1993 to help solve disputes between the telecommunications companies and the small users, residential and commercial. As of 1997 it has also been entrusted the processing of complaints about Internet services.

TIO’s service is free but it only intervenes after the user has initially tried to solve its disputes directly with the purveyor of the service. It’s authority includes the investigation of matters relative to billing, service cuts, mobile service, access to the Internet, privacy, operator and directory assistance, public phones and basic telephone service.

Today TIO processes about 1,200 complaints per week. Approximately 95% of these cases are solved within 48 hours and only 0.05% of these end up in court. As do most arbitrage processes, the TIO does not analyze cases from a strictly legalistic viewpoint but rather on the base of merit and reasonability.

The costs incurred by TIO are covered by all of the telecommunications companies depending on the number of complaints raised against them.

In spite of all this success, however, and to the detriment of all Australian users, aspects related to tariffs are unfortunately out of TIO’s jurisdiction. I personally am convinced that in order to truly comply with his role of defender of the rights of the users of public services, the Ombudsman must be involved in the process of establishment of tariffs. Evidently, this role in tariff fixation must be based on reasonability and not on the blocking of tariff increases which are necessary in order to continue to guarantee an adequate service.

How good it would be to see the incorporation of the figure of the Ombudsman of Telecommunications to help with our own privatization efforts. He could most certainly help insure that the awarding of concessions does not result in a penalty for future users. Likewise, his support of the inclusion of norms and regulations in the concession agreements that would guarantee a good level of service as of day one would save us a lot of the grief we are shouldering today.

An Ombudsman would be most welcome in what has up to now been a negotiated process strictly between telecommunications companies and the Nation. If the players do not accept this, we should require it of the Constituent Assembly.

In closing, I remind the users of cellular phone services in Venezuela, that tariffs in Israel, for example, are 10 times lower than theirs. The explanation? In Israel, the concessions were awarded to those operators who offered to install the most lines and the lowest tariffs. In Venezuela the concessions are awarded to those that offer the best deal for the taxman.