‘Stimmy in the morning
‘Stimmy in the evening
‘Stimmy at suppertime
‘Be my little stimmy
‘And love me all the time’
Apologies to the McGuire Sisters
Today we take our seats at the back of the plane and fasten our seat belts…for a flight of fancy…looking down at some of the curious features of the stimmy world.
There was a time when we thought it was weird for companies to buy their own shares. They’re supposed to be fructifying investors’ money by providing products and services…not gambling it in the stock market.
Companies create wealth by earning profits — from making and doing things. They take raw materials at a cost of X…add labour at a cost of Y…and sell the finished product at a price of Z.
As long as X plus Y (we’re simplifying) is lower than Z, the world is a richer place. They have ‘added value’.
But the Federal Reserve has been actively inflating the financial economy (asset prices) while depressing the real Main Street economy (sales, wages, and profits) for at least 30 years.
So, the relative importance and profitability of delivering products and services — compared to the quick, leveraged pizzazz of Wall Street — has declined.
That’s why mummas now want their babies to grow up and work for Goldman Sachs in New York, not for Mainline Manufacturing in Gary, Indiana.
And even CEOs of old-school industrial companies are tempted to try financial tricks. Stock buybacks, for example.
Companies routinely buy ‘sales’ by acquiring other companies for their sales volume. Typically, they buy at lowish, private-market prices…and then get the advantage of a highish public company valuation.
So the higher the stock market goes, the greater the appeal of buying someone else’s sales and profits.
The S&P 500 currently has a price-to-earnings (P/E) ratio of 42…the third highest in history. Big companies borrow at about 3% (the yield on the most creditworthy AAA debt). The inflation rate is about 2%…and moving up.
So, if you can buy a company at 10 times earnings, those earnings will be worth four times as much in your big company.
And if you can borrow at a real interest cost of 1% — adjusted for inflation — the deal should be a big winner for you. You, as CEO, should get a big bonus.
Buying your own shares back is not exactly like acquiring another company. Except that, it too, can give your shareholders more sales (and profits) per share, a higher stock price…and a bonus for the CEO.
But why stop there?
For instance — and this is merely a hypothetical of our own creation — if a company can make itself more valuable by borrowing money to buy its own stock, maybe it could boost sales and profits by borrowing to buy its own products?
In the digital economy, marginal additional sales can have a nearly 100% profit margin. Certainly, even in the old economy, if a company doesn’t have to provide a product, its margin might be near 100%, too.
So imagine a company that borrows $1 billion at 3%…and uses the money to buy its own products.
It has no manufacturing cost, no labour cost, and no delivery charges. No customer service or refund obligation. This will be the best business the company ever did.
Yes, it is absurd…but so are a lot of things that are actually happening…that we’ll get to in a minute.
And yes, in this confection, the company will have to pay $30 million in interest. But this increase in sales and profits would be multiplied into $42 billion ($1 billion more in profit times P/E of 42) in extra share value.
Shareholders would be delighted. The momentum traders and the Reddit crowd would get excited and probably bid the shares up to twice that much.
We might assume a $50 billion capital boost…at a price of only $30 million in annual debt service costs. Not a penny of real-world, Main Street, goods and services wealth will have been created. But everybody would get rich.
In other words, the manoeuvre would be shockingly profitable. We’re waiting to see someone try it.
Of course, the idea is idiotic. But it is at least absurd in a plausible kind of way…that is, within the range of reason, as an insane person might imagine it.
Lunatic business strategy
The trouble with the imagination is that it is limited by plausibility. Real life is not. So, if you want to read something really, truly bizarre…just read the financial news.
Read about MicroStrategy CEO Michael Saylor, for example. Or Tesla’s Elon Musk. Musk is, well, Musk. But Saylor pretends to be a sane person.
We first noticed Saylor when he said something newsworthily stupid 20 years ago. ‘Information wants to be free,’ was the expression.
It, and a lot of other dubious bons mots from Saylor, helped persuade a generation of dreamers that every cockamamie company with .com at the end of it would be worth a fortune.
It didn’t work out as planned. The Nasdaq peaked out in February 2000 and didn’t recover until 17 years later.
But now, Saylor’s back and still at the head of his company, MicroStrategy (MSTR). His strategy now is neither to buy other companies whose sales and profits could be incorporated into his own…nor to buy his own products…nor even to make money by providing goods or services, at all…but to make money by buying bitcoin.
We don’t argue that this is a bad bet — for all we know, bitcoin will go up.
Our point is that it is a lunatic business strategy. And symptomatic of a crackpot economy.
Saylor’s business has been on the decline for more than five years. But rather than think up new products and services that he could offer customers, Saylor borrowed nearly a billion dollars…to buy the cryptocurrency.
So far, this has been a great success. His company, previously worth about US$2 billion…is now valued at US$6 billion — which is about US$1 billion more than the current value of his bitcoins.
Which part of this makes no sense? Borrowing money to buy a famously volatile and risky thing? Turning your company into a bag of those things? Or the fact that the bag is now worth more than the value of all the things in it?
We don’t know. But here’s Saylor’s update on ‘information wants to be free’…
‘Bitcoin is a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy.’
But wait. There’s more. The idea is catching on…with — who else? — Elon Musk.
The South African wunderkind announced Tesla (TSLA) earnings last week. You might expect that a company that makes automobiles…and loses about $2,000 on each one of them…might have some grim news to share. But you would be wrong.
This is the Bubble Epoch, remember. As long as the fake money flows — US$9 trillion and counting — nothing needs to make sense.
Budgets don’t have to balance…companies don’t need to earn money…governments can claim to control the Earth’s temperature…non-companies (here, we think of the whole cryptocosm) can be worth $2 trillion…
And kids no longer have to go out into the world to make their fortunes; now, they can do it from mum’s basement.
Bait the hook
But back to Elon…
While Tesla lost money-making cars, at least it made money speculating on bitcoin. More than US$100 million. That, and money from various environmental credits, enabled TSLA to report a profit last week — of 93 cents per share.
So what’s crazy about that?
At this stage of the Bubble Epoch, 40% of the companies on the Russell 2000 are losing money.
But investors have never been more enthusiastic.
And here we offer some advice to the Pied Piper of tech investing himself — the aforementioned Elon Musk.
Instead of buying and selling bitcoin…why not just buy and sell (also known as pump and dump) MicroStrategy (MSTR)? Buy some stock. Explain in a tweet that it is a superior way to own the cryptocurrency, since you can depend on Michael Saylor to remember the passcode.
Then, as the Reddit crowd goes into a panic buying MSTR, you wait.
When the price has doubled, sell. And report another profit for the next quarter.
For The Rum Rebellion
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