Day: August 6, 2017

Further Signs Of: It’s All Falling Apart, Right On Schedule

“It’s not easy being green…” -as sung by Kermit the Frog of Sesame Street®

I have repeated (as in sung) the above line to myself, for what feels as many times as Kermit has sung it himself over the last few years. The reason? I have dared question the “It’s different this time” hypothesis in all its manifestations, and against all its defenders. It would have been much easier to do the opposite and just “go along to get along.” But I’m just not built that way.

Notwithstanding, I’ve also built a career based on just that, and been proved more right than not in the end. However, this one, has gone on far longer than people much smarter than I even dared think. But again, no one ever contemplated (let alone believed) central banks would print money ex nihilo to be used to purchase stocks, corporate bonds, government debt, and more and not only get away with it, but be sanctioned and applauded for doing so.

It’s been an adventure in sheer surreality, as well as sheer stupidity, all at the same time. But, as they say, the consequences for doing just that (i.e., QE and all its iterations) are appearing to show in an ever growing list of realities. That is, for those willing to look.

My argument, position, or hypothesis when it comes to not just the tech space, but also “markets” and more has been the following:

“I may currently be wrong, but I’m wrong for the right reasons. And once this monetary experiment of perverting both business fundamentals, as well as monetary ends? Watch how fast all that “wrong” turns right with a vengeance.”

I am here to state: That time is now – and it’s accelerating. And the current rise into historic “market” highs is a warning sign of the trouble brewing beneath – not an all-clear signal as it was in days of old.

Why? Because the rise is based purely on “hopium” and nothing fundamental. Hint: There’s a reason why the Hindenburg and its explosive gas-filled levitation is used for analogous purposes as to describe today’s “markets.”

I’ll use only a few of the latest examples, but they are all that’s needed to anyone who’s paying attention, for on their own they make quite a statement on the forthcoming consequences and calamity that’s continuing to unfold.

Remember when, as in, just this past March, how all the “great financial advisers” were shouting “great advice” to “get rich in real-estate” in Toronto? Here’s what I said in response to that “great opportunity.” To wit:

This is the moment in time where generic, over simplified advice, that sounds so good (and too good) shouted too an adoring crowd  – should be taken as the siren, and clarion call to those who are diligent in preserving their wealth to buckle up, buckle down, and prepare in earnest. For once this show is over? “Over” is going to be something many of those attending these types of seminars are going to pray for – as in “Please make it stop!”

Here’s how that’s currently unfolding as of this month (e.g., August) some 6 months later. To wit:

“Toronto Housing Market Implodes: Prices Plunge Most On Record”

I have a feeling that last line (e.g., “Please make it stop!”) is going to be stated to many a bill collector in the coming future of those who attended, and went out and applied all that “great advice.” And it’s not going to be isolated to Toronto. Why? Because this roadshow for “getting rich prowess” moved onto Chicago, and continuing onto others.

Here’s what happened to real estate after they left Chicago. again, to wit:

“Chicago Population Shrinks Most Of Any U.S. City”

The real issue is not all those would-be-buyers that should be there for all those new “great new deals” are vanishing in droves. No, what is surely a new-found revelation (and I’ll wager wasn’t expressed) of these newly minted “get rich quick attendees”, is just how much, and how fast, all those newly acquired taxes which they are now liable for are both due, and rising!

Yet not too worry, for as I implied, this show is moving onto others, and in particular, coming to California before year-end. Just in time (in my opinion) for the “it’s different this time” apocalypse to unfold there in earnest. For “unfolding” it is…

Remember when questioning the sheer audacity of not only claims for the “ads for eyeballs” value, but the valuations themselves for the companies that were to provide those platforms? (e.g., Unicorns) Well suddenly the “unquestionable” is being questioned – and the answers are leaving many of those past defenders speechless. I’m also of the opinion many and their proclaimed “net worth” is going to meet similar results. i.e., Valued less. Much less.

Recently I penned an article hypothesizing the following…

“What is getting everyone’s attention in “the Valley” is something I’ve been stating for years, only this time, it’s the sheer size of the claim, in one jump, that’s causing consternation within its once undoubting, ever-faithful, cheerleading pews.

Remember: Only in “The Valley” is it reported on, and accepted as an article of faith, along with a straight face; that a VC can turn a few $Million into a $Billion all based upon a standard of accounting equivalent to: “Because that’s what they say it is.”

Try saying that at your local bank if you’re trying to re-fi or buy a house. See how far you get. Yet, in “the Valley?” You may get “that loan” based on that “$Billion” stated on your balance sheet. Which is precisely why I bring this up.”

This was in response to the sudden questioning by many in “The Valley” as to how one unicorn (WeWork™) could leapfrog higher into the #3 position of all current unicorns using a metric for valuation that made even the “The Valley” faithful blush.

Well, it seems that “blush” is now turning into “egg” – and it’s running down not only a lot of faces, but it’s about to run everywhere. For what I’ve been touting for years (and raked over the coals, for just as long) seems to have been not only looked upon in a far more exacting detail, but the findings are truly eye-opening, for that once all-concealing “curtain” has really been thrown open. And what it shows ain’t pretty. To wit:

“Fake Unicorns: Study Finds Average 49% Valuation Overstatement; Over Half Lose “Unicorn” Status When Corrected”

Gornall and Strebulaev obtained the needed valuation and financial structure information on 116 unicorns out of a universe of 200. So this is a sample big enough to make reasonable inferences, particularly given how dramatic the findings are.1 From the abstract:

Using data from legal filings, we show that the average highly-valued venture capital-backed company reports a valuation 49% above its fair value, with common shares overvalued by 59%. In our sample of unicorns – companies with reported valuation above $1 billion – almost one half (53 out of 116) lose their unicorn status when their valuation is recalculated and 13 companies are overvalued by more than 100%.

It’s studies and revelations as the above that can’t be ignored by those paying attention. These are the moments in time where hypothesis for whether something was real – or fake – begin exposing themselves for not only all to see, but where eyes can no longer be averted. i.e., It’s where the magical thinking ends – and the reality of the moment begins.

And “unicorn” is, has, and always been a “story” to be sold to the naive. Just like “get rich quick.” The two go hand-in-hand, both in story belief, as well as ending consequences for those who believed just a little too much, for a little too long.

Why the above is also cautionary in its implications is when it’s paired with something that should be going in the exact opposite direction than where it is. I’m speaking directly to the lifeblood of the “true believers” of everything “The Valley” has now come to represent: Start-ups and their once dreams of IPO riches.

They’re not expanding – they’re literally dying on the IPO vine. All by way of their once all-seeing benefactors – Venture Capital.

Here’s a little to think about via Pitchbook™. To wit:

“PE doubles down on VC-backed startups”

Acquisitions continue to be the most common exit route (for VC-backed companies), but through May, over 20% of 2017 (such) exits have been buyouts by PE firms, a large proportion compared to past years, which have observed that percentage generally hover between 10% and 12%.

One may read the above and think “So what?” And it’s a fair point. But when you start adding things together such as the following is where things begin to take on more ominous signaling when applying in context. Again, from another Pitchbook article, to wit:”

“VC investment-to-exit ratio in the US at record high”

Opting to raise more funds rather than prioritizing an exit seems to be an increasingly popular route for startups.

Any idea why that might be? Here’s an “idea” I’ve put forth many times to the howls-and-screams by way of the mainstream business/financial media. Again, from the aforementioned article:

Do you think unicorns crossing the $BILLION dollar valuation mark at a clip of 1 per week currently – in this environment, with what you’ve currently witnessed to those who’ve made it out of the stable, only to have its valuation slaughtered much more in line with a glue factory rather than a land of milk and honey: what would be making the argument (or giving the rationale) for one to invest $Millions when the most recent IPO’s are shedding $Billions a a frightful pace?

Again, as I’ve stated many times prior (again to the howls-and screams) “Why IPO and show everyone you aren’t worth the “unicorn” (i.e., money or value) you claim you are – when you can just remain private and claim whatever you want – and everyone believes it?”

The problem now is everybody’s beginning to not only question, but rather, the “seeing” is now turning the once “faithful” into an ever-growing chorus of non-beleivers. Or said differently “It’s different this time” heretics.

To my eye VC exiting via way of Private Equity firms (and rising!) is not a show of strength, quite the opposite.

I am a firm believer PE deals (and their frequency) are one of the final signs one should be on the lookout for that signals “the end.” In other words, PE deals are notoriously late to the party acquisition makers, taking on massive amounts of debt and more inflating anything, and everything, as to enrich shareholders at the top of the chain – right before it all falls apart in wave after wave of bankruptcies and more.

Again, for I believe it needs repeating: Why would you stay private and cash out for limited dollars when the reason for the investment in the first place was for the unlimited riches in an IPO?

Think about that very carefully and see if your conclusions don’t come to the same. Regardless of what the next-in-rotation fund-manger cabal wants one to “believe.”

Add too all the above what is now an undeniable fact that most, if not all, of the empowering market “Trump-trade” has been stymied into DOA status, if not outright dead and buried, along with: the inevitable debt ceiling showdown which is sure to occur in succession.

The only thing which will make matters worse is, if (and I am of the opinion it is not “if” but when) the Fed. declares at its next meeting it is (once again) raising rates, or worse, announces balance sheet reduction begins in earnest immediately. The only thing which could possibly be worse is if they do both. And that is a very plausible possibility in my opinion.

Personally, I think the odds of such are at about 50/50. The “markets” think those odds are closer to nil. And I don’t mean one or the other, or even both. The “markets” are right now as expressed via volatility trades that none of the above will occur. I believe that to be lunacy. Yet, so far, that’s been the correct way to gamble. But “gamble” it is. Which is why the term “casino” now fits so perfectly. Because these “markets” have little resemblance to what was once thought to be what “investing” once meant.

But hey, I guess there is hope on the horizon, because once that real estate wealth to riches show reaches California? All those living in “shipping containers” or “a wooden box in someones’ living-room” and more waiting for the dream of IPO riches to arrive can move up into the real estate business and cash in big time. That is…

As long as their credit cards aren’t already maxed out. Because “getting rich quick” doesn’t live on charity.

© 2017 Mark St.Cyr