Andy Kessler

WSJ: A Market Hype Cycle Winds Down

Follow @andykessler

https://www.wsj.com/articles/a-hype-cycle-winds-down-crypto-ftx-bankman-fried-musk-ipo-investors-hubris-greed-11670161728

Crypto exchange Coinbase went public in April 2021 and briefly traded at a $100 billion valuation. Its owners soon piled into real estate. Last December, CEO Brian Armstrong bought a $133 million Los Angeles estate, while his venture backers bought up swaths of Malibu. Post-IPO shares are usually locked up for six months, so assuming they all sold Coinbase shares, that was a smart move. Coinbase now is barely worth $10 billion.

I’m a huge fan of venture capitalists, who put risk capital from investors with long time horizons (like foundations and endowments) into companies that invent the future. Corporations usually don’t have the risk tolerance. I’ve invested venture capital. You really do have to think ahead of everyone else. But I’ve noticed that most of the returns from venture investing, mine included, came when everyone got too excited about future possibilities, deep into the hype cycle of new technology. That’s when the toxic cocktail of greed, stupidity and hubris takes over.

In 1983 an IPO boom emerged from the recession raising funds for Compaq and other computer companies. In 1995 Netscape investor John Doerr said, “It’s possible that the Internet in fact has been underhyped.” On its first day of trading that August, Netscape was valued higher than General Dynamics at nearly $3 billion (I know, how quaint). Dot-com mania took hold until early 2000. America Online milked the hype long enough to merge with Time Warner on Jan. 10, 2000, before spiraling down as reality set in.

Don’t get me wrong. The hype cycle is a great time to fund future technology. Electric-truck maker Rivian says the company is funded through 2025. Many great winners have emerged from a hype cycle—Compaq, Google, Amazon, Salesforce, Facebook. But many multiples of those winners try and fail. That’s OK, but overenthusiastic public investors almost always end up holding the bag stuffed with losers after venture capitalists sell or distribute unlocked shares to their limited partners at puffed-up prices.

The 2014-21 cloud-computing hype cycle, helped by near-zero interest rates, was a barn burner that lasted way too long. Some great companies went public: ServiceNow, Snowflake, Uber. But it also brought huge dreams of autonomous cars and electric vehicles, pumping Nikola and others and burning investors. Remember QuantumScape, funded by Bill Gates? With its vision for a better battery, it peaked at $114 in December 2020 and is now under $8. QuantumScape went public via a special-purpose acquisition company, taking advantage of quirky rules that almost ensure sponsors don’t lose money while making whatever future projections they want without investor lawsuits. A license to hype.

Social Capital’s Chamath Palihapitiya became known as the SPAC king after promoting and then burying investors in companies such as Clover Health, SoFi, Opendoor and Virgin Galactic, which are down 49% to 86% from their $10 offering price.

Read the rest here.

WSJ: Crypto’s Final Price Could Be Zero

Follow @andykessler

https://www.wsj.com/articles/cryptos-final-price-could-be-zero-technology-debt-lbo-twitter-musk-bankman-fried-ftx-market-cap-coin-11669567022

There aren’t many leveraged buyouts of technology companies, and for good reason. Technology and debt, like Red Bull and milk, don’t mix. Why? Because when technology works, it commands high valuations. You can’t LBO Google. But when technology moves on to the next new thing, there isn’t much residual value in the form of assets and collateral to call on in case of debt defaults. FTX, Elon Musk and SoftBank are learning this lesson.

Twitter, which last turned a profit in 2019, now has $1 billion a year in debt payments. Wall Street can’t off-load Twitter’s buyout debt, now maybe 60 cents on the dollar, without losing money. Mr. Musk even told employees “bankruptcy isn’t out of the question.” Of course, he has benefited from selling his own highly valued (though declining) Tesla shares, recently another $4 billion for a total of more than $19 billion. As Chief Twit, Mr. Musk proclaims Twitter will operate under free-speech principles. Advertisers are fleeing. So are employees. If he defaults and walks away, the only thing left is some aging code and a few plastic blue birds to sell at auction.

The new poster child for the toxic cocktail of technology and debt is Sam Bankman-Fried, with his imploded FTX and Alameda empires. Sure, these companies misappropriated, to put it nicely, customers’ assets. And yes, withdrawals that acted like a bank run drove the company into Chapter 11. But the company’s original sin was to borrow against its own FTT token, which was held up by nothing but air.

This was crypto’s mass delusion. FTT was so thinly traded that FTX could set any price, but not forever. FTX and Alameda borrowed against tokens they themselves were manipulating, including Solana and others, which some called Sam Coins, now Scam Coins. The fatal conceit: They thought FTT would stay high forever, so they invested in often illiquid positions. FTX was even paying employees, vendors and whoever else would take it in FTT tokens, whose total market cap used to be almost $10 billion and is now about $400 million.

You can’t manipulate something forever. Reality eventually replaces delusion. All it took was someone to touch a pin to the bubble. After Coindesk leaked a copy of Alameda’s balance sheet loaded with FTT tokens, Binance CEO Changpeng Zhao started selling. FTT went from $22 to under $3 in 48 hours. So much for collateral. When the smoke clears, FTX/Alameda may have $8 billion to $15 billion in debt outstanding, with little to sell for repayment. It will take years to sort out who gets what.

Meanwhile, others also barreled in.

Read the rest here.

WSJ: My Attempt at Tuning Out the World

Follow @andykessler

https://www.wsj.com/articles/my-attempt-at-tuning-out-the-world-wellness-retreat-meditation-thanksgiving-spa-emails-work-life-11668976792

Welcome to Thanksgiving week, which raises the question: How do you turn it all off? You know, thinking about work, the fire hose of newsfeeds, emails and texts, constantly solving the never-ending puzzle of a job. I’ve asked other columnists this question, on this page and others, and to a person they smiled and said, “You don’t!”

Things requiring complete focus work for me: Playing basketball. Building an electric car. Skiing. But you can’t do these things 24/7. Recently, coming off a family wedding, my wife suggested we go on a wellness retreat. Being a red-blooded American male, I said “absolutely not.” We went.

The whole place had that classic spa smell—a mixture of lavender, eucalyptus and mugwort (I asked). I was informed the cucumber water was available only until 4:45 p.m. Not a problem. Everything had a spiritual twist to it. I noticed some people carrying Chopra-branded tote bags. Appropriate because Deepak Chopra personally—well, at a conference with a few hundred people—tried to teach me how to meditate. It didn’t take.

I’ve always been envious—well, not envious, more in awe—of those who could detach from real life with only their thoughts and meditation. Maybe this place could do that for me, and for what they charge a night, it better.

I figured I would spend my time sitting in a hot tub and watching football, my kind of wellness. Little did I know that I was signed up for a host of activities. Sadly, I slept through the morning “Intentions Ceremony,” which promised mindfulness and neuroplasticity. I was already behind. I intentionally skipped “Intentions Burning.” No need, I’ve burned many bridges with bad intentions in my life already.

Instead, I was off to “Floating Guided Relaxation”—more my speed.

Read the rest here.

WSJ: The Decline of Work

Follow @andykessler

https://www.wsj.com/articles/whats-work-worth-unions-profit-value-life-balance-human-capital-labor-foce-economy-manufacturing-11668268509

You hear these all the time now. “I want a career with a purpose,” which usually means an activist. Or “I need a good work-life balance,” which suggests someone doesn’t want to work very hard. Gimme a break. The CEO of a Fortune 500 company told me he recently spent an entire afternoon discussing his company’s pet-bereavement policy. He asked the human-resources folks, “Let me get this right, someone’s goldfish dies, and they get a week off from work?”

Work has become a dirty word. Cyber bohemians just want to dream and stream. And now this: The New York Times ran an opinion piece titled “How to Fight Back Against the Inhumanity of Modern Work.” What? Paper cuts are a bigger risk these days than losing an arm in a loom. Still, I thought the piece would be about dirty jobs—the hardships of coal miners, the plight of burnt-out nurses or the inhumanity of waking up at 5 a.m. to milk cows. Nope. The author complained about digital monitoring—coders, cashiers and others being tracked by evil bosses, who are measuring productivity. Gasp! Has society become that spoiled? Apparently so. The prevailing thinking is we’re all Lucy Ricardo and Ethel Mertz wrapping chocolates on a conveyor belt.

Only 8.4% of U.S. nonfarm payroll positions are in manufacturing. Many of those jobs were exported long ago to cheaper labor markets such as China. Even if some of those jobs return to the U.S., many workers aren’t qualified. Mike Rowe of “Dirty Jobs” fame said, “We are lending money we don’t have to kids who can’t pay it back to train them for jobs that no longer exist.” So they are underemployed. Or quit. Or seek purpose and balance.

We rightly encourage STEM jobs—science, technology, engineering and math. I recently learned of HEAL jobs. Dog walkers? No, jobs in health, education, administration and literacy. These are the growing jobs of a vibrant service economy.

It isn’t news that the U.S. is a service economy, yet too often the focus is on labor vs. capital, as if we still make widgets. Unions want to arm-wrestle value from capital and force higher wage payouts than is economically sound. This blatantly disregards human capital—what workers learn on the job is theirs to keep. We increase productivity and wealth by having workers figure out how to do more with less from the bottom up. So please stop paying people not to work. The best antipoverty program is a job because a job’s value comes from this increase in human capital. One-time payments are a waste.

I’ve written often that profits are a measure of the societal wealth created by corporations, and that the price paid for products and services is the minimum amount of value created.

Read the rest here.

WSJ: FTX and Binance: Another Nail in the Crypto Coffin

Follow @andykessler

https://www.wsj.com/articles/crypto-coffin-ftx-sam-bankman-fried-market-exchange-loans-binance-bailout-token-alameda-deal-11668030037

Tuesday’s blowup of crypto exchange FTX—run by wunderkind Sam Bankman-Fried, who once boasted that he could spend $1 billion on the 2024 elections—was inevitable. My beef with the crypto market has always been that it is backed by nothing but air. At any moment, that support could disappear. For FTX it just did. FTX sister company, Alameda, had been making loans against billions in an FTX token known as FTT, which traded last fall near $80 with a value of over $9.5 billion. On Monday it was $22 amid concerns that a leaked balance sheet showed excess leverage. Now it’s hovering around $3. No wonder FTX has liquidity problems. The fall happens fast. FTX agreed to be acquired by rival exchange Binance, the world’s largest, though Binance indicated Wednesday the deal was off.

Only four months ago, Mr. Bankman-Fried said that the worst of the crypto crisis was over and that FTX had a few billion dollars to bail out failed crypto companies. I guess not. Binance could afford to buy FTX because Binance is backed by its own token, BNB, which was worth $106.5 billion last fall, though now is worth only $45 billion. Is that crypto’s last $45 billion for bailouts? Bubbles collapse when no one else buys in. Coinbase, whose stock is down almost 90% from its initial public offering, and other exchanges may not have the heft to bail out too many failed crypto ventures.

So what backs BNB? I’m not privy to Binance’s balance sheet or income statement—one of the reasons tokens should be classified as securities, so investors can know what they are holding—but my guess is that the Binance token is held up by the same magical forces as FTT, nothing.

It has been only six months since the “algorithmic stablecoin protocol” Terra, tied to the Luna coin, blew up. They were held up only by hype. Then one day the bellows stopped pumping. This wiped out $80 billion in value, whacking some hedge funds and lots of individuals, neither savvy enough to see the bubble.

The dollar and Treasurys are backed by the good faith of the U.S. government via its income-tax-generating ability. When stocks sell off, they eventually find a bottom so long as they are viable enterprises that can eventually make money. Real-estate loans are backed by the value of a home or building, but crypto has no backing.

And the heat is on.

Read the rest here.

WSJ: The Cure? Cut Taxes and Spending

Follow @andykessler

https://www.wsj.com/articles/cut-taxes-spending-joe-biden-liz-truss-inflation-energy-costs-california-economy-manufacturing-recesesion-11667746085

A 45-day period will forever be known as a “Truss” for Liz Truss’s tenure before resigning as British prime minister, much as 11 days is a “Mooch” for Anthony Scaramucci’s short stint in the Trump administration. Come to think of it, a “Biden” is 208 days, the time from Inauguration Day until the fall of Kabul after the Afghanistan scram in August 2021. President Biden has been a bit of a lame duck ever since, and if polls are right, even more so after Tuesday’s elections.

I feel bad for Ms. Truss, but only because whoever was in that seat, like the passenger in James Bond’s Aston Martin DB5, was going to be ejected. Unknown to many, U.K. pension funds had been hedging against interest rate increases, using derivatives with six or seven times leverage. As inflation hit 10.1%, interest rates were going up no matter what, which caused funds to dump gilts, or bonds, to pay their margin calls, crushing the currency.

The press jumped on Ms. Truss’s tax cuts (lowered from 45% to 40% for £150,000 earners) but ignored her subsidies for high energy bills. It wasn’t tax cuts that did her in; it was deadly pension leverage. Both Reagan and Thatcher knew to slay the inflation dragon first. To stabilize the situation, the Bank of England printed tons of pounds to buy bonds—more quantitative easing in an inflationary world. Not smart.

The new prime minister Rishi Sunak, a Stanford M.B.A., is foolishly exploring tax increases. Sadly, tax cuts are probably dead in the U.K., maybe for a decade. Well, stick a fork in jolly old England. Mr. Sunak should listen to his predecessor Winston Churchill, who said: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

The U.S. should heed that advice as well. Mr. Biden says “in our bones, we know democracy is at risk” but nevertheless he turbocharges spending—bucket handle lifting. The Biden administration is pro-union, a tax on consumers. It killed pipelines and energy exploration, raising energy costs. It has forgiven student loans, which means tuition is going up. Its Inflation Reduction Act is filled with green pork and healthcare tax credits. It set minimum corporate taxes of 15% for big corporations that will be passed along to consumers. And a 1% excise tax on stock buybacks. And 87,000 new IRS agents to shake down the American middle class. Democracy is fine; I’d say the economy is at risk.

Interest rates of 5% or higher should slay the inflation dragon, but then what?

Read the rest here.

WSJ: The Deadly ‘De-Growth’ Craze

Follow @andykessler

https://www.wsj.com/articles/growth-world-economic-forum-sustainability-poverty-investment-esg-climate-protectionist-trade-energy-11667077994

The modern world is constantly subjected to crackpot movements that eventually fail, but not before causing serious damage. Karl Marx was a crackpot. So was the John Birch Society in its mission to fight communism “behind every tree.” The latest is Modern Monetary Theory and unlimited dollar creation for government spending, which caused today’s runaway inflation.

In the 1970s, the Club of Rome insisted that for the world to be ecologically sound, we needed a “no-growth economy.” This was as dumb as the debunked Malthus theory that population growth would outstrip food. The disgraced Club of Rome thankfully went dormant. But it’s baaaack.

The new craze is “de-growth.” Proponents demand we “put well-being ahead of profit.” Normally, I’d say “Pfffft, ignore them,” but none other than the Davos dudes of the World Economic Forum are featuring arguments for de-growth. Weird because mostly growing global companies pay the WEF’s bills—tributes to the woke dons. The WEF’s website is filled with scholar-infested nonsense including a video asking, “What would a post-economic-growth world look like?”

It wouldn’t be pretty. Like Manta rays that must keep swimming or die (sharks too), societies that don’t grow eventually devolve into oppression, chaos, anarchy and then ruin. The Roman Empire. The Soviet Union. Venezuela. De-growth is living with less. Capitalism’s productivity is doing more with less. Big difference.

What would this mean for the U.S.? No growth means no investment for innovation. This leads to stagnation—freezing everything in place. Then comes command and control. Experts to allocate slices of a finite pie. Unions (see how they treat independent gig workers as meat to organize). True collectivism. Eventually “Lord of the Flies” chaos. The Fyre festival. Everyone for himself.

Growth is oxygen.

Read the rest here.

WSJ: Make the Metaverse a Sandbox

Follow @andykessler

https://www.wsj.com/articles/metaverse-sandbox-innovators-tech-companies-meta-google-microsoft-tim-cook-apple-future-supernatural-ftc-facebook-11666548553

Apple CEO Tim Cook was asked recently about the dreaded green bubble—the one that appears when you send a message to someone without, gasp, an iPhone running the proprietary iMessage app. But it’s worse than that. His questioner added, “I can’t send my mom certain videos and she can’t send me certain videos and so . . .” Mr. Cook interrupted with a chuckle and said, “Buy your mom an iPhone.” Corporate hubris usually proceeds a downfall.

Interoperability can make or break technology, and much is still broken. Many Google apps don’t work well on an iPhone. Why? Apple wants you to use its apps, interoperability be damned. The iPad only recently added support for a mouse, but it’s not good enough for iPads to replace Mac computers and laptops. Why? To protect Apple’s $35 billion Mac business. Users suffer. Technology has a long history of ignoring interoperability. America Online ran its business like a walled garden. More hubris that didn’t end well. It even had two messaging services, AOL Instant Messenger and ICQ (I seek you), that couldn’t send messages to each other until 2003.

In 1990 a judge ruled that competitors infringed Lotus Development’s copyright on its 1-2-3 spreadsheet’s command structure and keystrokes. But it turns out that file formats can’t be copyrighted or patented, allowing Microsoft Excel to read and write Lotus 1-2-3 spreadsheets. This interoperability was a boon to users, though in the end not so good for Lotus, as the company didn’t innovate enough beyond spreadsheets. To protect its Windows operating system, Microsoft was slow to embrace internet protocols like TCP/IP and mobile standards such as Bluetooth and lost its edge in both.

Standards matter. Think of road widths, gasoline mixtures and lights that don’t blind opposing drivers. The 120/220 volt electricity divide was fixed via sensors that allow travelers to use their computer and phone chargers universally, although with different plugs. AA batteries were introduced in 1907, standardized in 1947, AAA in 1911 and 1969. Cellphone standards were another benefit to users and keep evolving—6G isn’t coming until 2030 or so.

Which brings me to the Metaverse, an awful moniker for the nascent three-dimensional online world where we will eventually work, learn and play. I’d prefer names like the Hive or the Vortex (franchising opportunities available). Whatever we call it, there are no real standards for avatars, clothing, motion, weapons, speech or architecture.

To figure this out, Facebook aka Meta announced the purchase of Within, maker of virtual-reality fitness app Supernatural. Almost immediately, the Federal Trade Commission fought the purchase.

Read the rest here.

WSJ: Stocks Can Always Get Cheaper

Follow @andykessler

https://www.wsj.com/articles/stocks-can-always-get-cheaper-wall-street-investment-earnings-bargain-market-trends-losses-charges-recession-peloton-11665945285

Are stocks cheap yet? When I was a young Wall Street analyst visiting institutional investors in Boston, I sat in a money manager’s office noting his framed prints of horseback riders in red jackets on a fox hunt. He asked me what I thought about a particular tech stock. I walked him through my forecast for the company and said the stock was a buy. “Why?” he asked. I said, “Because the stock is cheap.”

Big mistake. He launched into a 10-minute tirade, screaming, “Who are you to know if a stock is cheap? Have you ever lived through a downturn?” He even told me my tie was too expensive before he threw me out of his office. Ah, the service business. But I never again said a stock was cheap and instead focused on fundamentals, emerging trends, expectations and market sentiment.

Cheap stocks can always get cheaper. Companies such as Peloton, Carvana and Robinhood are down 80% to 95% from their peaks. Buy the dip, right? Be careful—the biggest mistake is looking backward, not forward.

Later I worked as an investment banker until I found out you had to be nice to people. I discovered a graphics-software company with a $5 stock and $5 a share in cash. Intriguing. If they could turn around their business, it could be a bargain. I won’t ever say cheap! I kept an eye on it and visited a year later. Because of losses and restructuring charges, the company only had $4 a share in cash and, sure enough, the stock traded at $4. After another year, it had $3 a share in cash and the stock was worth $3. I stopped visiting. It eventually went out of business. No future, no upside.

Market bottoms form when everyone is negative. The International Monetary Fund says the world economy is headed for “stormy waters.” Ray Dalio, who founded the hedge fund Bridgewater Associates, thinks we’ll see five years of “negative or poor real returns.” JP Morgan CEO Jamie Dimon says stocks could fall another 20%. Is that negative enough? It’s a start, given that few said these words a year ago.

My sense is there is more ugly stuff coming.

Read the rest here.

WSJ: Blame Lockdowns on Silicon Valley

Follow @andykessler

https://www.wsj.com/articles/blame-lockdowns-on-silicon-valley-technology-artificial-intelligence-safety-privacy-innovation-liberty-new-york-crispr-11665321090

Lockdowns were a huge policy mistake. I blame Silicon Valley. I know, I know, the real blame resides with ill-informed technocrats who instituted the draconian and non-Jeffersonian lockdowns: the Trump and Biden administrations, blue-state governors, the Centers for Disease Control and Prevention and the rest of the alphabet soup of head-nodding agencies. Yet policy makers implemented lockdowns only because they could—because Silicon Valley provided the tools to lock people in their homes without completely imploding the economy.

Think about it. You couldn’t force lockdowns without laptops, Zoom, Amazon deliveries, cloud computing, Slack, QR codes or Netflix. Without them, lockdowns would have lasted two, maybe three weeks tops before the utter destruction of the economy forced everyone back to the workplace. Instead, we took the Faucian bargain of technology-enabled yearlong lockdowns because it was doable. Silicon Valley’s tools became shackles.

Lockdowns came with huge costs: job losses, increased crime, stunted learning, delayed medical treatments, violent protests, government spending blowouts, supply-chain disruptions, inflation, mental-health issues—all avoidable. Like bad air days, I fear bad carbon days will soon invoke climate-emergency lockdowns to keep people from driving.

Technology giveth and technology taketh away. The latest example is the plan to install cameras on every New York City subway car to limit crime. Gov. Kathy Hochul said, “You think Big Brother is watching you on the subways? You’re absolutely right. That is our intent.” Privacy advocates, such as the New York Civil Liberties Union, are naturally up in arms. Its statement reads, “Living in a sweeping surveillance state shouldn’t be the price we pay to be safe.”

Smart cities are now possible. Surveillance cameras, congestion pricing, timed traffic lights, buses that actually show up on time, balanced electricity usage, it could be urban utopia. But I wonder when smart cities crash, will we turn them off and then back on again? China has already created smart cities and uses data as scoring inputs for its Social Credit System, which stifles freedom for its citizens. Tech giveth and taketh.

The National Traffic Safety Board last week recommended blood-alcohol monitoring for all new vehicles. Another invasion of privacy, although no word yet from the New York Civil Liberties Union.

Read the rest here.