Julian Knight: Another dotcom bubble about to burst? No, not yet
Sunday 20 February 2011
I'm old enough to have started working as a financial hack at the tail-end of the late Nineties dotcom boom, when bunkum phrases such as "first-mover advantage" and "new economic paradigm" were being banded around by wannabe internet millionaires and their friends in the City, trying to rush any old rubbish to market.
Much of it was built on the economics of the madhouse. I remember one UK fund manager, Neil Woodford at Perpetual, standing up against it; he shunned internet shares and promptly sank to near the bottom of the performance tables. At his nadir, I took an investor in to meet him for an article – a brave thing for Mr Woodford to do under the circumstances. He set out, calmly and clearly, why he thought that internet companies with a turnover smaller than a local pub were overvalued at several hundred million pounds. The investor bought a shedload of Mr Woodford's fund and that proved a smart move indeed.
Now the cosmic broker valuations of Zynga – which created the FarmVille game on Facebook – and Groupon – a group-buying discount website – have led some to question if we are seeing a return of the dotcom bubble. How can Facebook, for instance, really be worth $50bn, around the GDP of a medium-sized African country?
But despite this, I can't see a late-Nineties craziness developing – or if it is, we are surely still a little way from its peak. Sure, we may be experiencing a bull run in the markets, but it's based on some fairly sound fundamentals – earnings are good for companies, most sit on solid cash piles, and, as we explore on pages 86 and 87, where else can cash go to in order to possibly keep pace with inflation other than shares? As for the internet, even the derided Zynga produces $850m a year in revenues. And Groupon has 50 million members in America and has just launched here. I don't know what Mr Woodford thinks about this, but the economics of the internet and the stock market in general look a lot better than at the time of the late Nineties crash.
Clear thinking on regulation
I am confused. Not an unusual state for me. This particular confusion was sparked by the decision by the Treasury to rename the Consumer Protection and Markets Authority (CPMA) the Financial Conduct Authority (FCA). What was it about CPMA that so offended? FCA certainly trips off the tongue a little bit more easily, but did the Treasury not think that it's virtually identical to, yes, the FSA? In fact, perhaps it's a bit of clever cost-saving – staff can just blob some Tipp-Ex on the old FSA stationery.
Whatever the new City watchdog is called, the Treasury's announcement makes clear that it is intended to give it focus and a bit of bite. For a start, the Treasury says the FCA will have a clear set of consumer-protection objectives to fulfil. This is different from the unsuccessful FSA which was charged with squaring the circle of safeguarding consumers while promoting the interest of banks and insurers. To help it achieve its clear goals, the FCA will have the power to ban the sale of certain financial products for a year while it considers whether they are dodgy.
If we had had the type of regulation that is now envisaged by the Treasury we could have avoided, or at least curtailed, the mis-selling of pensions, split-capital investment trusts and loan payment-protection insurance.
I have always feared that the new beefed-up bank of England would get all the Government's time and attention and that the FSA replacement would be left as a powerless rump. Fortunately, Treasury ministers are getting the message that we need a consumer body with real power; all we need now is the right personnel. One area the FCA may want to look at is the sale to older people and low-risk consumers of traded life policies – investigated on page 85 – this has all the hallmarks of yet another slow burner of a mis-selling scandal.
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