Thursday, February 20, 2020

Covid-19: Global Retrenchment Will Obliterate Sales, Profits and Yes, Big Tech

If you think global demand will rebound as global debt and confidence implode, you better not be making consequential decisions based on Euphorestra-addled magical thinking.
Even before the Covid-19 pandemic, the global economy was slowing for two reasons: 1) everybody who can afford it already has it and 2) overcapacity. One word captures the end-of-the-cycle stagnation: saturation.
Everyone who can afford a smartphone (or can borrow to buy one) already has one. Everyone who can afford an auto loan already has a car. Everyone who could afford an overpriced house already bought one. Everyone who can afford a tablet or laptop already has one. And so on.
This saturation isn't just in the consumer market--the corporate market is equally saturated. Corporations leased too much space, bought more cloud services than needed, increased headcount willy-nilly, and increased capacity just as the market for their goods and services stagnated from global saturation of markets and debt.
Paint-daubed members of the Keynesian Cargo Cult (paging Chief Humba-Humba Paul Krugman) love to claim that "debt doesn't matter" but in their frenzied dance around the campfire they ignore one little feature of debt: interest. In a world in which money is borrowed into existence, all new money issuance and all new debt (the same thing) accrues interest.
And as Japan has proven, even if the interest rate is near-zero, if you borrow relentlessly enough, the interest due even on near-zero interest rates soon dominates your entire income.
The Keynesian Cargo Cult, busy with their rock radios (the dials are painted on), ignore the sad reality that marginal borrowers default because they can't afford to make the principal payments, never mind the interest, and the inevitable result is cascading defaults throughout the financial system.
It's not just marginal borrowers who blow up; marginal lenders also blow up as all the loans they issued to marginal borrowers blow up.
Then there's overcapacity. Yes there are shortages such as pork in China due to the spread of Swine Fever, but in one manufactured commodity after another, there is more capacity than customer demand.
This is a permanent feature of a globalized economy awash in cheap money. On my first visit to China in 2000, TVs were is massive oversupply as production had ramped up just as every household already had a TV.
Two other features of a globalized economy awash in cheap money are 1) too much debt and 2) complete destruction of discipline. Consumers, governments and corporations have all borrowed and spent on a grand scale, abandoning financial prudence in favor of a euphoric fantasy (encouraged by central banks) that the cycle of expansion would never end.
This global hubris was begging for a comeuppance, and Covid-19 has toppled the world's precarious dominoes. A retrenchment that was long overdue has started, and everyone who works for a company or lives in a nation that does business with China--either relying on China for parts, manufactured goods, tourists, students, etc., or as buyers of imported goods and services--is about to retrench whether they want to or not.
As I explained earlier, desire is a much shakier motivation than need. Aspirational desire for a higher-status good or service to replace the one you already have is a manifestation of confidence and certainty. When certainty dissolves into uncertainty and confidence in the near future melts into air, spending arising from the wispy fantasies of aspirational desire dries up.
The number of people who can't live without a new smartphone, vehicle, tablet, subscription to content, etc. is far, far smaller than pre-pandemic sales. And since profits flow from the marginal buyers of goods and services, profits are about to implode across the global economy.
Big Tech will not be immune to this implosion of profits. Corporate leadership runs in herds just like consumers, and so corporations hired too many people, signed too many leases, rushed into cloud services and borrowed too much money to buy back shares, a.k.a. "create shareholder value."
Just as everyone who can afford a car already has one, every company that wanted cloud services already has cloud services. All the Big Tech giants that have been soaring on expectations of endless 20% quarter-over-quarter growth in their cloud services will find growth crash to 1% or even go negative: as corporate sales and profits plummet, so does the need for more cloud services.
The fat in bloated household and corporate budgets will have to be trimmed, and fast. Headcounts will have to be slashed, marketing budgets burned to the ground, leases on empty space dumped and so on. Does all that online marketing actually work? Well, actually, no, not when consumers retrench.
Households will soon be grabbing their iPhones to delete all subscriptions: settings -> your name -> subscriptions -> cancel, cancel, cancel. People will look at the hundreds of dollars they're blowing on streaming content they rarely use and cancel Netflix et al. en masse. Even sacrosanct Amazon Prime and Costco memberships will be cancelled as people share accounts.
The global economy based on 20% quarter-over-quarter growth in everything will implode as growth slows to signal noise levels (1%) or goes negative. Valuations based on 20% quarter-over-quarter growth forever will flame out and crash to Earth.
Everyone expecting 20% quarter-over-quarter growth to return in the second quarter is going to find that the crash from the crazy high of Hopium and Euphorestra is devastating. Phones last a long time and so do vehicles. Profits that vanished like mist in Death Valley do not start gushing again as the entire world retrenches.
The dominoes have just started to fall: economies dependent on tourists from China are imploding, companies dependent on components made in China are imploding, companies dependent on sales made to Chinese households and enterprises are imploding, and so on.
Do you really think Amazon fulfillment warehouses have 12 weeks of every item in inventory? Are you joking, or just delirious from a high-ball of Hopium and Euphorestra? The global supply chain has been disrupted four layers deep: you think that assembly plant in Vietnam is unaffected, when 50% of the parts being assembled are sourced from China?
If you're confident the containers from China will soon be offloading at Long Beach in two weeks, you better check your meds. And if you think global demand will rebound as global debt and confidence implode, you better not be making consequential decisions based on Euphorestra-addled magical thinking.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Wednesday, February 19, 2020

Omens, Portents, Karma and the Mandate of Heaven

The question of legitimacy isn't limited to China.
what makes humans unique among social mammals? Some say humor, I would nominate superstition: regardless of how hard we promote our rationality and logic, humanity continues to sense portents and omens in events and feel the intangible tug of karma: the consequences of past actions that we arrogantly thought we'd escaped forever.
Michael Snyder recently compiled a list of peculiarities that are raising eyebrows around the globe: One, sure, two, not that unusual, three, well things happen in threes, but ten disturbances and we're only six weeks into 2020? 10 'Plagues' That Are Hitting Our Planet Simultaneously (Zero Hedge)
As the saying has it, Nature Bats Last, and maybe arrogant, destructive humanity's war on Nature is about to get its comeuppance. Maybe overdosing hundreds of millions of chickens and pigs to knock down bacteria in overcrowded conditions has finally generated a karmic blowback via bird and swine viruses.
As for karma in human society: maybe the disruption of the supply chain in China is a karmic response to offshoring production to fatten Corporate America's profits at the expense of all else in America's society and economy.
Then there's the celestial right to rule, a.k.a. The Mandate of Heaven, the concept rooted in Chinese culture that political leadership which fails the people invites divine retribution in the form of withdrawing the support of Heaven. This withdrawal of support manifests in the tangible world as natural disasters: earthquakes, floods, droughts, plagues, etc.
Though it's not politically correct to discuss The Mandate of Heaven in any serious way, the reading of omens goes back in Chinese history to oracle bones, the process of heating bones until they crack and then interpreting the patterns as portents to the future.
With human and domestic animal epidemics devastating China in a novel cluster of natural disasters, The Mandate of Heaven is in play even if no one dares speak of it openly. The regime is well aware that these parallel plagues are understood as manifestations that question the legitimacy of the current regime.
The question of legitimacy isn't limited to China. Soaring wealth inequality, the dependence on debt to fund "growth" and the political disenfranchisement of the masses are global manifestations of political-financial systems that invite divine retribution for their excesses of corruption, self-aggrandizement, and exploitation of the planet and its human workforce.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Tuesday, February 18, 2020

The World Is Awash in Oil, False Assurances, Magical Thinking and Complacency as Global Demand Careens Toward a Cliff

This collapse of price will manifest in all sorts of markets that are based on debt-funded purchases of desires rather than a warily prudent priority on needs.
Since markets are supposed to discover the price of excesses and scarcities, it's a mystery why everything that is in oversupply is still grossly overpriced as global demand slides off a cliff: oil, semiconductors, Uber rides, AirBNB listings and many other risk-on / global growth stories are still priced as if pre-Covid-19 demand was still guaranteed.
Punters are still buying semiconductor stocks based on out-of-touch projections that are the equivalent to counting the number of fairies on the head of a pin, ignoring the fundamental reality that very few people actually need a new mobile phone, vehicle, laptop, refrigerator, etc.
It boils down to confidence and certainty. People pursue what they desire but don't need when they're brimming with confidence in the future, bolstered by an animal-spirits euphoria that their income and wealth will continue rising--a sense of certainty anchored by a belief that their economic world is essentially without risk.
When confidence dissipates and is replaced by fear and uncertainty, desires lose their luster and needs take precedence. When you're afraid of getting a deadly virus or losing your livelihood, status symbols and frivolous spending no longer top the agenda.
Yet the entire risk-on / global growth story is based entirely on desires not needs. The vast majority of demand isn't for a pressing need, it's for euphoric aspirational consumption, spending intended to make the buyer larger than they really are, in their own self-image and in the image they present to the world in the brands they display, the cafes they dine in, etc. etc.
Since the world is awash in false assurances, magical thinking and complacency, we might ask: what's the market value of these disconnected-from-reality fantasies? There's no pricing mechanism for such intangibles, of course, but should counting the number of fairies on the head of a pin give way to a new appreciation of risk and a pervasive awareness of uncertainty, then global demand will fall off a cliff as desires are set aside indefinitely.
In a world of bogus projections and rigged statistics, plunging demand for oil is one of the few reality-based measures available. One of the games being played is whenever a reality-based measure is discovered--electricity consumption, satellite images of empty parking lots, etc.--authorities immediately limit access to the measures and/or unleash a tsunami of counter-narratives to discredit the real-world evidence that global demand is cratering.
Since oil is the master resource for the industrialized, interconnected global economy, it's tough to argue that declining consumption of oil doesn't matter.
When demand craters, producers must restrict supply or price will crater, too. The problem with oil and everything else that's now in over-supply / over-production is that producers can't survive either a sustained drop in price or a sustained drop in production. Since both are equally fatal, producers have every incentive to keep producing and hope that somebody else lowers their production to keep prices high.
Alas, no producer is willing to fall on their sword to keep prices unnaturally elevated. And so excess production continues apace until price collapses.
This collapse of price will manifest in all sorts of markets that are based on debt-funded purchases of desires rather than a warily prudent priority on needs.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Monday, February 17, 2020

COVID-19 Pandemic: The Complacent Are Clueless

The eventual price of substituting magical thinking and survivorship bias for actual evidence will be far higher than the complacent realize.
Here's a sampling of complacent assertions being made about the COVID-19 virus as if they were certitudes:
It's no worse than a bad cold.
It's less deadly than a normal flu.
You can't catch it unless you're in sustained close contact with a carrier.
Carriers are only contagious for 14 days. After that, you're home free.
A vaccine is just around the corner.
The Chinese government has it under control.
Only 2,000 people have died, it's no big deal.
The few cases in other countries are being managed, and it will soon disappear.
The pandemic will fade away by April due to rising temperatures.
China's GDP will only take a 1% hit, and global growth will only drop 0.25%.
Interestingly, there is no large-scale, credible data to support any of these claims. But the complacent are not just falling for false claims being passed off as "facts" rather than what they really are--magical thinking--they're making a much larger error known as Survivorship Bias.
The complacent are focusing on the few who have been tested for the virus, not the millions who haven't been tested.
The complacent are focusing on the accurate tests, not the many carriers who tested negative or the healthy people incorrectly tagged by false positive tests. The complacent are overlooking the fact that multiple tests are needed to confirm and even multiple tests can fail.
The complacent are focusing on the few who went to the hospital to get tested and treated, not the multitudes who did not go to a doctor or hospital (for a variety of reasons).
The complacent are focusing on the few carriers who have been forcibly hauled off by Chinese police and not the many who have wisely hidden away from prying eyes.
The complacent are focusing on the few facilities with test kits, not on the multitude of clinics which do not have test kits.
The complacent are focusing on the few who have been identified as carriers in other nations, not the asymptomatic carriers who have not been identified because 1) they have no symptoms and thus no reason to get tested and 2) they chose not to go to a doctor or hospital despite having symptoms.
In effect, the complacent are focusing solely on the few carriers who are symptomatic and have been tested, not on the much larger number of asymptomatic carriers who have not been tested. The complacent are ignoring the highly contagious nature of COVID-19, and the impossibility of controlling a virus that can be spread by asymptomatic carriers for up to 24 days.
The complacent are assuming 100% of all carriers outside China have come forward and been identified as carriers via tests, when the reality is asymptomatic carriers don't even know they are infected and contagious.
The complacent are assuming every healthcare facility in China has test kits in such abundance that they can test suspected carriers three times to confirm the diagnosis, when the reality is test kits are scarce and one test is not enough to make a reliable assessment. Carriers can test negative, positive and then negative.
The complacent are assuming casual contact isn't enough to catch the virus while a rising tide of cases confirm that brief, casual contact is enough to get the virus.
The complacent are assuming 100% of symptomatic carriers will go to the hospital to be tested and treated, when an unknown but consequential number of symptomatic carriers are fearful of what will be done to them and their families by authorities, so they hide from prying neighbors and authorities.
The complacent are assuming that asking people if they recently visited China or hosted a visitor from China will identify 100% of the asymptomatic carriers, when there is already proof that asymptomatic carriers have caught the virus from others: they did not visit China or have any known contact with anyone who came from China. They caught the virus from an intermediary who didn't even know they were infected.
The complacent are looking at cases and carriers that are known, not the cases and carriers which are unknown. Since asymptomatic carriers can spread the pathogen, the majority of carriers remain unknown. Since not every symptomatic carrier chooses to go to the hospital, many cases remain unknown.
In sum, the complacent are clueless. The eventual price of substituting magical thinking and survivorship bias for actual evidence will be far higher than the complacent realize. Playing games with statistics and high finance will not limit the spread of the virus or limit its profound economic impact.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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