1 August 2000.


As a cyberneticist dating from the sixties I am continually amused by the recent antics of the stock market.  Of course it is not hard to understand the motives of fund managers.  They wish to continue in their present lucrative employment.  Most of them have not got a clue, but believe that other managers might, so they follow any one of them who leads.   On Barvennon we see it every time we muster.  A mob in panic will follow any sheep that has got away from the mob and is still alive.

It is not hard to see the problem that they face.  The internet is interfering with historical corporate business.  Various media gurus liken the situation to the introduction of mail order to retailing.  I've got news for them.  This one is magnitudes bigger.

Over the last few decades traditional distribution-retail enterprises have grown.  Those businesses take anything from 20% to 80% of the purchase price of a consumer item.  This cut is not the retailer's greed.  It just happens to represent the labour and capital and copyright rental cost of distributing consumer products.  It is the cost of warehouses, employees, licenses and showrooms.  And as a consequence we have huge organizations devoted to retail, and investors who have shares in those organizations.  Since much manufacturing is proprietary, about half of available investment vehicles are distribution-retail organizations.

Then along comes a new concept, the internet.  Let us take Amazon Booksellers as an example.  Instead of hundreds of Barnes & Noble bookshop branches all over the world, we have two or a few Amazon distributor warehouses.  Because purchases can be automated on line, we need very few sales staff.

Aha, think the fund managers.  Then we will invest in Internet businesses.

The trouble with that strategy is, the same volume of investment (amount of cash) as in B&N bookshops is not required.  The reason that Internet businesses will become successful is that they save costs.   Although their return on necessary capital (startup) investment will eventually be the same as any other business (i.e. at about 22%), their capital requirement will be (by comparison) minuscule.  Consequently, their gross return will be smaller.

So not as much money will be needed in bookselling infrastructure.  There will be more money to invest in other things.  The trouble is, what are those things?

Of course managers of investment funds are not the only victims.  License and copyright holders everywhere will also suffer.  Microsoft is probably losing more than anyone else.  Bill Gates is a bit smarter than Metallica.  He does not piss into the wind.

The conclusion - Barvennon is not an economic forecasting organization, but there is that fund manager's investment stream that is looking for a home and nowhere to go.  Looks like a classic oversupply situation.  Except it is money that is in oversupply.

It does also explain why the US is experiencing non inflationary growth.


email here