Twitter–The Poster Child for Dot Com Bubble 2.0

Submitted by David Stockman

Thanks to the money printing mania of the world’s central bankers, the Wall Street casino has gone global. Accordingly, mindless speculation and momentum chasing have reached new absurdities, as exemplified by the red hot roster of international high flyers below.

The financial data for the top name on the list, Twitter, is all that is required to remind us that once again markets are trading in the nosebleed section of history, rivaling even the madness of March 2000. Currently, Twitter (TWTR) is valued at $31 billion.That’s 18X revenue, but the catch is that the revenue in question is it’s lifetime bookings over the 18 quarters since Q1 2010.

When it comes to profits, the numbers are not nearly so promising!  For the LTM period ending in June, TWTR booked $974 million of revenue and $1.7 billion of operating expense. That why “NM” shows up in its LTM ratio of enterprise value to EBITDA. It turns out that its EBITDA was -$704 million. In fact, its R&D expense alone was 83% of revenues.

That’s not the real fantasy, however. The sell-side hockey sticks indicate that TWTR’s forward multiple is only 86.6X projected EBITDA.  Let’s see. At its current total enterprise value, this implies it will generate $350 million of positive EBITDA in the next 12 months—or a $1 billion favorable swing from the LTM number.

Just say its going to take some doing—not to say a miracle. During Q2 EBITDA was -$104 million compared to -$13 million in the year ago June quarter. So TWTR’s cash profit numbers are marching to the rear at a furious pace, but never mind. It’s EBITDA will soar skyward any moment now, making it 86.6X forward multiple completely rational….. Right.

Needless to say, this kind of speculative lunacy would never occur on the free market under a regime of honest price discovery. Yes, markets would discount at hefty multiples the future value of unusually promising and innovative enterprises with demonstrated capacity to convert revenues into profits.

Thus, a 5% free cash flow yield might make sense for an especially solid and promising new enterprise. In that event, a $31 billion market cap would require EBITDA less CapEx in the range of $1.6 billion. Alas, it is not clear that TWTR will ever even generate that much revenue, let alone free cash flow—of which, so far, it has generated exactly none.

So the list below is mainly a throw-back to the dot com mania. Today’s equivalent of eyeballs are now being discounted at absurd multiples. In the case of TWTR, its valuation is being driven by hundreds of millions of account holders—a significant fraction of which are fake.

And perhaps that is the appropriate metaphor. The wild valuations shown below are the product of a fake market—a pure gambling casino that is being fueled by a worldwide money-printing craze that has no precedent in recorded history.

The cynic is likely to say, so what? The gamblers will take their lumps, and probably soon enough. But its not that simple. The serial bubbles created by the central banks cause vast malinvestments and deformations—-economic distortions which confer stupendous, unearned windfalls on some and arbitrary, wanton losses and penalties on others.

Just consider the implications of TWTR’s LTM financials. Its SG&A expense for that period was $657 million or about $350,000 per average employee over the period. Needless to say, this tsunami of money is not being earned from sales; its being burned from the proceeds of serial capital raises that have accompanied the skyward ascent of TWTR’s valuation in the venture capital and post-IPO casino.

As for the windfalls, the gigantic, if temporary, gains of options holders are obvious enough.  But how did the average price of a home in San Francisco rise to north of $1 million? How is it that moderate income tenants are being flushed out of rental units via every lawyer’s trick in the books? Why are traditional small businesses throughout the city closing-up shop owing to soaring commercial rents?

Any day now, this third and greatest bubble of the 21st century will reach a boiling point that even the mad money printers in the Eccles Building will not be able to sustain. Then there will be another thundering financial market crash—with collateral damage being ricochet willy-nilly in every direction along main street.

And that’s the real evil of Keynesian central banking. During the extended process of bubble inflation, the free market’s normal mechanisms which check unbridled speculation—such as short-selling—are disabled and eventually banished from the casino. Accordingly, bubbles grow to elephantine magnitudes under the malignancy of free money carry trades and one-way markets. In their wake, they channel massive flows of capital and real resources to blatantly uneconomic and often destructive purposes.

At the end of the day, free money is the mortal enemy of free markets. And free money is the catalyst for rank speculations that value imaginary cash flows at 87X…..that is, before the high flyers came crashing back to earth, like they always do.

Dot com 2.0

14 Signs That Bubble Prosperity Is Heading For A Bust

By Michael Synder

Did you know that a major event just happened in the financial markets that we have not seen since the financial crisis of 2008?  If you rely on the mainstream media for your news, you probably didn’t even hear about it.  Just prior to the last stock market crash, a massive amount of money was pulled out of junk bonds.  Now it is happening again.  In fact, as you will read about below, the market for high yield bonds just experienced “a 6-sigma event”.  But this is not the only indication that the U.S. economy could be on the verge of very hard times.  Retail sales are extremely disappointing, mortgage applications are at a 14 year low and growing geopolitical storms around the world have investors spooked.  For a long time now, we have been enjoying a period of relative economic stability even though our underlying economic fundamentals continue to get even worse.  Unfortunately, there are now a bunch of signs that this period of relative stability is about to end.  The following are 14 reasons why the U.S. economy’s bubble of false prosperity may be about to burst…

#1 The U.S. junk bond market just experienced “a 6-sigma event” earlier this month.  In other words, it is an event that is only supposed to have a chance of 1 in 500 million of happening.  Billions of dollars are being pulled out of junk bonds right now, and that has some analysts wondering if a financial crash is right around the corner.

#2 The last time that we saw a junk bond rout of this magnitude was back during the financial crash of 2008.  In fact, as the Telegraph recently explained, bonds usually crash before stocks do…

The credit market usually leads the equity market during turning points, as happened when credit markets cracked first in 2008.

Will the same thing happen this time around?

#3 Retail sales have missed expectations for three months in a row and we just had the worst reading since January.

#4 Things have gotten so bad that even Wal-Mart is really struggling.  Same-store sales at Wal-Mart have declined for five quarters in a row and the outlook for the future is not particularly promising.

#5 The four week moving average for mortgage applications just hit a 14 year low.  It is now even lower than it was during the worst moments of the financial crisis of 2008.

#6 The tech industry is supposed to be booming, but mass layoffs in the tech industry are actually 68 percent ahead of last year’s pace.

#7 According to the Federal Reserve, 40 percent of all households in the United States are currently showing signs of financial stress.

#8 The U.S. homeownership rate has fallen to the lowest level since 1995.

#9 According to one survey, 76 percent of Americans do not have enough money saved to cover six months of expenses.

#10 Rumblings of a stock market correction have become so loud that even the mainstream media is reporting on it.  For example, just check out this CNN headline from earlier this month: “Is a correction near? Wall Street on edge“.

#11 The civil war in Iraq is spiraling out of control, and Barack Obama has just announced that he is going to send 130 troops to the country in a “humanitarian” capacity.  Iraq is the 7th largest oil producing nation on the entire planet, and if the flow of oil is disrupted that could have serious consequences.

#12 As a result of the conflict in Ukraine, the United States, Canada and the European Union have slapped sanctions on Russia.  In return, Russia has slapped sanctions on them.  Will this slowdown in global trade significantly harm the U.S. economy?

#13 The three day cease-fire between Hamas and Israel is about to end, and Hamas officials are saying that they are preparing for a “long battle“.  If a resolution is not found soon, we could potentially see a full-blown regional war erupt in the Middle East.

#14 The number of Ebola deaths continues to grow at an exponential rate, and if the virus starts spreading inside the United States it has the potential to pretty much shut down our entire economy.

Meanwhile, things look even more dire in much of the rest of the globe.

For example, the economic slowdown has gotten so bad in some nations over in Europe that they are actually experiencing deflation

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral.

The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012, during the European sovereign debt crisis. “The European Central Bank has to act now,” said Andrew Roberts, credit chief at RBS.

And in Japan, GDP just contracted at a 6.8 percent annual rate during the second quarter…

Japan’s economy suffered its worst contraction since 2011 in the second quarter as consumer spending on big items slumped in the wake of a sales tax rise.

Gross domestic product shrunk by an annualized 6.8% in the three months ended June, Japan’s Cabinet Office said Wednesday. The result was actually better than the 7% contraction expected by economists.

On a quarterly basis, Japan’s GDP dropped by 1.7% as business and housing investment declined. Japan’s economy last suffered a hit of this magnitude after the 2011 tsunami and nuclear disaster.

There is no way that this bubble of false prosperity was going to last forever.  It was never real to begin with.  It was just based on a pyramid of debt and false promises.  In fact, the condition of the global financial system is now far worse than it was just prior to the financial crisis of 2008.

Sadly, most people do not understand these things.  Most people just assume that our leaders have fixed whatever caused the problems last time.  And when the next crisis arrives, they will be totally blindsided by it.

Copyright © 2014 Conyers LLC . All Rights Reserved.

The Federal Reserve and Bubbles

Many market pundits argue that the Federal Reserve is too dumb or too inept to identify asset bubbles.

By focusing on the Fed’s mental acuity (or lack thereof), these pundits are overlooking a key factor: the Fed wants asset bubbles.


Asset bubbles, at least according to the Fed’s models, will paper over the steady decline in quality of life that began in the US roughly 50 years ago.

This fact is staring everyone in the face, though few people can see past the smoke and mirrors erected by our government to identify and understand it. . Back in the 1950s, the average American family had one working parent and was able to get by just fine. Today, most families have two working parents, sometimes working more than two jobs and they’re still not able to afford a prosperous life.

A 2012 study by NYU Professor Edward Wolff found that the median net worth of American households was at a 43-YEAR LOW. The average American in the 21st century was in worse shape than his 1970s counterpart.

This process began to accelerate in the late 1990s. Looking at real media household income, one can see clearly that things have generally been downhill for nearly 20 years now.

Real Household Income

It is not coincidence that the Fed began blowing serial bubbles starting in the late 1990s. The Fed is aware on some level that quality of life in the U.S. has fallen. The Fed’s answer, rather than focus on solutions to the problems of job growth, income growth, etc. has been (and is) to blow bubbles to paper over this decline.

This is why we’ve had bubble after bubble after bubble in the last 15 years. The Fed doesn’t have a clue how to create jobs or boost incomes. Why would it? Most of the Fed’s Presidents are academics with no real world business experience.

Instead, the Fed believes in the “wealth effect” or the theory that when housing prices or stock prices increase, people feel wealthier and so go out and spend more money. This theory is baloney. People spend based on their incomes, NOT the value of their homes or portfolios.

Assets only convert into cash once the owner sells the asset. Anyone who goes out and spends more money because their home went up in value will only end up with credit card debt or home equity debt, which combined with their mortgage, puts an even greater strain on their financial resources.

The Fed wants asset bubbles because they hide the rot within the US economy. If the Fed didn’t raise stock or housing prices, people might actually start to wonder… “hey, why is my life getting more and more difficult despite the fact that I’m working all the time?”

The Fed wants bubbles. So we’re doomed to keep experiencing them and the subsequent crashes.

Originally published by Phoenix Capital Research

Jeremy Grantham 1999, Jeremy Grantham Today: "Over Next Seven Years, Market Will have Negative Returns"

As an investor It is difficult to sit out a party. I may even be more difficult as a money manager… Do so and you risk losing both clients and assets. Invest in unloved and undervalued assets and you do even worse.

But what is the alternative? Get drunk like everyone else?

We have to admit that this market has gone further, faster, than we thought possible. Bubbles of the current magnitude have never been blown back-to-back in such a short timeframe.

I am not the only one who see things that way. John Hussman has been preaching the same message and so has Jeremy Grantham.

Over Next Seven Years, Market Will have Negative Returns

We encourage you to read an interview of Jeremy Grantham, by Stephen Gandel, senior editor of Fortune: The Fed is Killing the Recovery.

The entire interview is worth reading. But here is one snip that caught our eye.

Fortune: Are you putting your client’s money into the market?

Grantham: No. You asked me where the market is headed from here. But to invest our clients’ money on the basis of speculation being driven by the Fed’s misguided policies doesn’t seem like the best thing to do with our clients’ money. We invest our clients’ money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will be cheap again. That’s how we will pay for this. It’s going to be very painful for investors.

It’s well worth reading the entire interview. But we are biased. It supports our own view about market valuations and the Federal Reserve.

Jeremy Grantham 1999

Grantham is one of few who saw things correctly in 1998 and 1999. While others were partying like no tomorrow, Grantham sat things out. In the process, he lost 60% of his asset base simply for not acting like a drunken fool, like nearly everyone else.

Please consider this Forbes Interview of Jeremy Grantham from 2009. The section of most interest pertains to 1999.

Grantham did not lose client’s money. Rather, he lost accounts and assets. Clients who stayed with him did quite nicely.

Unfortunately, it’s a sad state of affairs that investors (speculators really), time and time again chase rising markets and managers with a current hot-hand rather than invest prudently. Then again, that’s precisely what it takes to make a bubble.

This bubble is in a rare class with 1929, 2000, and 2007. But we do not know when the party ends, nor does Grantham or anyone else.

Actually, it doesn’t matter, at least in the long run.

Stocks in general are poised for negative returns for seven years (perhaps longer) once again.  If the party lasts a lot longer, seven might turn into eight or ten, but that will not change the ultimate outcome.

Bubbles Always Pop

The global economy has been on life support since 2008 thanks to trillions of dollars of  government spending and central bank printing of trillions more. Both strategies have boosted asset prices and given the illusion of economic growth.

It is difficult to know the extent that markets and the global economy have benefited from official policy stimulus; however, six years after the crash, economic growth and the labor recovery remain subpar. Strong growth should have been ignited by now.

Bubbles popMost economists still believe in the ‘official position’ that growth is edging higher and that interest rates will slowly rise to reflect it. They could be correct, but should it fail to unfold as expected, confidence in the efficacy of official policy will diminish and the social contract will break down further. Since markets require confidence, they will also react accordingly.

Some argue that economic benefits to stimulus have run its course, while the costs from looming unintended consequences have not yet been unleashed. Many believe (including us) that the risks and costs of current Fed policy outweigh the benefits.

The Fed’s asset purchase program (QE) and Zero Interest Rate Policy (ZIRP) are the foremost factors that have widened wealth inequalities. The richest few have benefited the most, simply because the 10 percent richest Americans own 80 percent of US stocks. The FOMC believe that its asset-price-inflation-trickle-down-policy leads to spending which ultimately leads to job creation, especially for the poor.

However, several FOMC members themselves have questioned Fed policies, citing that they have not worked as well as had been hoped, and pointing out that aggregate demand has been weak throughout the recovery. To his credit Fed Governor Jeremy Stein broached the subject of unintended consequences of Fed policies when he mentioned in his February paper, “A prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risk, or to employ additional financial leverage in an effort to ‘reach for yield’”.

Zero interest rates have incentivized corporations to issue debt in order to capitalize on the historically low interest rates; however, corporations have primarily used the money to pay greater dividends, buyback shares, or modernize plant and equipment. There is a strong case to be made that holding interest rates at zero for a prolonged period is actually counter-productive to the Fed’s efforts to achieve either of its dual mandates. This is because increasing productivity through modernization typically exposes redundancies: it allows firms to lay-off workers, while the improvement in competitiveness allows firms to drop prices.

An unintended consequence of ZIRP could be to lower household spending rather than raise it. There are some conservative savers who have a predetermined goal in mind for the minimum amount of savings they wish to accumulate over time. Those investors may refuse to move out the risk curve in search of higher yields (likely widening the wealth divide). To them, lower interest rates simply mean a slower rate of accumulation, which likely will jeopardize their minimum goal. The only recourse for this investor is to save more, which is the exact opposite intention of the Fed’s policy. For example, if interest rates fall from 4 percent to 3 percent, an investor would have to increase savings by more than 20 percent each year to reach the same goal over 30 years.”

Another negative result of ZIRP is that banks and other lenders are discouraged from lending due to puny return levels; and, therefore, the Fed’s desire to expand lending is compromised. Are lower (or negative) interest rates supposed to increase the incentive to lend money? That is an absurd assumption. Although somewhat counter-intuitive, if interest rates rose, then the supply of money willing to be lent would increase due to wider interest margins.

Current policies are so unprecedented and unproven that it is possible that the Fed itself has now become a source of financial instability. This could be the case either through the potential fueling of asset bubbles, through its compromised ability to conduct future monetary policy (due to it  unwieldy $4 trillion balance sheet), or due to “unknown unknowns.”

In a low to zero interest rate policy (ZIRP) environment, investors desperately search for yield. This frequently chases investors into assets to which they are ill-suited and to which they will miscalculate liquidity and downside potential. Under ZIRP paradigms, riskier assets become the best-performing. Credit spreads collapse and equities soar.

Massive monetary ‘printing’ by global central banks has not just emboldened investors, but these actions have collectively changed their behavior and psychology. There is evidence that policies have led to misallocation of resources. Investors are emboldened to take what many critics believe is inappropriate or reckless levels of risk. The motto, “Don’t fight the Fed” has taken on added meaning. Moral hazard and a deep-seated bullish psychology have become rampant.

Extended Fed promises of lower rates and a continuation of asset purchases even as the economy heals, are conspiring to propel prices ever-upward. Investing today has become mostly about seeking relative yield, rather than assessing value or determining if the investment’s return is sufficient compensation for the risk.

Simply stated, investors and speculators receive ever-lower returns for ever-higher levels of risks. Over time, the ability of an investor to assess an asset’s fundamental value becomes ever-increasingly impaired.

There have been persistent cycles of asset booms (bubbles) that eventually turned to ‘busts’. Very low or negative real rates always create economic distortions and the mispricing of risk, thereby creating asset bubbles. Each ‘boom’ had some differences, but the common factor has always been easy money which the Fed was too slow to withdraw. Providing liquidity is always easier than taking it away, which is one reason why the Fed has hit the “Zero Lower Bound” in the first place.

Eventually asset prices always return to their fundamental value, which is why bubbles always pop. The FOMC has backed itself into a corner. Current changes in policy are being designed around efforts to manage the unwind process seamlessly. Central bank micro-management appears based on a belief that they can exert an all-encompassing central control over markets and peoples’ lives. Those in power have come to believe that policies have a precise effect that can be defined and managed. This is highly unlikely.

In ‘normal’ times there is a more discernable connection between cause and effect. However, the usual relationships particularly break down during periods of over-indebtedness, unprecedented regulatory changes, and official rates reaching the zero lower bound. Today, the world is far from ‘normal’. It is not difficult to imagine the looming fallout from policies that have promoted asset price inflation, and which have materially compromised market liquidity.

In the long run, policies that punish savers at the expense of helping risk-takers and speculators are bad long-run policies for any country. It would be better to transform the country into net savers, rather than to continue to promote policies where growth is reliant on overly-leveraged consumers or speculators, and is micro-managed by attempts of central-control.