Another week, another slew of disappointing (if not outright pathetic) macroeconomic data releases. From revisions of first quarter GDP now printing negative, to a weekly “jobs” report that was heralded as “fantastic” because once again – they dodged the bullet of printing anything at or above 300K. (albeit the miss was only by 15K, a rounding error in any of the calculus)
Once again all this bad was spun throughout the financial media as to imply “good.” The reasoning for all this optimism being proclaimed was spouted as “Hey, it’s another print below 300K, this shows the economy is on track!” Even though this latest report is once again showing movement growing closer to 300K, rather than what would truly show improvement. Moving away from 300 and more towards 200K. However the hilarity didn’t stop there.
When the pending home sales report was released showing an improvement in April of 3.4% vs consensus of 0.09? You could almost hear the champagne corks going off behind the eyes of every next in rotation economist, fund manager, analyst, or professorial academic as they took to the airwaves to shout “See, see!”
I believe the real cause of their celebration was (just like the jobs report) they too dodged a bullet by once again having just enough specious data signals to shift perception away from a faltering and stagnating economy and “set the table” once again via their now well-worn version (or illusion) of: Three Card Monty economic reporting and analysis.
So indoctrinated does this now seem to be within the so-called “smart crowd” I wouldn’t be surprised to soon read of an Ivy Leagued institute of “learning” offering it by name as an accredited study and degree costing 6 figures in the coming future. That’s how emblematic this charade now become.
Today, anyone owning a business, or thinking about creating one outside of Unicorn Silicon Valley doesn’t need to hold some Ph.D in duh to understand there are still far more troubling issues within this economy.
Currently there are more and more businesses not only struggling, they are also needing to spend ever more scarce and valuable resources competing with companies that should be – out of business. Unlike other businesses (i.e., Where a company needs to actually make a net profit, meaning, there’s something left over to reinvest once all the bills and salaries are paid.) these “companies” are being kept alive only by the financial engineering made possible since the outright adulteration of the capital markets via the Federal Reserve and its continuation of its insidious monetary policy. This unfair competitive advantage has to constantly be circumvented requiring allocation of scant resources. Or worse for far too many – completely unavailable.
Today, a great many businesses that should, and want to compete are finding it harder, and harder to do just that. Innovation; along with market realignment can not only stagnate, but it can kill the next phase or wave of entrepreneurs or innovators that may hold the subsequent set of solutions an economy in entropy needs. All this is because of the markets (all markets) inability to clear.
Please don’t tell me about all the innovation happening within “The Valley” as if that is your version of the “See, see!” argument.
Yes, the innovation emanating there and around the country has been breathtaking. However: much of that innovation as of late I’ll contend is for the direct usage for, and application of businesses and entrepreneurs to utilize! e.g., You can now build an e-commerce website and begin selling, shipping, serving customers world-wide and more. That’s great, and yes it’s innovative – but there’s a problem nobody seems willing, or able to see. You now must have customers that have money to buy! Customers that can generate a net profit for what ever it is you are now selling to make the whole thing work.
Let’s use an oversimplified yet illustrative scenario to put some perspective into this.
If you’ve just innovated or “hacked” making a better “mousetrap” a few things according to the fundamentals of real, or true business have to take place. First, you need a customer that can afford to buy and use your product at a price you can make a net profit at. Second, the entity that purchased your product also needs to find customers they can do the same with. And Third: What ever company or provider previously supplying the now inefficient product or service – needs to be allowed to wither or cease freeing up the market place for potential customer acquisitions. And there lies the issue.
If the last line it the above progression is not allowed, or, the process is adulterated (i.e., crony capitalism) all the preceding is for naught. And the resulting consequences are far greater to an economy than any pretend they’re avoiding. i.e., “saving jobs” argument et al.
The dirty little secret along with the blind eyes put to the above by all the academic and professorial “smart crowd” is this: The adherence to remain at the zero bound is doing nothing but providing the fuel for financial engineering for those that shouldn’t be able to compete to not only do just that, but at prices bastardizing the true price discovery level where honest profits can be made and utilized. But that’s not all. It also has another insidious effect not understood by those whom never had to run a business but just remained in school and now teach how they “think” the real business world operates.
People want to point and shout, “Look at the funding and investing and entrepreneurship creation going on in the Valley! What do you mean innovation is being hurt? Are you blind?!” To which I’ll state again, “Yes, there’s funding and innovation. But (and it’s a very big but) the allocation of capital is now a numbers game as opposed to a more careful consideration to pure business fundamentals. Just as in times past. (does “sock puppet” ring any bells?)
Let’s say a hypothetical fund may have $10MM to invest. What they’ll more than likely do today is to put $X amount across the next 100 pitches evenly. Regardless of business fundamentals. The rationale to this is a pure odds play. i.e., Maybe 1 or 2 will hit. Who cares what the business is or most other considerations. When the “free money” is flowing – it’s all a percentage game rather than taking the time needed for due diligence and investing in truly promising upstarts.
In other words what doesn’t happen is: Invest in the 1, 2. or more out of the 100 adequately. The ones that shows real promise, innovation, and business fundamentals. Then use that partnership as to help ensure they have the best chance of becoming all they can. This model (the model where true business acumen is needed) is now shunned.
Yes, it’s an over simplification. Sounds a little too altruistic? Again, yes. However, that’s because it’s up against the backdrop of what’s now taking place in response to “cheap money” via the current state of macro monetary policy.
When money and investing is no longer rewarded by business acumen and prowess - rather it’s “Here’s a boatload of cheap money. Throw as much as you can, as fast as you can, at as many as you can, and see what, if any sticks” - that is when you should be looking for where the lifeboats are hanging. Rather, than hanging around on the poop-deck waiting to see if it’s all about to hit a fan.
Today, far too many businesses are being created, and funded to do nothing more than survive longer cash burn periods to beat out your competitor (not business rival but next inline for funding competition) as to move it closer, and closer to the now coveted unicorn status. (e.g., $1 BILLION market cap potential) And profits, customers, or anything else fundamentally business related be damned. It’s all about getting to IPO and VC cash-out. Period. And the destruction left in the wake of this type of activity at one of the most important levels in the business food chain this time will be even more devastating than it was in the ’90s in my opinion.
Just imagine the way this period of market mania will be looked back upon. When one of the reasons cited as a clue of a “bubble” will be how many businesses found themselves unable to compete not because of anything fundamental to business processes. Rather, it was due to the fact they had to use 1+1=2 math – as compared to their competition which was not only sanctioned – but encouraged, and rewarded via their stock price because of their ability to make 1+1=__________(what ever you want) via the non-GAAP methodology. Where unprofitable was turned into “We’re killing it!” with a keystroke in a spreadsheet.
There’s this and a whole lot more being perpetuated within the corporate elite via the cheap money and funding made possible by the Federal Reserve’s reluctance to get off the zero bound. Small business that don’t have the luxury of this accounting methodology as to be rewarded by the capital markets for using it find themselves not only at an uncompetitive advantage – they find themselves out of business sooner – than later. All while the academics scratch their chins and wonder why the issue is getting perpetually worse, not better. It’s near maddening to the business sane. And the ramifications for staying this low for this long are going to be more than profound in my estimation.
It also shouldn’t be lost on anyone that the financial media is once again in near hysterical jubilation as they’ve announced merger after merger of companies “Getting it done with M&A!” Those companies?
Time Warner™ once again the focal point of a merger. AOL™ once again in the spotlight for its impending merger. Add to this SalesForce™ another company that without the benefit of non-GAAP reporting can’t make or show a profit is said to be acquired by none other than the “innovation” juggernaut of the last decade – Microsoft™. And last but not least: Housing just reported its best rebound print in over 3 years – as more and more perspective home-buyers without the ability to pay cash outright or make a substantial down-payment are unable to qualify. Not withstanding how fragile the complete structure of the markets in total has now become to just the sheer mention, let alone actual increase of just 1/4 or 1%. Talk about hysteria!
I guess we’re just back to the old turn a blind eye to anything historical. Remember “It’s different this time.” Nothing to see here, move along, don’t fret, no need for concern. Just remember and repeat three times every time there’s reason for concern when the market drops 200 or 300 points out of the blue only to recover all if not more the next day…
“The Fed’s got your back, the Fed’s got your back, The……”
