Ever Seen A Bubble Slowly Hiss Away? By Karl Denninger.
Back in the 1990s, during the dot-com bubble, the global economy depended on the US stock market and the US stock market depended on about ten Internet stocks with negative aggregate earnings. It all fell over in the tech-wreck of 2000.
Today, a similar situation exists. Markets index gains have a huge reliance on the so-called FANG stocks — Facebook, Amazon, Netflix, and Google — and the other six stocks in the so-called FANG+ stock index — which includes Tesla, Alibaba, and Microsoft. For instance, to March 12, Facebook, Amazon, Apple, Microsoft and Alphabet accounted for 45% of the S&P 500’s year-to-date gain.
None of the so-called “growth” in those stocks has been real.
Tesla, for example, has never turned a profit, even on paper.
Amazon has never turned a material profit and only exists due to what looks like blatantly-illegal (under anti-trust law) cross-subsidization.
Netflix has negative free cash flow, which means that while on a GAAP basis they have made a “profit” they do so by assuming their “shows” have recurring residual value post-release, which anyone who has ever sold anything on a royalty basis knows is total and complete crap; nearly all of your money is made in the first cycle (for a book in the months after release, for a TV series the first showing of same, etc.)
And finally, Facebook and other “social media” companies only “make money” by radically invading your privacy including in places you cannot give consent such as every single web page anywhere that has one of their “like” or “sign-on” buttons. Without such data their so-called “enterprise” is worth zero as the cost of operating it exceeds the ad revenue they can gain from doing so.
So what we have is an outrageous bubble — exactly as we did in 1999. The market callers all say it’s different this time because these firms that lead have “real earnings” or can “crank up earnings any time they want (Amazon).” This is a damnable lie; not only are the earnings not real in that they’re taken through gross deception and accounting tricks.
Amazon, in particular, has been said to be “able” to crank those earnings “at any time” and yet over the last decade it never has — not even once. Why not? Because it can’t, that’s why. The day it does is the day its pricing is no longer supported by acts that anti-trust explicitly banned over 100 years ago and what remains makes a loss on every product sold net-net and thus the company collapses.
Note that I’m not saying these firms have “less value” should they cut that crap out, either voluntarily or by government force.
I’m saying they’re all functionally bankrupt immediately and soon will be factually as they cannot make an actual profit from operations without the schemes that no law-abiding society should permit and no matter how much cash you start with if you spend more than you make eventually you run out of said cash.
That is, the NPV of these enterprises under any rational accounting basis is negative and thus the equity is worth zero.
Time will tell, but I would guess there will be some resolution of this anomaly by the end of the year. Mr Trump has stopped boasting about stock price gains.