Silicon Valley: They’re Gonna Need A Bigger Towel

In October of 2015, I made the case for why “crying towels” were the next big investment opportunity coming to Silicon Valley. This argument was met with derision and ridicule from many I refer to as: the Silicon Valley aficionado set.

After-all, it was they which implied they “knew” better about anything concerning the business of tech than anyone else on the planet. And if you wanted proof of that – just ask them.

Getting them to stop telling you may be another matter entirely, but I digress.

In the above mentioned article I proposed the following. To wit:

And this brings on a whole host of other meme shattering, break out the “crying towels” type arguments. For if it can happen there – guess where else it’s going to begin happening? Is ________________ next? Just fill in your current favorite high-flying Non-GAAP social darling on that line – for it’s going to happen at all of them very soon in my opinion. Much sooner than many now even think or ever thought possible.

“Coders” will gladly live in some single bed shared between 8 others apartment somewhere near the Valley. Heck. they’re now reporting stories how one can live in a shipping container on the cheap in San Francisco. Sounds fantastic right? Well, it is. As long as the dreams (and expectations) of landing the dream job in a start-up or similar where riches based in stock options and more are forthcoming or, dangled like carrots in front of wide-eyed dreamers.

‘Crying Towels’: Silicon Valley’s Next Big Investment Op

Let’s put aside the once professed IPO or Tech “gonna be rich!” delusions of a Lamborghini® in every garage and McMansions aplenty to park them in. And bring in the very, very, very (did I say very?) real reality of stench and lunacy that currently is San Francisco.

Hint: Got your human feces notification app ready and updated? You’re gonna need it.

San Francisco’s median house price is continuing to fall. The “Silicon Valley” area (e.g., San Mateo, Santa Clara counties are doing the same. The problem here is, these are not suppose to be falling when the “markets” are at all time highs and the so-called “Deca-corns” are being released from their IPO stables. Unless… (rhymes with “glue factory”)

Uber™ has since IPO’d – and the subsequent response for valuation appears eerily similar to that of what’s basking on the sidewalks of San Fransisco in both odor, as well as appearance. While others (think Slack™ et al.) appear to be mimicking this same offensive reaction.

Unlike what you need to avoid getting “San Fran” on your shoe. All one needs to do is look at a recent chart of the latest “price droppings” of these once lauded unicorns to be reminded that when they drop, it’s not going to be anything similar to the images of rainbow colored ice cream one conjured after viewing the slide-deck.

No, to ensure the same doesn’t happen in one’s portfolio as what happens to one’s shoe in California, you don’t need an app, all you need is to go back to using common sense while viewing a recent chart of these “great investment opportunities!” and know, whats on the walkways of San Francisco has more in-common with their valuations, than the delusions pitched at any road show.

And if you are one of the unfortunate many that suddenly realized were advised and you now have a bunch of this utter horse crap “growth stocks to protect against inflation” in your portfolio? You have my condolences.

Remember Uber’s $120 Billion narrative, anyone? Bueller?

However, since 2015 most, if not all, of the prior arguments I’ve been making to the screams and hollers of the “aficionado set” have been playing out. The only thing that has been masking the effects and timing is that the Fed. had first jawboned their intention to cave, then completely caved and reversed course.

If they had not? Let’s just say “The Valley” would be in far worse shape than it is currently. Yet, I think it’s all been just a “pause.”

Here’s a bit more from the aforementioned article to bolster my point, again, to wit:

“Coders” will gladly live in some single bed shared between 8 others apartment somewhere near the Valley. Heck. they’re now reporting stories how one can live in a shipping container on the cheap in San Francisco. Sounds fantastic right? Well, it is. As long as the dreams (and expectations) of landing the dream job in a start-up or similar where riches based in stock options and more are forthcoming or, dangled like carrots in front of wide-eyed dreamers.

There’s nothing wrong with lumping it out with the hope of future pay offs. I did similar things when I was young. It’s a risk reward thing and I champion those willing to take the chance.

However, you know what changes everything? When the meme of “Gonna stay here till I cash-in and then I’ll buy me a McMansion!” turns into the underlying realization that quite possibly – you’re going to end up living in a shipping container! Possibly forever if things don’t change.

Suddenly Mom and Dad’s basement looks like paradise, and the thought of leaving “The Valley” becomes more, and more front of mind with every passing IPO failure or failure to launch.

Today’s reality…

Welcome To “Pod People” Screen grab (Image source via ZH)
Screen Grab – (Image source via ZH)

The above pictures make living in a shipping container look down right upscale, no? And to those that keep buying into the idea of “my next dig is a McMansion as soon as this thing IPO’s?” Hint: You’re now settling for a “dig” that makes those shipping containers the McMansion equivalent.

There’s an old saying that may just apply here, as in: The first step to getting out of a hole you’ve dug – is to stop digging. But then again, what do I know, for “It’s different this time” right? Right?

The illusion, or better yet, delusion, that the metrics for riches and business could be arrived at by believing 1+1 = (what ever you want) and could survive in perpetuity, without decending to the same results as any Ponzi scheme, implores how beyond lunacy its all been. Think of it this way…

The arguments now being made, along with what has already played out since central banks, and in particular the Fed, have perpetrated against the fundamentals of free markets and capitalism in particular: Bernie Madoff’s only crime would be – that he panicked too early.

For if he would have continued to “fake it” like most of these what I deem as “fake businesses parading as legitimate ones.” do quarterly. He would have suddenly found that in all but one or two years the Fed would not just “allow” but enable his scheme to even higher heights.

By the Fed doling out $Trillions, all his losses would now appear as just one big hiccup. Right in line with everyone else today. But it gets even more surreal if you want to take it out to its logical conclusion…

All those fake statements for wealth he had supplied would have not only been rectified, but would all be up somewhere north of 50% from the 2007 highs in only 10 years. Probably even more if he was able to partake on the IPO -VC racket. And he would no doubt be a requisite go-to fixture on every mainstream business/financial outlet to give “his take” at every hiccup that’s ensued since.

Heck, he may have even closed shop altogether thinking “Why should I continue to put out fake statements and risk going to jail, when all I have to do is invest in one of these unicorns and I can state legally my $million dollar “investment” is now worth $Billions?!”

Think about the above very carefully, for it truly is conceivable. And here’s why using none other than Uber, once again.

I made the arguments back in early 2017 that Uber was facing both a possible “Extinction Event” aka “Down Round,” as well as a possible “Theranos Moment.” Both of these (all my conjecture) have been mitigated (again, my conjecture) by only one thing: A VC (venture capital) outfit more brazen in its audacity to spin narrative of riches and business sustainability that made the founders of these money losing, cash burning fallacies of business envious. e.g., SoftBank™.

Here’s from that article, again, to wit:

If – and I do mean just that, Uber needs to go back to the “funding” rounds (and it’s easy to speculate it will need to with its self verified cash burn woes) with all the exposed dirty laundry, and excess baggage now exposed to the entire investing world and “Valley”, coupled with its extraordinary cash burning metrics and collapse in “growth ” story (i.e., China being just one) where the last funding round (June of 2016) was made via the Saudi Arabia’s Public Investment Fund.

Who’ll want to step in after it’s assumed that this company has now also burned through $3.5 Million of Saudi dollars – and now needs more?

Bueller?

“Unicorns Watch In Horror As Uber Careens Towards Extinction Event: A Down Round”

Bueller did not attend or raise his hand. But Masayoshi Son of SoftBank did. And had he not?

I was, and still am, of the opinion that Uber and all the others prancing about in the IPO stables would have experienced that “event” right then and there. For he also single-handedly saved the entire IPO case. That is – till now.

In regards to my earlier “Therano’s” equivivation argument, here’s a bit from that article. To wit:

Now to be fair Theranos™ was/is caught up in what has been deemed as fraud for their product offering, Uber is not. However, why I use the “moment” appraisal is this: Once it was shown that the whole “so worth it” valuation metric was no longer above reproach? The jumping-of-ship for those closest happened so fast even rats took notice.

Ms. Holmes publicly declared any, and all, accusations as false before finally having to recant in the form of pulling, or re-verifying prior testing results. But as she was doing that publicly, quietly many either working for, or involved in management were reported to be heading towards any and all exits. Then, precisely one year ago this week (yes, it’s the anniversary) Forbes™ revised, and declared Ms. Holmes net worth had gone from $4.5 BILLION – To Nothing. And just like that it was over almost as fast as it had began.

So exactly where is the equivocation argument? Good question, and it is this:

The revising of valuations and more came when suddenly everyone no-longer could justify the valuations based on “it’s different this time” arguments.

“Is This Uber’s ‘Theranos Moment’?”

May I remind you of just two number: $120 Billion, $45 IPO debut. The rest I’ll leave up to you.

So what does this have to do with today? Hint: Everything. Why? Hint: rhymes with WeWork™

WeWork is another of SoftBank’s VC latest investments that, much like Uber, came at what could only be deemed as a perilous time for these so-called “Deca-corns.” Because it appeared no one was willing to step or, or step in, only to find an ungodly amount of “San Fran” clinging to their shoes. But, once again, it was Mr. Son that did. And it’s unfolding into a pure disaster with every passing day.

Not only is the Uber investment not paying off as planned (reports have the “investment” now in the loss column over half a $Billion and climbing.) But the so-claimed proposal of WeWork being valued at nearly $50 Billion has fallen by near 80% if some reports are to be believed, and currently sits somewhere around a whisper number of only $10billion. And there are many more screaming it ain’t worth even that.

About that “screaming…”

Now enter none other than the clown prince of buzzer-banging investment advice: Jim Cramer.

So nervous of what this once lauded “Deca-corn” (yes, this is a real term because in the Valley, the term “unicorn” wouldn’t get the sycophantic media to cover your parties.) that he appears to have broken out into cold sweats when talking about it on CNBC™.

So worried is he that he is begging, yes begging, them not to IPO. Why? Because he thinks it will wreck the “market.”

This is being said when the “markets” are flirting with braking the all-time-record highs at any given moment. And now he’s concerned? Think about that!

You know who else is worried? Hint: Rhymes with SoftBank. Yes, that SoftBank.

So worried that this debacle will turn into an even more unmitigated disaster, they have now proposed the idea that if it does actually come to light, that they will buy some $750Billion of its stock at its launch to help sure it up.

Can you say: Desperation? For that’s not the way these things are suppose to work. It would appear SoftBank is running down the same rabbit-hole of logic to tech and investing that the “coders” still waiting to cash in, or cash out, are doing trading a shipping container not into a McMasion, but rather, a pod.

But then again, maybe this is a brilliant ploy for all concerned in the end. Why?

Because if the WeWork IPO doesn’t pan out as planned, and if that results into a funding crisis as has been reported about their proposed available “lines of credit” secured only if a certain IPO threshold is met. All that real-estate WeWork is on the hook for may suddenly be available as “work from home” rentals. i.e., Trade in those pods for a desk. Call it…

“It’s different this time – so let’s right size where we work, eat, sleep, bathe and more. After all, a desk today is so much more – and – it’s not your Mom’s basement, right?!”

I know, I know: here’s a towel. But as for your shoes?

You’re on your own.

© 2019 Mark St.Cyr

Market Apprehension For: “And Then – Depression Set In” Induced Reality Moment

For those that may not get the reference above, it’s from one of the all time best opening scenes that depicted reality for far too many of us trying to find our way during that period. The reference comes from the 1981 movie “Stripes” (Columbia Pictures)

It starts off with Bill Murray mercurially giving up another in a long line of employment opportunities (see: cab driver) in a fashion many of us only dreamed of doing. (and some still do!) Then, just when he thought everything was much the same as it always was, i.e., get food, go home, explain to the “Mrs.” what you’ve done, argue, make up, find another “job,” rinse, repeat. It begins going off the rails – and badly.

Nothing works out the way it once seemed to, which is why this strikes such a chord with today’s “markets.” For, in my view, the similarities are legend. Hence my sudden remembering of the now iconic line “And then…depression set in.”

As I referenced, there are so many metaphorical corollaries it makes it worth watching through today’s eyes, just as it was back then. Or said differently: it never gets old. Here’s what I mean…

You could think of the opening cab ride scene alone, with Murray and his fare, as a metaphor of how to view Uber™, IPO’s in general, their founders and the VC community at large. Trust me, it’s not as much of stretch as it sounds at first blush.

I see Murray’s fare as the embodiment of an all wrapped up into one rich, crass, “I’m just special, because I’m now rich!” crowd. And Bill’s character seems to embody the now after IPO investing public or “employees” that were mercilessly assured by one and all (i.e. the mainstream business/financial media et al.) that “riches” were at hand for everyone.

Hint: Uber’s or even the more recent Slack™ stock valuations looks a lot like (i.e., metaphorically) Bill’s bridge and car keys scene, does it not? But it doesn’t stop there.

As the opening of the movie rolls along Murray is depicted doing what seems to be what he always does, which I referenced in the opening paragraphs. This entire sequence can be laid directly on top of what has been happening in the “markets” over the past decade. Let me illustrate…

Don’t worry, BTFD (buy the f’n dips) rinse repeat. It’s all just a temporary thing. That is until he (Murray) sees his car is being repossessed right in front of him.

“What does this have in common with markets?” you ask. Great question.

Think of the repo scene as a metaphor for what the Fed has been doing with raising interest rates and reducing its balance sheet (QT.)

All that “easy financing” at zero-rates to buy whatever flashy, shiny car badging (i.e., ticker symbol) you wanted, suddenly now gets “margin called” the moment you can’t afford the payments (i.e., margin.)

The reason for this is that lowly “margin clerk” that gets continuously derided or continually promised to “make things right” is no longer nervous every-time there’s a “dip” in your employment.

They’ve now been given the “keys” via management to your ticker symbols and sold them at whatever depreciating valuation they may be worth, today – now. For much like the repo of a car – your once “margin account” has had the keys pulled and is off to the auction, aka “exchange.”

Next, you are then nearly run down via this same “repo” crew (i.e., central bankers) where they hurl the same slurs they’ve been throwing mercilessly at savers everywhere for nearly a decade, as they speed of with your once valued possession. (i.e., money or interest ) shouting, “Tough luck, pal!”

Your ability to pay bills, eat, obtain transportation, maintain a home, apartment and more are suddenly metaphorically represented by Bill’s pizza now out of the box, laying upside down, in the middle of the street.

You (much like Murray) have suddenly reached a point where you have to actually decide on whether or not that “pizza” can be saved.

It seems irrational looking back, but in the moment? You do just what Bill does and put it back in the box and try to figure it out later, because too much has gone on already to “think” anything out at that moment.

Or said differently – that pizza represents many a retiree’s savings account or stock allocation made by some 26 year old bank “executive” following a “diversified” portfolio thesis with “recommended” (or preferred) stock allocations or ETF’s, because that’s what the “bank” told him to do and he read something similar in a Tony Robbins book. Hint: see “Uber” or “Slack” reference while thinking “You need allocations in growth to offset any inflation pressures.”

“Pizza” anyone?

Murray finally makes it back to the apartment where safety and/or coddling seems to have been the norm. Only this time using today’s metaphorical play on words: “It’s different this time.” For suddenly he finds that his girlfriend is no longer amused with his, once again, reckless behavior and concern with holding a job. (remind you of any FOMC participants?)

She’s grown tired of having to carry the weight (think: The Fed et al.) of being the “responsible” one. Let’s just say she, in my mind, represents central bankers deciding to end the charade of just “being there” every-time and anytime rewarding this seemingly unending recklessness.

At some point there has to be a way out or end she muses. Then she does just that, ends it. All to Murray’s dismay, as well as pathetic begging, setting the stage for that iconic line, “And then… depression set in.”

The movie then goes on with far too many other references that one could apply using the same treatment as I’ve highlighted above, but they are far too many to list. However, it’s in that spirit I’ll leave you with just one last example…

In the end Murray finally finds redemption, but only after having to pretty much be knocked down in a moment of reality delivered via his Drill Sgt. It’s one of those scenes that also can include an overlay of another metaphor credited to former Champ Mike Tyson “Everybody has a plan until they get punched in the mouth.”

There are two very consequential central bank meetings due over the next two weeks. The first is the ECB this Thursday. This in one of Mario Draghi’s last appearances before he hands the bag baton off to Ms. Lagarde.

There is a possibility he can either send “markets” scaling ever higher or, send them into a tailspin should he disappoint and not deliver, on all points, the dovish expectations the “markets” demand. (I.e., interest rate cut, QE, et cetera)

Then there’s our own Fed meeting following it the next week on Tuesday and Wednesday.

The Fed, much like the ECB, is under implied pressure, via “market” positioning, that they will in-turn do the same and be uber-dovish with, at the least, a 50 basis point rate cut and jawboning for more QE, and soon.

If they do only 25, there had better be an unequivocal signal, and verbiage to back it up, that another 25 was coming in the next meeting. The need for jawboning more QE would then be even more imperative via my conjecture.

The issue here is the entirety of Wall Street, along with its cheer-leading mainstream business/financial cabal of BTFD’ers, is expecting another “Groundhog Day” delivery and result.

Many could be surprised to find someone changed the reels in the projector booth.

© 2019 Mark St.Cyr