Dollars for 75c – What could go wrong?

When one looks at the price earnings ratios at present and considers the profit history of the likes of Tesla you can’t help but scratch your head and ask if it really is different this time. Last week New York Times’ Kevin Roose published an article titled "The Entire Economy Is MoviePass Now. Enjoy It While You Can."  In an insightfully simple manner it answers that question….

"I've got a great idea for a start-up. Want to hear the pitch? It's called the 75 Cent Dollar Store. We're going to sell dollar bills for 75 cents - no service charges, no hidden fees, just crisp $1 bills for the price of three quarters. It'll be huge. You're probably thinking: Wait, won't your store go out of business? Nope. I've got that part figured out, too. The plan is to get tons of people addicted to buying 75-cent dollars so that, in a year or two, we can jack up the price to $1.50 or $2 without losing any customers. Or maybe we'll get so big that the Treasury Department will start selling us dollar bills at a discount. We could also collect data about our customers and sell it to the highest bidder. Honestly, we've got plenty of options. If you're still sceptical, I don't blame you. It used to be that in order to survive, businesses had to sell goods or services above cost. But that model is so 20th century. The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road. Overall, 76% of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to… Jay Ritter, a professor at the University of Florida's Warrington College of Business. That was the largest number since the peak of the dot-com boom in 2000, when 81% of newly public companies were unprofitable. Of the 15 technology companies that have gone public so far in 2018, only three had positive earnings per share in the preceding year… The rise in unprofitable companies is partly the result of growth in the technology and biotech sectors, where companies tend to lose money for years as they spend on customer acquisition and research and development… But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential winner-take-all' market." 

Like all bubbles, there are calls for ‘this time is different’ (the 4 most expensive words in investment).

In a way we are seeing this on the public ledger too.  The unprecedented scale of monetary stimulus saw ‘75c dollar bills’ pumped into the system to buy ‘growth’ now at the expense of future generations on whom the reckoning will fall.  

In reference to our Friday article (What will cause the next recession) a reader yesterday asked the question “exactly who is this debt owed to???”

Simply, that debt is sold to other governments, corporations and private investors all around the world.  The biggest holder of US Government debt is China, just ahead of Japan.  The GFC was famous for a lot of that toxic debt having been sold to unsuspecting mums and dads by banks getting out of Dodge.  Doug Noland in his weekly Credit Bubble Bulletin last week pointed out the danger of all that intertwined global debt:

“But there's a shot that the world has commenced a crisis period that will unfold into something more comprehensive and challenging than 2008. And at least in the U.S., financial crisis is the furthest thing from people's minds. Not even on the radar. Not possible.

The VIX closed the week at 13.42. Blue skies as far as eyes can see. But to one that has been chronicling the "global government finance Bubble" now for over nine years, I really worry. Excess became systemic. Deep structural maladjustment - systemic. Global imbalances - unprecedented. The amount of global debt - previously unfathomable. And, deeply concerning, the world has become so much more divisive and hostile over the past decade. 

Come the next international crisis, it will not be the U.S. and a group of likeminded global central bankers coordinating a unified policy response. Expect a disparate group of bankers, politicians and strongmen autocrats pointing fingers, making threats and demanding action from others. If they can't after months successfully negotiate trade deals, how are they to respond to crisis dynamics that they are wholly unprepared for.”