When the Music of the “Wealth Effect” Stops

The phenomenon has reached historically huge proportions in the Everything Bubble era. But it comes in cycles – with a big impact on the real economy.

This is the transcript from my podcast, THE WOLF STREET REPORT:

OK, so here we have a phenomenon that has taken on historically huge proportions in the era of the Everything Bubble: More or less wealthy people with liquid assets are plowing their money into cash-burning companies, and not just startups, but big companies too, that have been around for many years with tens of thousands of employees and billions of dollars in revenues, that are still burning cash. And there are a lot of them.

Some of the most shining examples just this year are: Tesla, which received another $2.3 billion from investors in early March; Netflix, which received another $2.2 billion from investors in April; Uber which received another $8 billion from investors during its IPO in May. Tesla and Netflix will burn through this money in about a year. Uber might take a little longer.

Then there are a whole bunch of permanently cash-flow negative fracking operations that received all kinds of funds. But it also includes the many hundreds of startups that receive millions and billions from investors without even having a business model or revenues.

This is big money flowing into this companies, and these companies then go out and invest and spend this money until it’s gone, and investors are then asked to give them more money. This is so routine and it happens all the time now, and in every larger quantities. While there is a little bit of hand-wringing about it in some corners, included by yours truly, because it shows the excesses currently underway, it doesn’t appear to be slowing down. On the contrary.

Investors that chase yield and profit opportunities are eager to go out on a limb and hand over their money to these companies that then spend and invest this money.

So here is why this is great – for the real economy and the people that work in it, and why the big S is going to hit the fan if this ever slows down or stops as these investors are getting mangled.

Let’s use the example of a tiny startup. A couple of guys have an idea and got some angel funding, and with this funding they developed their idea. And so a year later, they get $2 million from VCs. And these two guys hire some people and pay their salaries with this money, and they rent an office and pay the lease, and they use this money to buy computer equipment and furniture and mood-lighting and some craft brews to put into the corporate fridge in case of an emergency.

And after 10 months, they’ve spent most of the $2 million, and now they are able to raise $4 million from VCs, and they hire more people and put more craft brews into the corporate fridge and buy more computers and pay more salaries and payroll taxes, and the like. They spend every dime that investors give them. And before they run out, they get more money.

Then the service they’re working on is ready to go live, and they raise $50 million and hire more people, and buy more beer, and much of the new money they raised is dedicated to advertising to launch their product, and so they buy ads for $40 million, most of which goes to Facebook and Google.

Everything this company spends goes into the economy, and directly or indirectly adds to the economy as measured by GDP.  The office lease is a service, and is added. The computer equipment and the beer and the furniture the company buys are added to GDP. The salaries it pays are being spent by the employees on rent and restaurant meals and smartphones and Uber fares and furniture, etc., and in this way, their salaries are converted into economic activity that is added to GDP.

And the businesses that sell this beer and the furniture and the ads, they too pay their employees from those funds, and they buy stuff too. And so the investor-money that the startup received in multiple rounds of funding enters the real economy and is being constantly recycled to generate business activity elsewhere.

And everyone is happy. The investors are happy because the startup, which is burning a huge amount of cash, is getting some traction, and these investors hope that a few years down the road they get billions of dollars when this company has its IPO or is acquired by Apple or Alphabet.

And the executives of the startup are happy because their joint is going in the right direction and because their equity stakes are starting to have huge valuations though the company might not yet have made a dime in revenues.

And the employees are happy because they have a job and because they too see the equity event at the end of the tunnel that they hope will make them rich.

And all the companies that sell them stuff, from Facebook and Google to the craft brewer are happy because they sell them stuff and they’re getting paid, which allows them to pay their employees.

And the governments at all levels are happy because they’re collecting various kinds of taxes and fees from the company and its employees.

And if Microsoft comes along and outbids Apple to buy the company for $2 billion, then everyone is even happier, and the equity holders are getting paid off with money Microsoft extracted from its customers. And the recipients of Microsoft’s money then plow some of this money into new startups, and they spend some of it, and they put some of it in Treasury securities, just in case.

In the worst-case scenario, it doesn’t get this far. After raising $10 million, investors lose faith and decide not to fund it anymore. After the beer is gone, the company will lay off its people and break its lease and sell the furniture and shut down.

In this worst-case scenario, investors are out $10 million, that the company spent. But this $10 million entered the economy and was recycled, and boosted GDP likely by more than the $10 million through the multiplier effect.

In this worst-case scenario, these investors used their money to provide a stimulus to the real economy. It worked like a wealth tax, where some percentage of their wealth is removed from their wealth for the benefit of the economy. Investors call it a capital loss, but that’s what it does: it boosted the economy at investors’ expense.

So let’s use a big example that involves real money. Tesla. Since its IPO in 2010, Tesla has raised $21 billion from investors via debt and equity offerings. This doesn’t even count the funds it raised before its IPO. And it has burned through most of this $21 billion by now.

Tesla has real revenues, and they’re growing in leaps and bounds. But it spends a heck of a lot more than it takes in. Hence the negative cash flow. So the total amount Tesla spends is the combination of its revenues and the money from its investors.

Some of the money it spends is invested in manufacturing facilities and equipment. Some of this equipment is purchased from German companies, so these are imports, and they do not benefit the US economy. They benefit the German economy. But other sums are spent on equipment and materials made in the US, and it’s spent on vehicle components that are purchased all over the world, and a big part of the funds are spent on salaries of its 40,000 or so employees, most of them in the US.

In other words, every dime that investors ever handed to Tesla is getting spent in the real economy in the US and other countries and boosts those economies.

In the worst-case scenario that Tesla goes bankrupt and these investors experience this dreaded capital loss, they should be proud: they have boosted the US economy with their funds. This includes a lot of foreign investors, such as sovereign wealth funds.

Even if it doesn’t come to the worst-case scenario, those investors have boosted the US economy, and it will take new investors to step in with fresh money and bail out the old investors to keep the chain going, thus prolonging the cycle.

In the US fracking industry, the cumulative negative cash flow just from the publicly traded companies is well over $200 billion, funded entirely by investors. There are many oil and gas drillers that are not publicly traded, and their negative cash flow adds to that amount.

This money got spent on high-paying jobs in the industry, including tech jobs. It got spent on equipment and supplies manufactured in the US. It got spent on transportation, provided by trucking companies. While some of it got spent on products that were imported, such as steel products, much of it was spent in the real US economy and was then recycled by the people and businesses that received it, thus adding more the US GDP.

This is the principle of investors funding cash-flow negative businesses: These companies put more into the economy than they take out. And investors will only get paid if new investors bail them out, and take over the burden of the negative cash flow.

When Lyft and Uber went public the old investors got bailed by new investors recruited from the public. These companies are still cash-flow negative, and are still burning investor funds – meaning that they continue to spend these investor funds in the real economy.

This too is part of the “Wealth Effect.” The wealthy or not so wealthy asset holders invest some of their funds in cash-burn companies that then use these funds to stimulate the US economy.

Funding cash-flow negative companies is a great thing, while it lasts. It is like a voluntary tax on investor assets that is not perceived as a tax but as an investment because new money keeps bailing out the old money, and so the moment when this investment is converted into a capital loss gets moved out.

At big companies such as Apple and Microsoft, the capital losses they constantly experience when they shut down or write down the acquired operations get plowed into their “non-cash charges” that investors ignore, though they lower the profit of those companies, just like a tax would. For smaller investors, the outcome is more obvious.

But these things come in cycles. And when the cycle turns, that’s the moment when new money no longer wants to bail out the old money, and cash-flow negative companies begin to topple.

The money investors had put into these companies was spent long ago, and is gone. This is when the pain of the capital loss comes to the foreground. It tends to involve trillions of dollars; and if it gets messy, tens of trillions of dollars globally. But these losses, that suddenly show up, had been spent in prior years to boost the US and global economy, and this money was recycled but is now gone, and investors get to grapple with what really happened.

This is how financial crashes that happen far from the real economy can trigger deep recessions in the real economy, because all this investor-funded stimulus spending suddenly stops, and these people that got paid with this money are being laid off, and the offices become vacant, and the tax revenues slow down, and with these people getting laid off, they stop spending money, and the whole recycling processes reverses.

But looking at this phenomenon today, I have to say, so far, so good.

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  90 comments for “When the Music of the “Wealth Effect” Stops

  1. Cyclops
    Jul 4, 2019 at 3:07 pm

    Funny money gets bailed out once again by the central banks! But old fashioned stagflation will come back with revenge! Meanwhile, the younger generation is still sweating making little more income but with two or three part time jobs! Great R.E. Bubble 2.0 about to pop with baby boomers down sizing to smaller homes from oversized McMansions and frantically dumping their dream vacation homes in fly over country! Will this happen on Trump’s era?

    • rhodium
      Jul 4, 2019 at 11:41 pm

      I don’t know, but when this latest balloon deflates, it’s going to be a nightmare. I’m afraid for so many people because we’ve already had a relative stagflation for most of the working class over the last two decades. When the job cuts start rolling through the economy in earnest, it’s going to take a lot to stop the panic. If it happens before the end of 2020 I can only imagine what a jacked up election it’s going to be. Prepare for insanity because people will be desperate.

      • alex in San Jose AKA Digital Detroit
        Jul 5, 2019 at 5:13 am

        The bottom 80% never recovered from the last crash. Plenty of very pissed off people out there, some of them even smart enough to realize our present leader is only out for himself.

        If we can find a 40-year-old with Bernie’s stance and chops, we’ll have a chance to get back to sanity. And by sanity, I mean when FDR was in charge.

        • Verity
          Jul 5, 2019 at 10:18 pm

          You mean self financing his presidential bid and not taking a salary? You must have been stoned through logic class.

          I guess in your mind its much better to take Saudi, Russian, Mexican and Chinese money and sell access to SAP information on your private server.

        • Dave
          Jul 8, 2019 at 7:00 am

          Right; bigger, more expensive government (what Bernie espouses) will make us all better off.
          Think of Venezuela, Cuba, North Korea and the former Soviet Union lines for bread and toilet paper.

    • sunny129
      Jul 5, 2019 at 8:54 pm

      What’s this WEALTH EFFECT any way? Doers it trickle down or up?

      The bottom 90% own less than 7% of Wall St wealth (Equities+ Bonds) compared to top 5% who own 71%!

      There are two Economies in America. One for the top 10% and another for bottom 90% mostly wage workers!

      The so called wealth effect is good ONLY for top 10%!

      • Illy
        Jul 6, 2019 at 5:40 am

        So true, but same as it ever was: A function of ambition.

        This is the best explanation of our current state – and our real economic situation – that I’ve ever read. Anywhere. Bravo, Wolf. Nice job. Reminds me of why I check in here.

        Of course, you know the real word for this scheme is Ponzi.
        Sorta like Putin being the head of the Russian mob. (Hey, could he keep the job otherwise?) However, the obvious construct our lives depend on must not be questioned or even spoken of, lest it all fall apart. So hush-up!

        Nice to hear truth done well, though.
        Really nice.
        i

      • Auld Kodjer
        Jul 7, 2019 at 9:05 pm

        My grandmother taught me to believe only half of what I see (and read). I will let others judge which half they believe of the following:

        The Economist Intelligence Unit suggests America is now a “flawed democracy”
        http://www.eiu.com/topic/democracy-index

        The Guardian suggests this is because of a rise in the American oligarchy, and “when oligarchs fill the coffers of political candidates, they neuter democracy”.
        https://www.theguardian.com/commentisfree/2019/jul/07/donald-trump-oligarchs-democrats-right-left

        And Winston Churchill once suggested once suggested that “The opposition occupies the benches in front of you, but the enemy sits behind you”.

        So I’ve taken the liberty (irony unintended) of modifying Clinton’s quote. It’s not the economy, “It’s the 1% stupid”.

  2. CoCosAB
    Jul 4, 2019 at 3:19 pm

    Since 2007/8 the word “investment” lost its meaning… Courtesy of QE & ZIRP.

    • Cynic
      Jul 5, 2019 at 8:04 am

      Quite true, in some respects: socialists are waiting, with bated breath, for the end of Capitalism and the advent of Nirvana – but, effectively, Capitalism has already died with merely the forms and institutions remaining and they are behind the times.

      The ‘equality of outcome’ they dream of may yet come, but in a far from desirable form….

  3. Bruce walker
    Jul 4, 2019 at 4:03 pm

    Ponzi. Ponzi. Ponzi.

  4. Bruce Walker
    Jul 4, 2019 at 4:14 pm

    When new money bails out old money,it’s called ponzi.

  5. kk
    Jul 4, 2019 at 4:21 pm

    Why does it have to stop – have we not printing presses, paper and ink?

    • Jul 4, 2019 at 4:31 pm

      Because the rich will have no bag holders except other rich. Once the middle class is dead everything will collapse. The rich will then become the new poor.

      • sierra7
        Jul 5, 2019 at 8:54 am

        The truly “rich” (wealthy) in times of stress wait until the economy is screaming and then vacuum up more “real” property. That’s how they remain “rich”.
        What we are experiencing today is not a “real” economy. It is a casino with virtually “free” money available to those who already have real money to “lend” to the unsuspecting. That’s how capitalism works. There is always a greater fool. Until there aren’t any.

  6. Fred Lowe
    Jul 4, 2019 at 4:26 pm

    Kind of like a pyramid scheme, and when the dust settles we start all over again, with the help of Uncle Sam, as we watched in disbelief after the mortgage meltdown, when the same banks responsible were “rewarded” by given billions to start the pyramid all over again….

  7. Joe Lalonde
    Jul 4, 2019 at 5:15 pm

    The cost of paper and ink may cost more than the money printed on.
    Been trying to convert winnings from my cyber games…hasn’t worked yet.

  8. David Hall
    Jul 4, 2019 at 5:38 pm

    I did not want to invest in Amazon because it was not earning any money for years. I guessed wrong sometimes.

    I think J.C. Penny is at risk of going out of business instead. Sears filed for bankruptcy in 2018. I got shoes at Payless ShoeSource cheaper than at Amazon, but they filed for bankruptcy earlier this year.

    • illumined
      Jul 4, 2019 at 8:36 pm

      No, you didn’t really guess wrong. Amazon would never have gotten to where it is had it not been for cheap money subsidies from the Federal Reserve. Your only “mistake”, which wasn’t really a mistake, is paying attention to fundamentals in a time when the Casino has made it so that for some companies fundamentals don’t matter. It’s sad for this situation to exist, but as long as the central banks cling to the idea of the “wealth effect” it will continue for a while longer.

      • Jack
        Jul 6, 2019 at 1:40 am

        That is correct assertion illumind.

        The Fundamental problem that is Facing the so called “Western Democracies “[ BIG laughter here please], is the dedication in which those at the helm went about destroying the very Foundations that their countries were built on!

        In the Economic sphere , the continued “ Termiting “! At the Rules of which the Market operates and the erosion of the principles of FREE MARKET have brought us to were we are now!

        No more decency in taking the rules of good governance allowed monopolies, PE’s , and straight out corrupt use of policies driven by what I call ( corporate insiders working under the guise of PEOPLE’s Representatives) !!! To round up the corrupt circle around the Majority of honest players in the market who believed they are playing on fair grounds with rest of participants.

        You only need to look at the shonkey way the SEC have dealt with the IPO’s during this year 2019! To understand that Nothing is governable in the lands of COWBOYS!

        This Situation haven’t risen overnight though as I mentioned, it has been an active process that is effectively chipping away at what remains of those countries’s Economies .

        Belated happy 4th of July!

        and remember your ancestors rose against KING GEORGE for his ( insolent)! Desire to TAX them an extra 2%!!!

        You’re working for 6 months a year to pay for your ( current LEADER’s ) follies.

        Enjoy the happy times ahead.

  9. Jul 4, 2019 at 5:49 pm

    Uber and Lyft want to make personal transportation solve the problems public transportation was supposed to. Tesla’s problem is they are burning daylight, other companies are moving on the technology. The 1930s was an age of new technology, but a financial bust. We can probably lay all of that on Wall St. Lessons learned since, don’t raise rates too soon in the recovery. BB on Fed policy in 1937.

  10. littlebit
    Jul 4, 2019 at 5:54 pm

    I guess I am to old. We used to call this throwing good money after bad.

  11. MF
    Jul 4, 2019 at 5:58 pm

    “And everyone is happy.” No. The families forced to move — or worse — because housing got bid up again are not happy. Flyover country — with its old-fashioned plants-and-equipment business model which is starved for capital because IRL scaling is hard work — isn’t happy.

    The mania phase is only good for those willing to party like it’s 1999 until the music stops. Meanwhile, they suck up valuable resources only to spend it all on glitter and smoke machines. Meanwhile, they make life loud, messy and intolerable for the rest of us.

    • endeavor
      Jul 5, 2019 at 8:50 am

      I think flyover country’s future is Florida writ large. Retirees will sell their overpriced homes on the coasts and cash out moving to a less expensive more laid back middle America. Employment will come from care for these elderly and services to repair and upgrade the housing and infrastructure. Let the coasts be the engine of hyper capitalism.

      • Escierto
        Jul 5, 2019 at 9:31 am

        Do you want to live in these places? The ones with cheap real estate are hell holes where no one wants to live except meth addicts. The ones that are cool like Flagstaff, Arizona or Missoula, Montana have high priced real estate.

      • MF
        Jul 5, 2019 at 11:03 am

        At the very minimum new retirees will stay in place. This will be the skip-over generation. After that, Millennials will inherit Boomers’ un-sellable homes and use them as vacation rentals until they can retire.

  12. Rcohn
    Jul 4, 2019 at 6:47 pm

    The argument that today’s stocks deserve a higher multiple and startups deserve a ridiculous level of capitalization is based upon very low interest rates resulting in higher discount rates to capitalize earnings.But the other side of very low interest rates is very low rates of return on capital. To pay high p/es just because of very low interest rates is just plain stupid ,when the other side of the coin is very low rates of return.

    • Sarcastic Fringehead
      Jul 4, 2019 at 10:26 pm

      Rather than make these low returns at high risk, this small investor is sitting on cash. It’s in a short-term Treasury fund. Why bother investing in this market? I don’t think I’m the only one. This lowers velocity. The only way to win right now is don’t play. Isn’t this the opposite of Wolf’s scenario?

      • makruger
        Jul 5, 2019 at 9:36 am

        Ditto, sitting on short term treasuries, CD’s, and money market. Not earning much, but hopefully won’t loose much either. I was too conservative for the last 10 years, and lost out on some epic returns. But now it really is a good time to be conservative.

      • HollywoodDog
        Jul 5, 2019 at 11:14 am

        The smartest people I know are in cash–and have been for about a year. It’s impossible to apply standard investment strategies to an insane market. But the music has played on far longer than expected…

  13. Paulo
    Jul 4, 2019 at 6:52 pm

    Thanks for the transcript as opposed to a podcast link. Most appreciated.

    I sure don’t get this ‘new’ investment economy where companies expect money for nothing produced and investors expect profits without due diligence or actual company performance. I come from construction where people are hired when there is an actual building that has a buyer/owner. Contractors that produce empty buildings don’t get financing for a 2nd attempt. It’s like money is now meaningless, zeros and ones on a computer screen.

    These IPO companies sound like Vegas gambling schemes.

  14. Old Dog
    Jul 4, 2019 at 6:54 pm

    Wolf, excellent piece as always.

    Shouldn’t deficit spending be added to the things that prop the GDP?

    The people who buy Treasuries are (unknowingly?) funding the government payroll and defense spending, which are gargantuan. Most of this money goes into the economy.

    These investors are also (unknowingly?) financing every government contract, whether it is much-needed highways or bridges-to-nowhere. They may not see themselves as high-risk investors but by trading yield for safety, they are accepting yields that are below inflation. That difference would be their wealth tax.

    I’d wager that this investor class will demand higher yields as years go by. If the Treasury caves in, it will inflate the deficit even more. At some point the government will have to start cutting public spending to pay for defense and interest. At some point, these two items will take the lion’s share of the budget.

    Medicare will be targeted for substantial reductions. Which means that people will have to pay for their health care and will be left with less investable wealth. The wealth equation will become much more complex in the sense that health will have a growing impact on wealth.

    Nobody knows how these feedback loops will play out but as population becomes older and less productive, it’s difficult to imagine an optimistic outcome.

  15. William Smith
    Jul 4, 2019 at 7:06 pm

    Seems like there is a developing systemic structural failure with the whole capitalist model. It is only now a matter of how long the can can be kicked down the road. Reminds me of when the soviets melted all the gold roofs and looted the vast treasures of the churches and monarchy. Once that vast wealth ran out, their whole philosophical communist model collapsed. In our case, the investors are the “gold roofs” and the philosophy is rapacious capitalism. History always repeats.

    • sevensec
      Jul 4, 2019 at 9:25 pm

      I don’t know if it’s yet so much like Communism, but the situation Wolf describes here definitely feels like a command economy.

      Perhaps it’s a command economy with some remanent capitalist features, but ultimately it seems to be based around using the fiat of financial elites to gin up & sustain sheer make-work/activity-for-activity’s-sake in the overall economy.

      If that’s the case, and if these elites control the printing presses, who knows how long this system may yet continue? Why should they then ever run out of money? Is the “everything bubble” even still a “bubble” if the basic nature of the economy has shifted to a kind of command-oligarchy?

  16. polecat
    Jul 4, 2019 at 7:19 pm

    So Wolf, where does a Planet w/ finite resources play into all this .. ?? I mean, it seems to me that between the Cult of Progress, Economics sans externalities, and global human inertia is going to eventually do us in as a civilization.
    A quatloo for your thoughts.

    • polecat
      Jul 4, 2019 at 7:21 pm

      Oh, and further more …. a happy 4th to you and yours ! ‘:]

      • Jul 4, 2019 at 8:25 pm

        Yes, Happy Fourth to everyone.

        We’re going down to watch the Hyde Street Pier fireworks trickle out of the dense fog and frigid wind, a San Francisco tradition :-]

    • Jul 4, 2019 at 8:22 pm

      polecat,

      I get depressed when I think about these things, so I’d rather not :-]

      I’m just the little guy. I do my tiny part the best I can. I know other people do too. But it may not be enough…

      • AV8R
        Jul 5, 2019 at 3:59 pm

        One summons the agency one possesses.

        On that note, could I ask for a H1 assessment of the QE drawdown?

        There’s something about a Glacier stoically standing there and suddenly calving that fascinates me.

    • illumined
      Jul 4, 2019 at 8:53 pm

      @polecat – While certainly the planets resources aren’t infinite, people have been predicting doom and gloom from impending resource shortages for 100 years. Exhibit A are the dozen or so totally failed predictions of peak oil, starting in 1919 when a geologist named David White predicted we’d hit peak production “within 3 years”. Then there were the prognostications of doom from the Population Bomb which predicted catastrophic famines the 80’s from overpopulation. Then there the Limits to Growth predictions which said we’d be out of everything by the year 2000, oil, natural gas, copper, etc.

      How many of those predictions came true? Zero. And yet somehow these prophets are never taken to task for being wrong despite being wrong virtually all the time.

      • Saltcreep
        Jul 5, 2019 at 5:29 am

        Illumined, I would claim that in one sense peak oil is well in the past, and that is in the sense of peak economically viable oil.

        Much of the oil currently being extracted is only made to look viable by huge amounts of credit being made available to participants across the value chain. Once consumers, producers, service providers and public infrastructure providers are unable to go deeper into debt on aggregate in order to enable the extraction, refinement and delivery of oil, then I would contend that we will see a sharp fall in oil production (i.e. when this whole global debt bubble pops).

        My take on this matter is that we can trace the start of the take off in exponential debt growth back to the period when easy conventional oil output peaked 40 odd years or so ago. When, instead of reviewing our plight and discarding the growth based economic model born from the industrial revolution and the gradual transition from horses and oxen to coal to oil as the main power source of our economies, we added a new fuel to the fire in the form of ever growing debt.

        Also, the well documented effects our burning of fossil fuels is having on our climate and ocean systems is frankly terrifying. And the accelerating deterioration of our environment and resource base is also well documented, where everything from species extinction and biodiversity destruction, habitat destruction, resource depletion (also in respect of renewables like soil, ground water and marine food stocks) is gathering pace. It amazes me how anyone can look at how the situation is developing and not get despondent about it.

        • Cynic
          Jul 5, 2019 at 8:13 am

          An excellent summary, Saltcreep: the decline/collapse curve started in the 1970’s, we are quite some way along it, and have done an awful lot of damage – reversible, perhaps, in geological time but not on the human scale – to our planet home since then.

      • Jul 5, 2019 at 9:51 am

        We become much more efficient at using the resources we have. Soylent Green?

      • economicminor
        Jul 5, 2019 at 1:25 pm

        illumined, the outlier in the *it hasn’t happened yet so it won’t happen* is that exponential growth is not possible in a finite system.

        We may not know when but as the population not only grows but continually moves away from primitive to more advanced cultures the demand for resources, which includes energy of all kinds, grows even faster than the population. There WILL be a point where the cost of obtaining more and more is a diminishing return. I personally believe we have already surpassed this point. A top is a curve not a V shaped peak. I believe we are in denial of the fact that we have taken all the easy fossil fuels, minerals, fish in the seas, ect and are on to the expensive stuff. It is going to be hell to pay when this truth becomes evident.

        Our species is easily led and kind of dumb about a lot of things. Delusion is a past time. Why are we still adding ethanol to our fuel when it costs more in energy to produce the ethanol than we gain burning it in our gas tanks? We frack and develop oil fields that produce so much NG that we have to burn it at the well heads because we have no markets nor delivery systems for it. AND we run this system on borrowing against future revenues.

  17. RagnarD
    Jul 4, 2019 at 7:25 pm

    Wow
    That was really Fn good.
    I’m stunned. :)
    Happy 4th

  18. RagnarD
    Jul 4, 2019 at 7:37 pm

    Wolf,
    How
    Would u rate SilValBub2 vs SilValBub1?
    Considering ur focus on where the money was spent, I gotta believe massive overspending on band width is a lot better than over spending on Google and FB ads and craft beer, no?

    But
    U make a great point
    Reminding us
    That there is a LOT of freedom in this system
    Some ppl maybe spend unwisely
    But when the money gets so widely spread
    There’s going to be some smarties getting rained on who have good flowers to grow

    Vs almost any other “rational” socialist system, this has to kick ass, as far as idea generation.
    As of course it has been.

  19. Eamonn Harter
    Jul 4, 2019 at 8:25 pm

    The HBO series Silicon Valley sounds pretty close to reality.

  20. MCH
    Jul 4, 2019 at 8:38 pm

    Wolf, Tesla is about love, and you can’t put a price on love.

    I think the real lesson in this article is just don’t be left without a chair when the time comes. I can guarantee Elon will have a hair when that happens.

  21. Stephen
    Jul 4, 2019 at 9:13 pm

    So far, so good. When I read this, of course, I thought of the joke about the man who flung himself off the 100 story building and as he passed each floor, he yelled, so far so good! But it’s the 4th of July and I prefer to think of the many memories I have had from this wonderful holiday. Memories of fire works and family and friends, barbecues, parties, girl friends, etc.

    • Iamafan
      Jul 4, 2019 at 9:23 pm

      With more than $1 trillion set for buybacks this 2019, you’ve got to wonder what happens when the music stops and companies need to pay back all that debt.

      • nicko2
        Jul 5, 2019 at 3:02 am

        They are praying for a half point rate cut…. But will that really be enough?

  22. timbers
    Jul 4, 2019 at 9:42 pm

    Umm…why do you suggest the music will end? Ever. To my eyes looks to be just beginning. Super Ultra Deluxe Dove Powell joins Super Ultra Deluxe Dove Europe joins Super Ultra Deluxe Dove Japan joins Super Ultra Dove Deluxe China…this had been going for many decades. We are all Super Ultra Dove Deluxes now.

    • Randall Passmore
      Jul 5, 2019 at 12:29 am

      How about a plan for when the nice craft beers are gone? A big hangover needs more beer?

  23. George W
    Jul 4, 2019 at 9:54 pm

    I have never been a big fan of the trickle down economic theory.
    This article provides a decent explanation of how in part this theory may play out

    I would be curious to see where big money from tax cuts etc, is actually spent/invested over say a 10-20 year time span.

    • RagnarD
      Jul 4, 2019 at 10:26 pm

      Just thinking…
      there apparently wasn’t any trickle before the industrial revolution.
      Though it seems, if you were are farmer or tradesman / craftsman,
      you were relatively OK.

      And the only trickle under communism smelled a lot like urine from the Politburo.

      And it is pretty clear, without innovative Genius, we don’t have huge economic paradigm shifts, which IS how we increase our standard of living.
      So, I think capitalistic trickle down from the genius innovators, is all we’ve got. All that’s been proven to work, anyway.

      Not to say, striking / unions, have not had their place in time.

      • George W
        Jul 4, 2019 at 10:55 pm

        Someone needed to fund the Mayflower voyage to India-America and it was Venture capital that did so.

        Tax incentives/right off and the trickle down rational came much later.

        • d
          Jul 5, 2019 at 3:58 am

          “Someone needed to fund the Mayflower voyage to India-America and it was Venture capital that did so.”

          That was not an event of venture capital.

          It was a capital flight event.

          The remaining rebellion supporters and regicides removing their fund’s beyond reach of a vengeful Regent establishment.

      • Paulo
        Jul 4, 2019 at 11:25 pm

        @ Ragnar

        “In 2013, the percentage of workers belonging to a union was 11.3%, compared to 20.1% in 1983. The rate for the private sector was 6.4%, and for the public sector 35.3%.”

        And where has all the recent anti-unionism in the US got people? Stagnant wages, massive corporate profits, a giveaway tax rate, and massive inequality. I would guess Unions had their day for sure.

        All I know is that when I was a kid every one of my friends families could afford a single family dwelling on one income. Everyone had a car. My own belief, and I respect any disagreement commentors have, is that the real decline came about when Reagan fired the air traffic controllers and replaced them with military scabs. After that, war was declared on union membership with working conditions and wages in decline ever since.

        I just watched this documentary a few weeks ago. It won an Oscar for depicting UMW strike 1973 in Harlan kentucky. It was riveting and well worth the time. https://en.wikipedia.org/wiki/Harlan_County,_USA

        Today I drove home and passed several picket sites against Western Forest Products who are trying to roll back the few remaining benefits BC loggers and millwokers have left. I can’t believe workers are still having to fight the same battles over and over. Brutal. If workers can’t earn a fair wage for a hard days work, how can they be expected to be good little consumers? You can’t go any lower than a Dollar Store, although…I guess they could still branch out and offer plastic shoes and shirts for sale. Made in Asia, of course.

        • George W
          Jul 5, 2019 at 12:05 am

          Killing off the consumer one job at at time.

          When one company off shores their jobs it is no big deal when every company does so, it becomes an economic catastrophe.

          Even if congress corrects their misguided tax incentives, the damage has already been done.

          There is no going back, America’s future will fall further into the hands of the few…

        • 2GeekRnot2Geek
          Jul 5, 2019 at 7:39 am

          Paulo,

          Reagan loved unions as long as they were in Poland (Solidarity.)
          If they were in the U.S.A, not so much. And you’re correct, the Air Traffic Controllers combined with “Trickle Down Economics” were the beginnings of all of what goes on today.

          And George W has it right too.

        • RD Blakeslee
          Jul 5, 2019 at 8:39 am

          Paulo, There are unions and then there are unions.

          I grew up in Detroit in the 1940s and 50s.

          The UAW under Walter Reuther was honest and effective.

          On the other hand, the Teamsters under Dave Beck were nothing but a protection racket.

        • RagnarD
          Jul 5, 2019 at 8:56 am

          Well, seems to me, all this correlates to 1971 when the dollar became total fiat, yet remained a reserve currency (due to the oil for dollars with Saudis) . If all the world is using / required to use our currency to buy oil and for general trade, and yet we print it for nothing….
          How can manufacturers in this land of free money with high cost workers and expensive and extensive regulations, compete against foreign competition with low cost workers and minimal regulations who are willing to exchange hard assets for our fiat paper?

          It’s amazing that USA manufacturers do as well as they do.

        • Dale
          Jul 5, 2019 at 12:08 pm

          The plan is for consumers from emerging markets to take place of developed market (DM) consumers. EU, CA, AU, JP, SK, and US are only 700M consumers, while the rest of world is 7B consumers.
          This means most citizens of DM must accept the lower living standards appropriate to their global class.

          Globalism in a nutshell.

          All the DM corporations think they will get a big piece of the new markets, so they are accelerating the process, but they will get nothing.

          This is how developed markets are killed with their own rope.

        • economicminor
          Jul 5, 2019 at 3:04 pm

          Unions were/are their own worst enemies.

          My first and only factory job was at Douglas Aircraft Company. I had grown up around metal as I spent many many hours at my grandfather’s blacksmith shop. So when I was hired they put me in the metal ducting section where we used jigs to get all kinds of ducting ready to be welded. I had worked there about 8 months when the lead man had a serious heart attack.

          There were 13 people on my crew/shift and NO one wanted to be the temporary lead. So I took the job. At first it was really hard as most of the crew had worked together for years and I was the young outsider. Our section was also behind schedule which put additional pressure on me. This was swing shift so most of the actual administrative staff was home watching TV giving me room the 1st shift lead didn’t have. I was energetic and figured out the job. After 6 months we were caught up. Surpassing the 1st shift’s production. They started moving my crew to other jobs and other departments.

          The original lead couldn’t come back and the Union wouldn’t let me keep the job because I didn’t have enough seniority. They brought in a man from 1st shift, gave him my job and wanted me to go back to de-burring metal.

          I walked out that night after the end of the shift and never went back. Unions are to rigid and stupid.

          My sister was university trained but she was carrying mail. The Post Office was trying to make itself more efficient so they put hundreds of people in their Employee Involvement Program. She volunteered. She spent years going to meetings all over the country. There were the employees, the union and the management. The union was inflexible, the management was entrenched, the employees had ideas but No one really wanted change. They spent years and many many million$ and accomplished virtually nothing.

          Ford wanted to make a modern plant in the US but because of the unions didn’t want to lose employees to robots, they ended up building it in Brazil.

          The unions are always fighting to maintain or grow the numbers. This is their income. This is their Achilles heal. They build a system upon income from the members and are then unwilling/unable to change so when the world changes, the employees get left out anyway.

          It was no wonder that a lot of manufacturing moved off shore.

          Sad but again, human nature at its best/worst.
          We are watching it all over again. History may not repeat but it sure does rhyme.

        • RagnarD
          Jul 5, 2019 at 3:31 pm

          In 1992
          I was involved in a start up business, and we went to a trade show at the McCormick conference center in Chicago. we had our booth, and all booths required an electrician to come and install an outlet into which we could then plug our stuff. The electrician came in literally stood there and looked at the hole for 15 minutes to half an hour. then he put it in and left. Obviously it was all about time / quota. As u say economicminor, talk about creating incentives for Business NOT to be done in your city.

          My partner was hip to how they operated, so when the end of the conference came he made sure we had all of our stuff packed and ready to go before all the other booths, because otherwise you were at the mercy of the union guys, who moved at the same pace packing booths up, etc.

          I could see that getting ugly and bloody as people lost their patience with them. Total brain dead gangster thugs.

  24. George W
    Jul 4, 2019 at 11:32 pm

    A Culture of innovation and the future of VC.

    Crony capitalism got it wrong, Fang’s, not big screen tv,s proved to be the future

    As recession looms, big changes are ahead.

  25. Chris
    Jul 5, 2019 at 12:14 am

    A nice description of how the so-called unicorn companies appear to be positive for the economy. But in reality, this is just malinvestment. It damages or destroys old, sustainable businesses that took decades to grow and are probably impossible to replace. And it destroys capital that, although it was never real, will eventually result in a black hole of debt somewhere on the planet. I don’t know how this all ends but it can’t be good.

  26. nicko2
    Jul 5, 2019 at 12:57 am

    The number of billionaires in the United states doubled in the past ten years. That stat in itself is pretty amazing. Then look at the other end of the scale, those making minimum wage (around 50%) of the population, have not seen their wages keep pace with inflation in a generation.

    Thanks to the post global era, those in power have been able to paper over the vast chasm of growing inequality via cheap consumer goods and junkfood. The results again speak for themselves… there are now more obese and overweight people in the world than starving ones… chronic diseases like cancer, diabetes, and heart disease are sky rocketing (the western diet is fully globalized).

    There is a way to go yet, for example, here in Africa, only a small percentage of people even have a bank account, around 30%…. Mobile banking is the latest revolution. That is to say, there is a large new, growing middle class, but it’s in Asia, Africa, and middle east.

    Back to america, Perhaps enough people will wake up before its too late. Elections are coming in less than 500 days.

    • d
      Jul 5, 2019 at 4:12 am

      Remember when a good 3 bed house, on land, was 12K, same house is now 1.3 M+, Get offers for it all the time, My trust still owns it, at the time of purchase 12K was 30% above average market price for housing, its in a good location, high demand neighborhood.

      Change in less than my working life time.

      when the house was 12K 1 MIL was a HUGE amount of money, and a new upmarket car was 2500.00

      Today’s low numbers billionaire, is really only that days low figures multimillionaire.

      • Just Some Random Guy
        Jul 5, 2019 at 10:03 am

        “when the house was 12K 1 MIL was a HUGE amount of money, and a new upmarket car was 2500.00”

        I’ll guess a 12K house was somewhere in the 60s? In which case median income was about $6K a year. So incomes are 10X higher than back in the “olden days”.

        And what did that upmarket car have? ABS? Airbags? Collision avoidance? Bluetooth? Heated seats? Auto climate control? Apple Play? No, it had nothing remotely resembling a modern car. Probably didn’t have power windows even. How many miles did that upmarket car last before it was junked? 100K, maybe. Compare that to any modern car that will last 250K miles easy.

        And looking at MSRP for an “upmarket car” in 1965, not so sure about $2500 that you claim. A 1965 Cadillac Deville was $5500 new. So basically it took a year’s worth of median income to buy a Cadillac. Pretty much like today where it takes a year’s worth of median income to buy a luxury car. And today’s luxury car is about 100X better than a 1960s version.

        The more things change, the more things stay the same.

        • Kye Goodwin
          Jul 5, 2019 at 2:20 pm

          Random Guy, Agreed that modern cars are better than the ones manufactured in the 1960’s but your list of improvements since then reminds me of an idea that I’ve read in a few places recently, that economically IMPORTANT innovations are arriving more and more rarely. A better comparison for understanding this is to contrast both eras of cars to walking or riding a horse. Then the two kinds of cars don’t seem so different. When the automobile first appeared it brought about a huge increase in economic capacity, but the innovations since the 60’s that you list are mostly increases in the costs of transport with a lot less increase in practical value. Sorry, I’m off topic, but this big picture maybe helps to explain the slowing growth of recent decades.

        • RagnarD
          Jul 5, 2019 at 3:44 pm

          I used to like to tell my kids it like this:

          if you’re walking riding a horse seems great, if you’re riding a horse Traveling by boat may seem great, if you’re traveling by boat riding by steam engine train may seem great, If you are a diesel train, writing a model T may seem great, if you’re in a model T riding in a 1980 Honda Accord may seem great. But what’s the difference between that Honda and a Rolls Royce / Porsche / BMW / Lexus etal ?

          The first are all about utility, the latter are largely about status. Yes, they are amazing machines, but the difference in marginal utility for things other than status projection are minimal.

        • Just Some Random Guy
          Jul 5, 2019 at 3:54 pm

          I just mentioned some things off the top of my head. But in any objective way a car today is exponentially better than a car from the 60s. It’s more reliable, much safer, better performance, beter gas mileage, more creature comforts, etc. My point is for the same price relative to income, you get a lot more car today than you got 50 years ago. Which means relatively speaking cars are cheaper today than back in the “good old days”. But people still like to fantasize about a time that never existed when everything was cheap and great and wonderful.

        • Chuckles
          Jul 6, 2019 at 5:34 pm

          Bankers. Bankers. Bankers.

          In the 1960s, people bought a new car with cash every 2-3 years.
          Now, they are financed for seven years, or worse leased for three. Do the math on who’s getting rich in that scenario. Guess who’s paying. Might as well just include the financing cost in the purchase price.

          Used to be one income easily bought a single-family home. Now it’s two incomes, with 1/3 or more of the income going to taxes (income & property).

          See how all this works? It wasn’t an accident.

      • Cynic
        Jul 5, 2019 at 1:14 pm

        A small, charming, 1920’s house in this English village in a ‘growth hub’ -on a big plot – recently sold for about £700k.

        It’s been demolished, now 3 ‘luxury’ houses are being built there with no garden at all as far as I can judge. Of course, there will be parking space….

        It would have sold for about £120k, or even less, in 2000.

        Then, it would have been within the reach of an average lower middle-class (Brit social defintion) young family, and they could have made a fantastic kitchen garden and orchard on that plot,as well as extending if they wished.

        At £700k it was far beyond them, and has fallen into the hands of speculators enabled by dirt-cheap money.

        Things change, but they do not remain the same. Sadly.

        Ridiculously, the UK government, and dumber property owners. regard such falsely inflated property valuations as part of ‘national wealth’. Idiots.

    • Cynic
      Jul 5, 2019 at 8:08 am

      The social structure of the US appears to be increasingly Latin American, papered over, as you say, with easy credit and consumer crap (and flag-waving).

      The UK is a seedier version of this.

      But some people will still be foolish enough to boast about the number of millionaires and billionaires, when they can’t possibly join that class themselves.

  27. Peter Stubben
    Jul 5, 2019 at 5:11 am

    the velocity of money explained…great stuff Wolf!

    but don’t forget the Government’s vig that dilutes money expansion — the 30-40% to be redistributed into (can I say) non-productive hands (wasted assets), and that slows everything down…and may get worse in 2020.

    best for the July 4 weekend…PJS

  28. Aravind
    Jul 5, 2019 at 5:27 am

    “We borrow from our future to pay our debts to the past”

    Don’t remember where I read that, but the “we” in this case is surely humanity

  29. Old-school
    Jul 5, 2019 at 5:47 am

    I am only invested in one stock at the moment. Fundamentally it is relatively cheap. It’s a small cap with a good balance sheet. The average holding period is six weeks which tells you that at least for this stock most people are gambling, not investing.

  30. Gershon
    Jul 5, 2019 at 7:55 am

    The financier parasites are killing the host, the productive economy.

  31. Just Some Random Guy
    Jul 5, 2019 at 9:51 am

    So much negativity. We just had a blow out jobs report. 224K new jobs and wage growth is 3% a year. Highest female participation rate in 10 years. Unemployment at 3.7%.

    But the comments here act like it’s 20% unemployment and 224K jobs LOST instead of created. I mean come on people, get a little perspective here. It’s not all doom and gloom all the time for crying out loud.

    As to start ups….

    I’ve worked for 2 of them. The first one was started by 4 people. Very generous stock options for everyone. The company got bought. The 4 partners each walked away with about $100M. The employees, depending on how early they joined walked away with anywhere between $25K for newbies to $1M+ for those who joined early on. I was somewhere in the middle, walked away with about $250K.

    Then a few years later I joined another startup, with almost identical results. Only difference was this one was started by 3 instead of 4. Got bought again, the 3 founders walked out with $100M and I walked out with about $200K.

    Neither of the 2 companies ever turned a profit. The second one was close and probably would have been profitable within a year had it not been bought out.

    I’m debating whether to go to a 3rd startup now. The payoff is nice, but to quote Danny Glover “I’m getting too old for this S***”.

  32. Senecas Cliff
    Jul 5, 2019 at 10:55 am

    One of the least useful and most destructive examples of this “investment behavior,” are the shared e-scooters now blocking the sidewalks in major cities. If you do the math it is a horrible business model with millions in capital tied up in scooters rented by phone that have a lifespan of a few months and little or no way to be maintained or secured. The only possible motive to start one of these companies is to attract investment capital and grow the fastest so you can attract more. Except that these companies employee very few people, and buy all their scooters from China so there is little benefit to the local economy. In the end we will be left with the bad debt and junked scooters covering the landscape.

    • Nicko2
      Jul 5, 2019 at 11:31 am

      Plus they’re REALLY dangerous. People are dying on them.

  33. Halsey Taylor
    Jul 5, 2019 at 12:10 pm

    This appears to be the 21st century version of the WPA.

    Unlike FDR’s version, the current one has been privatized and is intended to benefit the wealthy.

  34. Constant Walker
    Jul 5, 2019 at 3:09 pm

    “….and there’s hell to pay when the fiddler stops! It’s closing time.” Leonard Cohen

  35. Les
    Jul 5, 2019 at 4:01 pm

    Past cycles stopped when Japan walked away from a joint international central bank intervention or from monetizing its debt. 1987 preceded the top in tbig crash. 1998 preceded the Russian debt crisis and the 2000 tech and telecom bubble top. 2006 preceded the 2007 financial bubble top.

    Another would be the 1964-1970 debt monetization to finance the guns-and-butter policy during the Vietnam War.

  36. WSKJ
    Jul 6, 2019 at 3:21 pm

    A family member fits the category of start-up micro-cap executives that you describe above, Wolf. His actual routines are actually closer to the sort of hardworking, snug-belt, approach often described here by the likes of Paulo, than the craft beer quaffing management lifestyle that you describe above. (Seems like you are talking about what used to be called “the 3-martini lunch” guys. Whatever happened to the martini, anyway ?)

    While much of this post is thoughtful and no doubt accurate in terms of describing the contribution to the U.S. economy that the high-life start-ups make, I wish to remind us all that there are the start-ups that are focused not only on R&D, and big ideas, but also putting it all together to get into real production of tangible goods. Not talking Silicon Valley here.

    …… and as long as you are staying sober enough to write the thoughtful posts, Wolf, you can have our share of the “entrepreneur’s craft beer”.

    • Jul 6, 2019 at 6:42 pm

      WSKJ,

      Most startup people work insanely hard. That’s part of the deal. A good friend of mine once told me as I was starting up my own thing here, “Startups are not for old men.”

      But I have also visited a number of locations of startups. And there is usually a fridge in the kitchen, and there is usually craft beer in the fridge. This was also the case at the maker-space I rented for our WOLF STREET meetup. I’m not sure who is paying for this beer though. At any rate, the beer was just an example to add a little liquid humor to a very dry topic.

  37. WSKJ
    Jul 7, 2019 at 5:07 pm

    Well, Wolf, you did mention “beer” a number of times in the post, and when you specify craft brews, the reader knows that they are a luxury item that really has to go if the belt is really tightened. My penny’s worth above was intended partly to suggest that my industry’s start-ups do better than Silicon Valley’s when it comes to tightening the belt. (LOL)

    In fact,I believe that we share the belief that a reward is in order for hard work, discipline, and thrift. Your post above is a good reminder that there has been some trickle-down effect to the general economy from the Fed’s policies of the last decade.

    I continue to question whether the benefit to the wage-earning classes would have been greater if interest rates had not been pushed so low for so long.

    These are important questions when our next national elections are looming, and proposals for bigger government and higher taxes, and more craft brews in every fridge, are being put forth.

    Your objective coverage, and informed opinions, are important to your readers, so, as always, thx Wolf.

  38. Xypher
    Jul 7, 2019 at 9:28 pm

    Legal ponzi schemes. people betting on something intangible, but a good snake oil salesman at the helm, aka tesla. SpaceX is actually a tangible item, as they are proving it in tests that everyone is able to see. Maybe that is what Elon is hoping will be the foundation of the rest.

Comments are closed.