Friday, March 2, 2018
If the market goes down, a lot of companies that are "zombies" could collapse all at once, leading to more pessimism in the market.
A recent article in the Guardian and on NPR finds that the average Uber driver makes less than $4 an hour driving for the company - this is less than half what I estimated before, which was pretty pessimistic as it was. You are just buying a car for Uber and selling it to them in increments, when you drive for Uber. The monthly "income" barely covers car payments, much less other expenses - and Uber requires you drive a new car, too.
The question is, if Uber is losing money on each ride, and the drivers are making less money than they would at Wal-Mart (which is hiring, by the way - like everyone else) how long is it before Uber loses enough drivers to make the entire concept no longer viable? And how long can Uber hold out before it runs out of cash to "burn"?
Oh, yes, burn rate - that was the mantra of the "dot-com" era of the late 1990's. Back then, the value of a "dot-com" company was determined by how much capital they squandered not by how much profits they made. "It's a new paradigm!" people cried - what another commentator recently said was the sure sign of a bubble, when talking about Bitcoin.
And therein lies the problem with the current economy. There are so many things teetering on the brink, ready to fall, that a small "tipping point" is all it takes to push them over the edge.
Take Sears, for example. Many people - including myself - have predicted that the old-line retailer, who botched online sales (after inventing mail-order in the first place!) was headed for the dumpster. Heavy debt load and loans from the CEO have kept it afloat, but for how long? Stores keep closing, sales keep dropping, and the place is a disaster. What happens when interest rates go up even 1%? Suddenly, all that debt becomes impossible to service.
Oh, sure, the Washington Amazon Post will say that it is all due to "Amazon" taking away sales - but online retailing accounts for less than 20% of overall sales in America. Something else is afoot, and that something else was the orgy of mergers and private equity buyouts of the last decade or two, leaving old-line retailers mired in debt they can no longer service.
So we have plenty of those zombies in the marketplace, stumbling around like the walking dead, waiting for that final shotgun blast to the head. And then we have the nouveau zombies, the "dot-com" companies that have yet to make dollar one, and have no realistic expectations of ever doing so. They are kept afloat through private equity funding and IPOs, with the thinking being that if they can grab enough market share, they will end up the monopoly winner in the marketplace - a marketplace where barriers to entry are low and competition is murder. I mean, taxicabs? This isn't rocket science.
And speaking of rocket science, what about Rocket Jesus? Can he really make 500,000 electric cars a year and are there enough buyers for them after Trump introduces tax subsidies for coal-powered cars? Don't get me wrong, I admire his (Musk's - not Trump's!) Utopian ideals - electric cars powered by solar shingles, power packs in every basement like 1930's science fiction. Rockets that land tail-first under their own power - also like 1930's science fiction. It is amazing stuff, but all losing money rapidly. And so long as deep-pocket investors pump money into it, it will be great. But a hiccup in the economy and.... where's all the money going to come from?
The problem is, markets are emotional and we saw this in 2009. The market went down - suddenly - and a lot of people panicked. A lot of computers panicked, too - programmed to sell off shares to cover margin trades or other scenarios. Either way, bad news has a way of snowballing - causing multiple defaults in a row, even for businesses that are otherwise "successful". As I noted before, when I had millions in mortgage debt for my investment properties, I did not sleep well at night. Most of these commercial notes were "callable" notes, which meant that if I bounced a check at the bank, they might decide that I needed to pay the full balance on the mortgage right away. Bank lines of credit work the same way. You could have a business that is doing OK, but bankers get nervous, or their ratio of debt-to-equity falls below government guidelines, and they either have to attract more depositors, or get rid of more loans. Net result is, a marginal business that is making a profit, ends up bankrupt the next day.
Each bankruptcy leads to more pessimism in the marketplace. When a person loses their job and is foreclosed upon - a common event in 2009 - they stop buying "stuff" and going to restaurants, and whatnot - and that in turn kills off other businesses, who lay off workers, who in turn spend less, and so forth. Again, the snowball effect at work.
The problem we have is that while our economy is doing well - a nine-year bull market - it was predicated on low-interest and low-inflation, both of which are likely to change shortly. As I noted before, it seems Trump's instincts with regard to the economy are all 100% opposite of what we should be doing. This is a lousy time for a trade war, with farmers having the lowest income in 10 years (income off 50-75% according to some sources) and over 80% of farmers taking a second job to make ends meet. Now China is threatening to tariff soybeans and corn. Gee, I wonder how that will play out for America's farmers? Maybe they can all get jobs in steel mills and coal mines!
Our economy is doing well, but a bit hollowed out. It is too leveraged in debt. Too many companies took on too much debt in the last decade - and too many consumers as well. Once we start to see the zombie companies finally collapse, it will trigger a landslide of bankruptcies of other marginal players, which in turn could turn robust companies into marginal ones. This is not some wild ranting or weird hypothesis, either, but a basic summing up of the history of our economy and how chaos theory works in practice.