No Profits? No Problem. (Until Now)

  • 2019 — the year of the IPO disappointment
  • Uber and the rest: Profits don’t matter, until they do
  • The beginning of the end of the gig economy (thanks, Fed)
  • Canna-businesses take a page from Apple and Home Depot
  • Trump’s plan for sound money (we’ll believe it when we see it).

If the 2010s were the decade of the “gig economy,” 2019 was the year in which its pioneers finally became available to retail investors. And retail investors recoiled.

Going into 2019, Wall Street’s best and brightest expected a record-setting year for IPOs — eclipsing that heady year of 1999, when the dot-com boom peaked and companies raised nearly $108 billion going public.

But as of last Thursday, the total this year is only $62.33 billion, according to this morning’s Wall Street Journal.

And the performance of the biggest “tech” names has been abysmal…

IPO Uh-Oh Chart

… Especially when you could have bought an S&P 500 index fund at the start of 2019 and be up nearly 30% now.

For a long time, the mantra surrounding these companies was “No profits? No problem.” So it went for Uber and every company that modeled itself after Uber.

“Starting about a decade ago,” writes Derek Thompson in The Atlantic, “a fleet of well-known startups promised to change the way we work, work out, eat, shop, cook, commute and sleep. These lifestyle-adjustment companies were so influential that wannabe entrepreneurs saw them as a template, flooding Silicon Valley with ‘Uber for X’ pitches.”

In many ways and for many people, these companies have made life easier and more affordable. They also lose prodigious amounts of money.

“If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year…

“To maximize customer growth they have strategically — or at least ‘strategically’ — throttled their prices, in effect providing a massive consumer subsidy. You might call it the Millennial Lifestyle Sponsorship, in which consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base.”

For deep-pocketed venture capital and private equity investors, it all made sense as long as these companies kept growing that user base.

But that couldn’t go on forever. And it turns out the plateau came just as many of these companies went public this year. (Who’da thunk it, right?)

Uber went public in May at $45 a share. It hasn’t traded anywhere near that level in five months. Checking our screens this morning, it’s sunk below $30.

We saw it coming here in The 5. In the summer of 2017, at a time the mainstream was oohing and aahing over Uber’s “disruptive innovation,” we spotlighted two financial renegades who said there was no there there. One of them, transportation consultant Hubert Horan, ran the publicly available numbers and concluded Uber was subsidizing each fare up to 61%.

Uber had to disclose additional figures when it went public last spring, but they didn’t change Horan’s analysis: There’s no way Uber “can produce their service at costs consumers are willing to pay.” Nor is there evidence “that they can ever profitably expand to any other markets (food delivery, driverless cars, etc.)."

Then there was the whole fiasco with WeWork, the “office sharing” company that had to scupper its IPO plans when investors suddenly realized, “Hey, this company’s losing $1 billion a year!”

In October, one of WeWork’s biggest investors — the Japanese tech giant SoftBank — agreed to pour billions more into the company in exchange for taking an 80% controlling stake.

Founder Adam Neumann was muscled aside, but there’s no need to shed a tear for him — he’s collecting a $1.7 billion payout.

The guy had a special kind of genius. He started a company in the mundane and capital-intensive business of subleasing office space. But because he created an app for it, he could convince gullible Silicon Valley types he was another “disruptive innovator.”

Adam Neumann

Tech-bro Adam Neumann being his best disruptive self at a 2017 conference in New York [Flickr photo by Noam Galai/Getty Images for TechCrunch]

Thompson’s Atlantic article tackles the phenomenon from the microeconomic level. His takeaway: “Venture capitalists and startup founders alike have re-embraced an old mantra: Profits matter. And higher profits can only mean one thing: Urban lifestyles are about to get more expensive.”

Our own takeaway is more macro in nature: None of this would have happened were it not for the Federal Reserve. The Uberized world is one gigantic hairball of malinvestment.

“Malinvestment” is a term employed by the Austrian School economists of the 20th century. The definition is simple — the flow of capital into places where no sane person would ordinarily put it were it not for the stupidity of central bankers and their easy-money policies.

The Federal Reserve's easy money delivered us the dot-com bubble in the late '90s and the housing bubble of the mid-2000s. Malinvestment.

The whole “Uber of X” thing, as Thompson noted, began about a decade ago. That was right around the time the Fed’s post-2008 policies of near-zero interest rates and “quantitative easing” were starting to take effect.

The too-big-to-fail banks were the first beneficiaries. But right behind them were venture capital and private equity folks who could borrow at rock-bottom rates.

They proceeded to pour this borrowed money into projects that made no economic sense except for the easy availability of credit. How easy? Here’s a long-term chart of the fed funds rate, which helps set the pace for other interest rates throughout the economy…

A Recipe for Malinvestment

Consumers are always the last ones to feel the effects of the Fed’s “stimulus” measures. And a cheap Uber ride probably doesn’t make you feel as prosperous as an early-stage investment in a gig-economy startup, does it?

But that’s how the system is designed. It’s the Fed’s world. We’re just living — and scraping by — in it.

On this next-to-last trading day of the year, the major U.S. stock indexes are pulling back from record highs.

At last check the Dow and the S&P were both down about a half percent, the Nasdaq about three-quarters of a percent.

Gold is taking a breather after a strong rally that began a week ago today, the bid at $1,514. Crude is three cents away from $62 a barrel.

“It’s incredible how much this once-niche event has grown in the last few years,” says Ray Blanco — reviewing his notes from this month’s MJBizCon in Las Vegas, the world’s biggest cannabis trade show.

But Ray did more than press the flesh on the exhibit floor — important as that is. He also ventured out to the Vegas locations of several companies in his portfolio, along with companies on his watchlist.

One of his first stops — a retail location of MedMen Enterprises (MMNFF), right off the Strip. “This is one of three stores in Las Vegas,” he tells us, “with another coming soon. Plus 37 additional stores either open or opening soon in six other states.

Mad Men Shop

Inside a MedMen shop: The Apple Store vibe is no accident…

“In addition to some of the popular cannabis brands, MedMen also offers its own exclusive brands at its stores. MedMen stores also sell a collection of high-end company apparel — I was struck by the quality and selection of T-shirts, hoodies, hats and the like.

“It’s clear that they’re working to build a luxury brand that consumers will want to evangelize. That’s an extremely attractive model as competition grows in the legal cannabis space.”

Ray also paid a call on a store he calls “the Home Depot of growing cannabis.”

It’s called GrowGeneration Corp. (GRWG). “Need fertilizer, grow lights or trimming equipment? Everything in the store caters toward cultivating marijuana.

Grow Generation

Not your ordinary garden-supply place…

“They’re ramping up growth all over the country and in unexpected places,” Ray says after chatting up the company’s CEO on the conference floor. “Sales have been so strong at GrowGeneration’s new locations in Oklahoma that they’re working on even more expansion there.

“One of the very attractive components of GrowGen’s business is the fact that they offer higher-end consulting services, including greenhouse design and grow planning.”

And Ray’s Home Depot analogy is especially apt because the firm recently appointed former HD CEO Bob Nardelli as a senior strategic adviser.

Want access to Ray’s best cannabis names in real-time? Check out this offer before it expires on New Year’s Day.

“I don't understand those who gripe about your missives,” says an entry in our mailbag. “If one doesn't find value in it, don't read it.

“I, on the other hand, greatly appreciate The 5. I get news I don't hear from major media, investment concepts about which I have not heard and frequently a chuckle or two.

“Thanks for a great publication! I always look forward to reading your thoughts!”

“I have a working theory about America’s economic policeman role,” writes one of our regulars, following up on our most recent de-dollarization musings from last week.

“President Trump’s foreign policies might be driven by a profound understanding of something simple: Having a global reserve currency is not in any nation’s best interest — including ours.

‘De-dollarizing’ and returning to a gold standard is the best thing that could happen to every country. This is as true for America and its citizens as it is for all others.

“We must keep in mind that a privately owned central bank, rather than our government, produces the almighty dollar. President Trump does not seem to be a fan of the Federal Reserve or its policies.

“The banksters’ currency/financial wars (and worldwide de-dollarization agenda) are ongoing processes. President Trump probably realizes what the inevitable endgame will be, as well as how destructive and painful things will get if it drags on.

“This could be why he’s doing what he can to accelerate it. The sooner we return to a sound monetary system, the sooner everyone can plan for the big reset and hopefully start moving forward.”

The 5: Sorry, we don’t buy into theories that Trump’s playing 11-dimensional chess.

Trump’s Fed-bashing has been shamelessly opportunistic. On the campaign trail in 2016, he linked the Fed’s ultralow interest rates to a “big fat, ugly bubble” in the stock market. “But if you raise interest rates even a little bit,” he warned, “that’s going to come crashing down.”

But once in office, he needed to keep that big fat, ugly bubble inflated — hence his calls for ever-lower and even negative interest rates.

This year we’ve witnessed a truly bizarre spectacle with most of the people whose names have been floated as potential Trump nominees to the Fed board of governors. They give lip service to a gold standard… but they also insist the Fed must open the monetary spigots to fight deflationary forces.

The agenda is so patently obvious: “I want sound money, but not yet because we have to get Trump reelected first.”

Reminds us of the 1972 campaign. Richard Nixon leaned hard on the hapless Fed chairman Arthur Burns to print money to lock in his reelection. The idea was that after the election, the dollar could be re-linked to gold, albeit at a higher price than the $35 an ounce figure when Nixon closed the gold window in ’71.

Nixon won 49 states in ’72… but the dollar-gold link was never reestablished. Meanwhile, Burns’ money printing set us up for the near-runaway inflation of the Carter years.

Something like that strikes us as a far more likely outcome than a return to sound money during a second Trump term…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. For the last several weeks, one of our most successful high-end trading advisories has been closed to new readers.

I’m pleased to announce that embargo is now over — and once again, you can join the most remarkable “club” in the world.

But this invitation has an expiration date — Thursday night at midnight.

So before you get caught up in any further New Year’s plans, please review your exclusive invitation right now.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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