A Rising Market and a Short Memory!

There was a time not long ago when the Mullard Company, as it was then, called a meeting of industry representatives to try to establish where the the electronics industry was going now that the radio and black and white TV markets seemed to be heading towards saturation. The post-war development of radar also seemed to be stabilising, the new transistor had yet to prove reliable and, in contemporary, MT speak, the visibility of the future was obscure.

No such consideration was taken two years ago when it was already clear to `The Man in The Street' that the market for the hand held phone, a device already in the hands of children, could not expand for ever. The concept of the Internet was seen, however, as the door to an infinite market available at low cost, providing the customer had access.

Already, however, the technology of the PC was more than adequate for the users needs, except for games and media demands. To optimise the latter needs a huge new universe of broadband usage was envisaged which, providing the finance was available, would provide an industrial transformation--just like that, in the phrase of the music hall magician. And was money available? It came in billions from all directions, share prices of companies with a dot com in the title rocketed.

However, there is in nature a time constant determined by the ability of a market to absorb and adjust to new ideas. Investment Analysts expectations far outstripped the situation realisations, almost to the degree of misleading investors. The subsequent market collapse is now history. Optimism has been replaced by pessimism, to the perception that the IT industry will undergo the the physical collapse that overtook shipbuilding, coal mining, and steel production during the Great Depression. The difference now is that software is a multifunctional industry that thwarted in one direction can turn immediately to another, whereas the old industries were heavy with physical assets, factories, shipyards etc.

Also capital investment for concept engineering is quite low, depending on what people cost, hence the rapid development of share option schemes, based on idea of working for reward in the future. An excellent scheme, providing there is a future, and if there is, the acquiescence of the shareholders, whose money it is that is funding the scheme.

Expenditure of the so called dot com companies expanded to the point where the Internet market became a `Black Hole'. The economic philosophy of the dot.com being that wealth and progress was expressed solely in names on databases listed in millions, the validity of these names, bearing in mind both the mobility and mortality of human beings must be questionable. The valuation of many of these companies expressed in the their share prices was accepted by the financial establishment that promoted them to the highest ranks without questioning either their financial viability, or where the promised extraordinary profits were coming from, given the inevitable competition that would arise.

Once investors realised that they were not buying profit, but only losses, and the only assets were so called `Business Models', or ideas with only indistinct expectations, the money dried up, and the Stock Market attention turned towards `Valued' companies, ie companies with tangible assets in the form of organisations with clearly defined markets eg retailing and building, leaving a whole industry based on Communications tarred with the brush of investment inadequacy.

However, the withdrawal of finance did not solve the problem of future investment in new technology. Not all TMT companies performed badly. It was the expectations of the market that a TMT company not producing extraordinary results, or burdened with the Government induced `BroadBand' debt, was worthless, that caused a collapse in sham prices to sometimes a small percentage of its previous years valuation. `Alice in Wonderland' has become a serious scenario.

What is amazing is the whole phenomenon took place in a market skilled in using highly technical analytical techniques to assess trends and valuations, to decimal fluctuations.

It was assumed, and accepted, that the New Technology was subject only to `New Rules' of its own creation, bypassing the norms of classical investment analysis.

There was the assumption that the Internet was a virtual infinite market, and that providing enough money was available it was possible to achieve market dominance by investment alone using take-over techniques financed solely by excessive share valuations.

The term to `Burn Money' turned out in the end to have a very real, rather than hypothetical meaning. A whole industry has been decapitalised on a stupendous scale affecting companies, employees, and investors. The probability of sufficient new money being invested to restore the situation to the pre-collapse momentum is virtually zero. Until new money does emerge as a regular investment flow, the current instability and lack of `Visibility' will persist.

It was said that the Stock Market in 1931 `Took off on a flight from reality.' That the situation exists that allowed a re-run of the thirties crash shows how much investment depends on human nature, and how little on human calculation.

The market is normally controlled by inbuilt negative feedback within narrow boundaries of deviation.

Once outside these bounds the system assumes a non-linear positive feedback aspect developing into a classical Catastrophe Curve, terminated by a crash. Subsequently, like an earthquake there are aftershocks which continue until the system returns to stability within the controllable margins, and investor confidence is restored, amid realisation that applying `New Rules' indiscriminately also can arouse `Old Problems'

The rebuilding of the TMT market will take place brick by brick, each level sustained by investor confidence. This is going to take some considerable time, and who is not to know that at the end, new technical developments will have rendered the original model obsolete.