Over the past few months I already spoke about the stock
buybacks, and how they have reached all-time highs. This was in my opinion the
main trigger for stocks to go up over the past few years but has now stalled
due to increasing interest rates.
How extreme have these stock buybacks been? In Billions
of dollars, the buybacks have surpassed capital expenditure! In the past 20
years, this has only been the second time that this is happening. The last
time, unsurprisingly, was in 2007, right before the credit crisis.
40% of the value added to S&P 500 stocks since 2009
has been through dividends and buybacks. Has real value been created? Has there
been real innovation? Have companies focused on growth and outpacing their
competitors? No, the only thing that has been created is a smile on
shareholders` faces.
On the face of it, shareholder value
is the dumbest idea in the world.
- Jack Welch -
The cracks slowly start to grow, and obviously it will
hurt the most in the areas where money has been flowing freely. Case in point:
startups. Since 2013 there has been an explosion in Venture Capital deals
raising 100 Million dollars or more. Having been stable from 2007-2013 with
about 0 -5 of such deals announced, over the past 5 years it has grown to 45
deals announced! If you are looking at one of the largest bubbles that are
blown since the previous crisis, look no further than startup funding.
I have been a startup consultant over the past 4 years,
and to look at the industry up-close is just stunning. The number of VC`s,
incubators, accelerators and private investors is mind boggling. I am in close
contact with these investors, and I still find it amazing to see that none of
them actually care about profitability of a startup. Heck, the startups don`t
even necessarily need to have any revenue! It`s all about daily active users,
the average number of minutes spent on an app, and many more of these useless
metrics that have just been brought to life to cover up the one thing that
matters: profitability.
Being a startup consultant, it is my job to try to lower
the chance of failure of a startup from let`s say 98%, to 92%. You might wonder
why anyone wants to hire a consultant who is so downright pessimistic, but in
my opinion that is exactly what startup founders need: some grounding. They
need someone to drag them back to earth, tell them about the viability of their
product or service, the potential size of their market, and the chances of
becoming profitable.
What I feel is that many of the startups are playing a
game of “who can hold their financial breath the longest”. A good example is
the Southeast Asian fight between Grab and Uber; from the start, these
companies have been throwing buckets and buckets of money at their customers,
trying to lure them in as regular customers. I remember a point in time where I
had 5-dollar discounts with Grab on an 8-dollar ride, every day, for 6 months in
a row. Has this increased my loyalty for
Grab? Not at all. I still choose the cheapest option, regardless of the service
provider. After spending Millions of Dollars on both sides, Uber decided to
give up, and sell their Southeast Asian operations to Grab. There have only
been losers at that point; Uber lost their markets, Grab (or should I say,
Grab`s investors) lost Millions of Dollars in discounts, and the consumer is
now dealing with a near monopoly in the market right now.
But let`s look at the mother of all examples: Amazon.
Since the late 1990`s they have been squeezing physical retailers, by making
online retail cheaper. They have destroyed many of the well know brick and
mortar brands and department stores. By playing a game of “Who can hold their financial
breath the longest”, they have gotten rid of most of their competitors by being
unprofitable in their operations for 20 years. Who has paid for this? Amazon`s
investors. Now that physical retailers are leaving in droves, commercial rents
are dropping like never before, and guess what…
Amazon now decides to set up their own brick and mortar outlets…
Genius? Yes!
Unfair? How would you feel if a runner on steroids (read: nearly unlimited cheap credit) wins from someone who has worked long and hard to reach their goals?
Amazon now decides to set up their own brick and mortar outlets…
Genius? Yes!
Unfair? How would you feel if a runner on steroids (read: nearly unlimited cheap credit) wins from someone who has worked long and hard to reach their goals?
One of the biggest winners in these examples are the
consumers, as they can purchase products and services at the lowest rates. In
my opinion, this has suppressed consumer inflation rates massively, and now
that we are going back towards interest rates reaching “fair value”, all these
discounts and low prices will disappear, and companies will go back to their
main goals: becoming profitable.
Most likely, this will result in a spike in inflation, together with a few other factors that I will discuss in the next chapter.
Most likely, this will result in a spike in inflation, together with a few other factors that I will discuss in the next chapter.
Meanwhile,
looking at a different industry, global auto sales have been coming down a lot
over the past 2 years, now being back to levels that were last seen in 2009. Is
this because of the rise in companies like Uber? Or is it just because we are
in the midst of the next global economic downturn? How will this downturn
affect auto companies like Tesla, who haven`t even been able to become
profitable yet? Will they survive the lethal combination of rising interest
rates and declining auto sales?
The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.