You don’t necessarily get what you want or expect; but you usually get what you deserve.
Corollary: What should happen usually does happen. But not necessarily when it is s’posed to happen.
When the feds went into full moron mode in 2020, it was easy to forecast that inflation would be coming. But it was impossible to know when.
In the space of 18 months, the Fed increased its balance sheet by US$4 trillion. And the federal government handed out trillions in its various gimme/stimmy programs. Businesses, meanwhile, were closed. Output was discouraged.
Was this not a recipe for inflation?
Only a Fed economist wouldn’t have seen it coming. And now, inflation is here…at levels not seen since the 1970s.
Another thing that was obviously going to happen was that the high flying, wealth-destroying tech companies would fall to Earth. Investors wouldn’t pay extravagant prices for money-losing companies forever. Eventually, the bubble would pop. And it seems to be popping now.
Sinking ARRK
Cathie Wood is the queen of the bubbleheads. Look what’s happening to her. The Wall Street Journal:
‘Shares of the popular ETF, which is known by its ticker ARKK, have declined 45% so far in 2022—including 21% in April alone—as rising interest rates punish stocks that are valued on the prospect of robust future growth.’
With few exceptions, people don’t invest in stocks for fun. They invest to make money. In an honest market, they make money from earnings, either paid out as dividends or retained by the company. But in the fraudulent market of 2009–22, many billion-dollar companies earned no money at all. They took in capital — either as equity or debt — and gave nothing back.
Zoom, for example, hit it big time when the feds shut down the economy. Suddenly, ‘Zoom’ became a verb! And everybody wanted to do it. They Zoomed in the morning. They Zoomed at noon. And then they just kept Zooming until late at night with business associates…with family members…with friends.
Trapped down in Argentina, we Zoomed along with everyone else. But, along with other Zoomsters, we paid nothing for the privilege. Zoom was a great service. The challenge for the company was how to make money at it.
As long as the Fed was mainlining credit into Wall Street arteries, it didn’t matter how much money a company earned. Prices rose. And investors hoped to make money from capital gains, not earnings.
Face to face losses
But now, the Fed is no longer buying bonds. It’s letting its portfolio of bonds ‘run off’; they are expiring at maturity. And the Fed is also talking tough, threatening to raise interest rates, which would make it harder for these money-losing companies to raise more debt financing.
Also, with the economy returning to normal, zooming is becoming less attractive. Now, we can have meetings face to face.
What should happen in these circumstances? The highfliers should crash. And they have.
In terms of price-to-sales, Zoom sold for as much as 124. Now it is available for seven. Palantir was at 46; now at 15. Lemonade Inc at 107, currently trading for nine.
Robinhood made its reputation by allowing low-cost, rapid stock trading. The price rose to 26 times sales. Now, it’s only four.
All across the spectrum of promising tech start-ups, the up-and-comers are up-and-coming apart. Teladoc Health is down 77%. Block, minus 57%. Exact Sciences has lost 85%. Unity Software has fallen 58%. And Twilio, down 66%.
Another way to look at this is this: people usually get what they’ve got coming. So we have to ask ourselves: who has what coming next?
Stay tuned…
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Bill Bonner,
For The Daily Reckoning Australia
