So far, 2019 has been the year of unprofitable businesses going public. Despite not making a cent or being years away from being in the black, companies are filing initial public offerings, or IPOs. What’s worse is that investors are scooping them up, unable to resist the temptation of thinking they have uncovered the next FAANG stock – Facebook, Amazon, Apple, Netflix, or Google. Will these money-losing ventures take a bite out of stock market valuations, or will they pull through and pad portfolios?
WeWork to Lose
Consider WeWork, which provides shared workspaces for technology startups and offers services for entrepreneurs, freelance professionals, and small businesses. At first glance, it looks like a successful company: 400,000 members, nearly 500 locations, and $5 billion to spend thanks to SoftBank’s general investment in U.S. tech companies. However, like most firms that have filed for an IPO in the last couple of years, a monster lurks beneath the surface.
The company lost $1.9 billion in 2018 and $993 million in 2017. In the first quarter of this year, WeWork reported a $264 million loss. While revenues grew to $728 million in the January-March period, it is far from recording a profit – and this is in a bull market. WeWork’s core business model consists of signing long-term leases and then subleasing these properties on a short-term basis, which can be a dangerous revenue generator because office rents plunge in a recession.
Then, of course, a couple of internal scandals could worry investors. According to The Wall Street Journal, WeWork CEO Adam Neumann, who controls 65% of voting rights in the company, has purchased properties and leased them back to WeWork, making millions in the process. This has led to conflict-of-interest concerns.
But Neumann told CNBC that investors need to look at WeWork’s losses as “investments” that will eventually lead to more cash flow. This sentiment was echoed by co-president and CFO Artie Minson, who also told the business news network:
“We really want to emphasize the difference between losing money and investing money. You can lose money or you can invest money. At the end of this quarter, we have these cash flow-generating assets.”
In other words, the power players want the market to buy the hype ahead of its IPO.
It is true that venture capitalists and angel investors expect losses in the infancy stage. But there are losses and then there are billion-dollar losses by a nine-year-old startup in a decade-long economic expansion. So what’s going on? The answer to that question lies inside the Eccles Building.
Taking Stock of Money
Since the stock market bottomed out in 2009, the M1 and M2 stocks have skyrocketed, expanding between 1% and 6% per month. The substantial increase in the money supply has slashed interest rates to historic lows, creating an abundance of cheap dollars on the open market. The results have been cheered by everyone. Why not? We are witnessing the longest bull run since the end of World War II, record-high stock valuations, and plenty of winning on Wall Street and Main Street.
As Charles Dickens wrote in A Tale of Two Cities, “It was the best of times. It was the worst of times.”
The Fed’s money-printing scheme has led to a prevalence of malinvestment, enormous debt, overleveraged businesses, indebted consumers, and publicly traded firms not making a cent of profit – and potentially never will.
So why does paying attention to the M1 and M2 money stocks matter?
The Austrian School of Economics highlights the correlation between the growth rate of money supply and the strengthening of stock prices. At the same time, a slowdown in expansion pauses the momentum in share valuations. Post-Keynesian theory argues the opposite: The changes in the stock market affect adjustments in the money supply.
Here is a chart that contrasts the increases in the M1 with Dow Jones milestones:
Here is a second chart that compares the drops in the M1 followed by declines in the leading stock index:
This should be a worrisome trend for every American. Those closer to the pump will get their hands on the freshly created Federal Reserve Notes. As the money travels through the system, everyone else gets debased dollars, which creates a situation of rampant price inflation and weakening purchasing power.
President Donald Trump, as a candidate and private citizen, understood the dangers of printing money and artificially decreasing interest rates. Once he transitioned from his New York penthouse to the White House, he forgot this understanding of monetary policy and now actively encourages the Eccles Building to mirror the measures of past Fed regimes. His tweets appear to be working, too.
Dot-Com 2.0
WeWork is anticipated to burn through $9 billion of cash over the next year as its expenses have doubled at the same rate as its revenue growth. It’s like the dot-com bubble all over again: Spend first and ask questions later. From WebVan (grocery delivery) to Kozmo (one-hour delivery) to Go.com (search engine), dozens of companies spent $500 million, lost $1 billion, and were overvalued upon debut.
So, when WeWork claims that enormous losses are investments, you can look back to the dot-com era as another time when investors were sold a bill of goods that bleeding cash will produce vast riches. Sure, a billion in the red now, but a billion in the green tomorrow.
But who’s to blame for this? The Federal Reserve and its printing press? Or the businesses and investors who believe they’re making money off the next Amazon or Facebook? Think of it as a kindergarten classroom. A bunch of students get hyper from consuming chocolate bars and soda pop. They are running around, yelling at the teachers, and beating each other with bicycle chains. It’s easy to wave your finger at the children, but remember who gave them the sugar.
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