The Approaching Silicon Valley Meltdown

Tyler Durden's picture

Authored by Mark St.Cyr,

To say that we are living through precarious times seems to be an understatement. Whether one lives in the so moniker’d “developed world, emerging, or frontier” there seems to be one constant currently: No one seems to be able to accurately ponder what tomorrow may bring, whether its political, economical, social, or combination there of.

The only thing constant right now is one of two things: Either, further instability is on the horizon. Or, complete and utter chaos is already knocking on the door. (See Kim Jong-un or Robert Mugabe for clues.)

Stability, the once deemed word for progress throughout civilized society now seems, to have devolved to mean, at what point of the instability around them they’re currently coping with. i.e., If you’re currently muddling through economically while dodging being a statistic, as the term goes, that currently means you, or your situation, is currently “stable.”

This now applies to not only people, but business, as well as politics worldwide. If you think I’m exaggerating? Hint: Hollywood. Need I say more?

However, there has been one outlier, for the most part, which seemed to skirt around all the current chaos, relatively unscathed. That would be Silicon Valley and all its ancillary provinces aka “Disruptive Tech.”

So far the coveted group known collectively as “FAANG” (e.g., Facebook™, Apple™, Amazon™, Netflix™, Google™) seems to have held the “barbarians at the gates” known as investors relatively at bay, or “stable” in their positions, if you will. What has been, anything but, is their cohort of IPO brethren that were supposed to have joined them.

“The Valley” seems to fit nicely as a moniker for a now self-recognized nation-state, after-all, if you include the market cap of these and a few others (e.g., Tesla™ and more) their combined valuations rival those of sovereign nations.

For all intents and purposes one could say they’re already developing and embracing their own newly formed currency, aka “Bitcoin™.” All that’s needed would seem is proposing a charter, and recognition.

And that’s why it’s all about to burst, in my opinion. All of it. Why?

Just as there are always clues, it’s in the consistency of further developments, along with weighing any prior, coupling them with the current, then trying to extrapolate whether or not they still stand, or are valid. This is the work most people (especially those paraded across the sycophantic mainstream business/financial media) won’t do. And not doing so for many – as of today – will have ramifications, maybe for a lifetime.

So what’s the “Why?” Of course, it’s only my opinion, but I stand behind it more fervently than ever before. And it is this…

“The Valley” (and its entire ancillary complex aka “the disruptor class”) is on the verge of receiving a wake up call, the likes of which may make the dot-com era look relatively “stable” in hindsight.

To use the political as an analogy, let’s just say, I believe the newly formed “nation-state” of FAANG will have much more in common with the turmoil in Brazil, Spain, Venezuela, and a few others in the coming months as it continues to desperately cling to the mythical Utopia of magical creatures known as unicorns, and cash out riches known as IPO’s. That “Utopia” has already been found to be a Potemkin Village made of spreadsheet papier-mâché analysis and valuation metrics, not worth the digital paper they’re written on.

But what has been far more important over the last few years is this:

Every-time a unicorn has rung its IPO bell – it’s been marched subtly off the so-called “trading floor”, directly to the glue factory door, onto another floor, aka the “killing floor.”

 

Where it and its so-called “lucky” IPO debut investors, along with their wallets, met the same fate.

It’s been a “rinse floor and repeat” proposition going now for nearly 3 years. You know what else happened about 3 years ago? Hint: Quantitative Easing (QE) officially ended. I’ll contend that’s causation, not correlation. A very important distinction and difference, along with what it portends going forward. For as I iterated prior – there are always clues.

Back in April of 2015 as the effects of QE3 had yet to be realized (official end was Oct/Nov 2014) “The Valley” was still in complete euphoric mode. It was during this period I penned the following:

From the article, “Bubble Confirmed: From Sock Puppets To Action Heroes” To wit:

If the stresses now rearing their head within the markets continue I’ll make a prediction.

 

What you’ll not find more of going forward is VC’s strewn across the skies dawning capes and spandex searching through an ever-expanding universe of start-ups to fund. No. What you’ll find is a lot of the once so-called “wonder companies” that were previously funded desperately seeking additional funding of any type possible. Not to expand, or to buy the next greatest “eye balls for dollars model” to compliment their existing “now desperately seeking eyeballs for dollars” model.

 

What they’ll be in is a frenzy seeking funding – for their very own survival. Because Non-GAAP “We’re killing it!” earnings reports won’t do the most important thing in a recessionary downturn alongside the reality of no more “free” money.

As of that writing there have been far more tales of unicorn woes than anything else. Hint: Snapchat™, Twilio™, Blue Apron™, just for a few recent examples.

Then of course we have the “stable-mates in waiting” decacorns that were supposedly so ready, so fantastic, so disruptive, so _______(fill in the blank) that when they made their procession down to the IPO “floor” everyone would be dazzled.

Of course I’m speaking to Uber™ and such. How’s that all working out? Hint: The valuation was supposedly cut to around somewhere in the $40’s with Softbank™ supposed interest. Yet, that was before the latest fiasco in London was calculated in, or should I say, out? e.g. “Uber London loses license to operate.”

Hmmm, wonder what it’s worth today? I have a feeling nothing with a 4 handle, or even a 3, but that’s just a feeling. But if it stays private? Sky’s the limit when you’re the one doing the valuation metrics, right? Just ask them.

Remember when Snapchat was about to save the IPO world? (and if you’re one of the “lucky” to get in at the IPO, you have my condolences) This was the company that for all intents and purposes was going to show everyone that dared question the power of “The Valley” and their incessant hold to the “It’s different this time” meme that it was they that were in fact “the chosen.”

And they did just that – and were chosen to join the others in the IPO hall-of-shame with no redemption for both their valuation metrics along with many an investors wallet. You don’t hear about investors wallets anymore,but did you hear how “Billionaire Snapchat CEO Evan Spiegel and supermodel Miranda Kerr are a having a baby“? IPO’ing just-in-time does have its advantages, does it not? Again, if you were one of the debut “fortunate”, again, my condolences.

Yet again, Who’da a thunk such a thing even possible when the entire mainstream financial media was in near blissful, rapturous fascination with both the product along with its story?

Hint: From the article, “The Big Snapchat IPO Question: Will Investment Dollars Also Go Poof?” To wit:

In my opinion: This isn’t a good sign if you’re the supposed “David” in “The Valley’s” version of “Goliath” killers. Especially if you’re simultaneously held to be the IPO savior of tech. And there’s only one thing worse than “expectations” not being met, even if it is hopes, or dreamlike infused wishes.

 

What’s that you ask? Hint: When you state publicly that your business, a business that is looking to garner other people’s money who will someday be looking for a return on that investment read – they may never find that scenario ever possible.

 

Think I’m kidding? From their S-1 filing, page 19, in bold, italicized text. To wit:

 

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

 

So, I’m going to ask you a question from a business standpoint: Why in the world would you include such a statement?

 

Some will argue this was just some boilerplate legal mumbo-jumbo that is constructed and stated in more differing ways than there are ants on the planet, and needs to be included somewhere within the fine print, where all this form of legalese gets inserted to be glossed over. And that would be a fair argument. However, if that’s the reasoning: Why in the world would you make this statement front, center, and unable to miss?

 

Unless?

When it comes to that “unless” question, there’s only one question I feel answers it. e.g., “Too soon?”

I’ve made a myriad of arguments in articles on basically the same theme over these last few years, and most have fell on deaf ears. Yet, as the “markets” have continually gone higher any coverage for these so-called mythical companies seems to have gone from front-page news to the obituary section, where again, no one wants to read for fear it might be theirs to be read next.

Unless they’re having a baby. If then, see above.

Yet, there are glaring signs that should be laid out and parsed for what they may portend in the very near future, coming from what has now been classified as what can only be called the “never gonna let you down” family of all that “The Valley” holds dear. e.g., The FAANG family.

First, there’s Apple. As of now the new phone seems to be a hit. (To be clear, I’m an Apple product fan and user) However, what seems more than troubling is that the entire Apple mystique seems to be not only unraveling, but falling into atrophy.

Differing product rollouts (think wireless ear buds for one), software upgrades that are actually downgrades (as in features once favored by power-users suddenly vanish in their entirety) missed or delayed shipping dates, sufficient product inventories and/or availability., and on, and on. And yet? The CEO, Tim Cook, the once heralded operations aficionado seems to have plenty of time allocated concerning political statements be at the ready for consumption, rather, than all of the Apple products still in limbo. (Think Mac Pro® for another)

There’s just something not right with that entire situation, and I believe there will be backlash to be paid in the coming future. If so. the ripple effects are going to be well felt. However, when it comes to Apple – they run a business that generates net profits, massive at that. If there is any seismic activity in “The Valley”, Apple might not only fair the best, but actually benefit from it. But that’s for another article.

Then there’s Facebook and Google, the ultimate “ads for eyeballs” representatives. Currently their numbers seem to be “hitting it out of the park” as is portrayed ad nauseam via any next-in-rotation fund manager. However, as I’ve opined far too many times to count, I believe that is the result of failing ads-for-eyeballs campaigns concentrating their efforts to the two remaining points, where a return for those ad dollars has even the remotest shot of providing a sale.

If true value and efficiency was the reason for these two entities to receive, now, nearly 2/3rd of all the digital dollars being spent across all of social or digital media. If this were true, it begs the question: Then why are the largest ad buyers in the world for mass marketing products pulling their ads from these venues consistently? Hint: type “ad fraud” into your search engine of choice)

I contend their gains go hand-in-hand at approximately the same rate, as all the competitors lose the equivalent amount.

All one has to do is compare what were supposedly the next “kings” for further “ads for eyeballs” riches losses with these two ever-increasing gains. I content, after this retail season concludes, so to will those gains. And that alone will change everything, and I do mean just that – everything – for these two current FAANG rulers.

Then there’s of course Amazon, Netflix, (and how can one leave out) Tesla. Here’s where one question will become paramount when, or if, things become slippery. That question is: Where’s the money? aka Net profits.

Every time there seems to be a questioning of valuation in any of these companies one thing is for certain: Future Hype makes it appearance, again, and again, and again, and again. Tesla has now made it an art-form. Need proof? Fair enough, to wit:

As Tesla wrangles with production failures and more, suddenly the stock appears vulnerable – then just like magic (or clockwork to be precise, but there’s a mix of both for sure) Mr. Musk dons a stage and venue and rolls out the “next big thing.” This time, its “Semi-trucks, and a new “Roadster.

All sounds just fantastic, right? Well, it is, what’s even more fantastic will be how Tesla finds the time to do any of it as its current state of affairs in delivering already claimed vehicle production falls further, and further, and further behind schedule. Which begs the question: Does this P.T. Barnum effect begin to wear thin on already promised riches that aren’t showing up? The share price seems to be showing the “effect” is no longer the catalyst to unseen black-sky territory as it once was.

As I stated in the article, “Future-Hype Arrives Right On Cue… Again” To wit:

…I cavalierly made the comment that Elon Musk and Jeff Bezos would nod their head in approval. For this has become so blatantly obvious to anyone paying attention, it’s now downright comical.

 

Why? As I’ve been stating for years – It’s all about how to play the headline reading, algorithmic, front running, HFT, trading bots.  Hint: Remember how every time it seemed Amazon™ stock valuation was questioned there was suddenly barrage of “news” about drone deliveries? All coincidence I’m sure. After all it’s not like it worked for the Fed, right?

Now its electric semi trucks, and for Amazon, it’s now about taking over the government procurement supply chain. What’s next rocket ships to Mars? Wait, I’m sorry, I already forgot, that was last cycle. It’s getting harder to keep up.

Silicon Valley and its now representative, amalgamation of companies collectively known as FAANG currently seem invincible to the warnings signs building up all around them. Much like in the early stages of the dot-com era where upending calls for caution were met unheeded, or just-plain-out dismissed with a vengeance.

But that’s the funny thing about reality, especially when the pendulum reaches the final height of its swing. For once it does, it comes back the other way – with a vengeance.

The issue this time is this: On the upstroke was where “cartoon superheroes” and “it’s different this time” magical thinking with childish abandonment was not only rewarded, but seemingly reined supreme. Until…

Hint: The main course on the table this week thought the same, until.

Oh yeah… And meaningful Tax Reform will be passed before year end.

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pitz's picture

Can't happen soon enough.  Millions of Americans are tired of the out-of-control H-1B/OPT visa abuse, the offshore tax abuse, and the abuse of investors that comes from a significant number of SV tech companies.  

Arnold's picture

Green alligators and long necked beasts......

Stuck on Zero's picture

There's little tech left in Silicon Valley. Mostly it's online retail and social media. Real tech has moved to Austin or China.

Arnold's picture

I think that Tim Knight will be a bit happier in Palo Alto when the intellectual pressure goes elsewhere.

DownWithYogaPants's picture

Note to author:

Causation definitely implies correllation.

So if something is causative the result is definitely correlated.

Do I have to explain everything?

Forbes's picture

He needs to learn how to write, make an argument instead of rambling, and get a copy editor. Other than that, you'll have to explain everything.

Endgame Napoleon's picture

If SV tech jobs have moved to Austin, why is Texas’ per capita income sitting at $19, 617? You’d think the tech companies would bump up the average, but maybe, they can fill the jobs with more cheap labor in that state due to lower housing costs.

https://en.m.wikipedia.org/wiki/List_of_Texas_locations_by_per_capita_in...

Just as a user of several of these products who cannot afford to invest in anything, I think the author is right about Apple. They will probably hunker down, perfecting their product, which is excellent in many ways, including the design.

But one thing I have noticed is fewer updates among their “ecosystem” of independent app makers who provide one of Apples’ big advantages. Is there adequate compensation for all that hard work done by non-corporate programmers?

In the Era of Fake Feminism, the idea of a few highly paid corporate employees and their often equally highly paid, connected-up spouses, doubling up on six-figure salaries per household, is highly motivational for the plebeians, especially those toiling in the 1099 dead ends, with their twice-as-high SS taxation and zero guaranteed income. But after the luster wears off of creative professions, those toiling away at something they love start thinking about the high cost of things like food and shelter. Apple’s own company-made apps are good—really good—but it seems like they need the product choice of the independent app makers to stay strong.

Google has a product that just works well, too, but the ad revenue is apparently what supports it. I think people use it mainly for the ease of use. It is pretty smooth.

markitect's picture

We probably spent over $50,000 over the years on adwords, cant identify a single sale result of that spend, all our conversion tracking points to tire kickers and sales people using our ads to find us.  I'm sure it works for some businesses but it it really sucks for most.  I cant see this model surviving much longer.  Their real revenue stream is selling your data, all of it.  As the masses slowly wake up to the fact they are being tracked, followed, watched and sold every minuet of everyday there will be a tipping point where everyone dumps all things google.  I've even noticed some hipster types ditching smartphones all together, seems to be a new trend to "unleash" completely.  Myself have eliminated all google accounts and use strictly my own server for email now and turn off the cell most working hours.

personal109's picture

Wait till everyone start using much faster browsers like Brave, which bock ads and trackers by default.  Watch Google and Facebook's profits tumble. 

canisdirus's picture

And ZH's. The site is almost completely unusable on a computer due to ads and frackers, while it is absolutely unusable on mobile without serious ad/tracker blocking.

Froman's picture

Absolutely correct.  My firm wanted to build a certain piece of software and put an RFP out on the street a few years back.  The one requirement; that the entire system had to be programmed in the United States.  No off shore development at all because previously when we had used a well known tech firm it relied heavily on off shore development and there were problems with back doors that were programmed into the software as well as multiple other issues.  We had several well known firms come back and tell us they were extremely interested in the work but there was no way that we would be able to get what we wanted programmed 100% in the United States so they were not bidding on the job.  Ultimately, we ended up hiring our own team of people.  While it seemed expensive up front it saved a ton of money in the long run.

SilverTech's picture

"There's little tech left in Silicon Valley."

That's pretty much bullshit. Drive around and look at all the little companies in Santa Clara, San Jose, Milpitas, Fremont.

It's mile after mile of tilt-ups. Every one filled with small tech companies building all types of obscure tech products.

You'd be astonished, but of course you'd rather just be ignorant.

Consuelo's picture

 

 

We already gots the chimpanzees - thanks...

 

 

Cash2Riches's picture

Silicone valley, like so much else in our modern economies is in a massive bubble, that is just waiting to collapse. They THINK they have monopolies over the market. But they will learn the hard way, that they can only abuse a large portion of their base, for so long before alternative solutions rise.

11b40's picture

For every action, there is a reaction....eventually.

just the tip's picture

the opposite of your immigration reference would be my preference.  let them incorporate in india, thailand, malaysia wherever and keep their immigrants there.

land_of_the_few's picture

They are approaching the Desi Event Horizon, a Subcontinent Samosa Singularity. Everything will get sucked in then it will explode and erupt gigatonnes of bad code, class actions and hard UV radiation. With a hazy afterglow of stolen data and IP, and corporate accounting fraud.

bamawatson's picture

can't happen soon enough
sadly, will not happen
they completely own the chikdren
no escape

south40_dreams's picture

Tech is hideously over valued right now, and most of those companies have very few tangible assets to fall back on.  Maybe you'd like to buy a really expensive condo in the leaning tower of SF, or a recently deconstructed winery in Napa, or how about some Hollywood properties the "big boys" just put on the market to pay for, errr, gropers rehab

taketheredpill's picture

I can see AMZN rolling over retail (and other) distribution until there is nothing left.  

Google and Facebook may be the only way left for average investor to get a diversified exposure to longer-term technology startups.

Don't want to buy more at current levels but there on my list.

 

The rest of the Faangs...meh.

 

 

ReturnOfDaMac's picture

Tax reform?  Ha ha ha!!  Pedo Repugnicants are great at stirring up dissent, riling up the riff-raff, and even temporarily winning government, but governing?  No chance in hell.  These chimps can't get along with themselves or anyone else.  Prediction: No bill will make it through congress, at all.

FreeNewEnergy's picture

Ding, ding, ding! We have a winner. Give that man a chicken dinner!

Prediction: No bill will make it through congress, at all.

You are absolutely correct. The Republicans in congress, especially the Senate, are pure posers. They act like they're doing something, when, in fact, they are only doing what they do for show.

They bailed and failed on repealing (and replacing) ObummerCare and they won't pass any tax bill. Four Republican senators have alreay voiced no votes. Throwing in the repeal of the mandate was the final tell. They plan on using elimination of the individual mandate in exchange for Democrat votes for re-establishing the insurance co. subsidies that Trump ended.

It's a failed strategy because, from the Dems point of view, the individual mandate is more important than the subsidies. Killing the mandate ends Obamacare. If people don't have to buy it, they won't. So, trading that for re-upping the subsidies is no great deal in the eyes of Democrats.

They can have everything except the subsidies AND kill tax reform as well. Easy decision for them.

Congress does nothing other than run for re-election (oh, and grope, rape, and expose themselves). They should all just go home. The American people would be better served without them.

ReturnOfDaMac's picture

Congress does nothing other than run for re-election (oh, and grope, rape, and expose themselves) ... holy smoke someone else gets it.  You make my day!

truthalwayswinsout's picture

Everyone is discovering rather quickly that digital online advertizing is a scam. What else do you need to know?

Just about everyone knows Google is responsbile for the massive fall off in small business starts ups in the U.S.

Just about everyone knows Google and the rest of the FANGS are at the edge of their useful lives before they are replaced.

Liberaldisdain's picture

You can loose a lot of money betting against what is versus what should be. ZH loves to loose money that way. 

Sparkey's picture

As Long as you stay away from Loose Women you'll be 'OK', That is what Moma said.

Casey Jones's picture

I would short the shit out all the FAANGs, but there's no saying how long they can extend the pretend.

land_of_the_few's picture

Well Apple briefly dropped to THIRD place globally in June or so for the first time in years  ...the data trend direction is very clear. Their global smartphone market share is now rather similar to their desktop OS share just before smartphones started taking over.

Hkan's picture

Waiting for return pendelum swing wipe out last leg supporting this shit.

Its about time!

silverer's picture

Silicon Valley is actually more like 'Silicone' Valley. More fake and hype now than actual substance. It's all starting to sag.

Easyp's picture

Maybe a stupid question but ignoring the valid business concerns above what would happen the valley were to suffer a strong earthquake?  I assume California buildings constructed to withstand shocks but if Palo Alto was flattened then what?  Amazon would survive but some of the others might struggle.

silverer's picture

Ah, c'mon. Nothing that a $2,999.00 smart phone can't fix.

Consuelo's picture

 

 

"You know what else happened about 3 years ago? Hint: Quantitative Easing (QE) officially ended."

 

It did?  Really...?   

Final Authority's picture

"Oh yeah… And meaningful Tax Reform will be passed before year end."

Will they tell the truth about taxation in America?

http://losthorizons.com/index.html

 

Bemused Observer's picture

I think we are very likely to see a tech backlash. People start pulling back from being 'online' all the time, begin reducing their on screen presence. They resist the increasing digitalization, and start refusing to 'create an online account', pick a password, screen name, etc. When they are instructed to sign on with their fakebook account, they hit the back button instead.

The greater the 'deep state' presence, the less time people will want to spend there. And I think we may see a period of time when tech occupies a much less important part of our lives, used primarily for entertainment purposes. This, after a critical mass of users are hacked, ripped off, etc due to an online presence and forcibly relegate it to the back burner for awhile. (I completely disagree with the notion that we will all just embrace a digitalized world, not after all the major hacks and lack of security we have seen.

After a while, it would likely be re-introduced, but in a much slower, smarter way that eliminates the 'disruption' aspect and focuses on the 'innovation' part. Small disruptions in a specific sector are one thing, if they introduce new ways of doing old things, but system-wide disruptions for the hell of it are DAMAGING to a society.

They should have done that from the start. Seeing what they had, they should have KNOWN there would be all sorts of unforeseen problems, and gone slowly. They dumped all their water into a shiny new bucket, and only now are they seeing that it is full of holes and leaking fast..

ali-ali-al-qomfri's picture

'We change at the point of most extreme'-Booda

At least there is a whole generation of future farmers

who have already, most successfully, run many complex-online farming operations.

Transferable skills/s.

Bemused Observer's picture

Online farming? How does that work?

SantaClaws's picture

"People start pulling back from being 'online' all the time, begin reducing their on screen presence."

See https://www.nytimes.com/2017/11/18/opinion/sunday/internet-digital-techn...

Bemused Observer's picture

Good read, thanks for the link!

natty light's picture

There's a cafe on Broadway in Oakland that encourages patrons to put away their phones and have more interaction. 

A. Boaty's picture

I feel bemused at using a computer to read a comment about a tech backlash.

Bemused Observer's picture

LOL! You're right, it IS a bit strange...but of course the tech is so imbedded into everything that you CAN'T make a complaint without using some tech. But the backlash won't really be against tech, but against the current misuse of tech.

I actually LIKE tech, and see great potential. But it is being squandered, spoiled because of a few who want to control everything. It is these people who will cause the backlash, and who will be the targets. When they're gone, the tech can shine and show us what it's got.

Consuelo's picture

 

 

To say that population growth in this area, along with all of the downstream-vendor business that has been Booming here since 2012 - all on the coattails of the ad-revenue-cum-social-media space, would be the understatement of the century.

The 'growth-out' that has taken place here since 2012 makes the 2005/06/07 housing bubble seem quaint by comparison.

When this place meets its 1980 moment ('recession-proof', remember that name given the technology sector back then...?), well I don't have words...   

Hillarys Server's picture

Get a good job in Silicon Valley, pay rent and health care and you should have enough left over for a Starbucks coffee, Prozac, an I'm Still With Her button and your daily microdose of LSD.

HilbertSpace's picture

I hate Facebook as much as the next guy, but this column is incomprehensible. 

If there is one thing that will screw up Facebook and Google, it is that they have grown too big for their britches. As the primary feed of propaganda to the masses, they will be brought under government control. For the short run, this ought to be good for them financially, as the state will prohibit competition in exchange for control of content. 

But, over time, the state will turn it all to shit, as it does with anything else it touches. If you don't like Silicon Valley, you should be happy, because the days of Silicon Valley inovation are over. The FAANGS and the state will see to that. I am in the Valley, and I can tell you that at one time it produced this overwhelming sense that things should be done better, faster and cheaper. Now it produces an overwhelmning sense that its mission is to enforce ideological purity and ensure the appropriate behavior of the unwashed masses.

There is good news though. Unlike Washington, which is ruthless in it's pursuit of power while expousing virture, Silicon Valley belives in itself beyond the point of good sense. There isn't enough "diversity" available to compensate for the accelerating persecution of its overwhelmingly white and Asian male workforce. 

 

HisBoyElroy's picture

NO ONE UNDER 25 IS ON FACEBOOK.