I just read the article titled Disruptions: With No Revenue, an Illusion of Value that discusses the overvaluation of tech companies.
This article is so intuitive, yet so refreshing. It’s incredible that people aren’t discussing another eminent collapse.
Let’s talk about money and value.
Money represents a denominated value; it represents purchasing power. What does it mean to be worth something? It must possess utility, and that utility must be great enough, must possess enough value, that you would be willing to trade something else you value equally for it. But what if the value of what money is representing is actually valueless? What happens when the value attached to the dollar don’t reflect the value attached to the object? What happens when the dollar is worth significantly more than the object? You simply won’t exchange your money for the object, and suddenly it’s value decreases and disappears.
What if someone told you that a company was worth a billion dollars, but you actually believed it was worth nothing? I think of Instagram, Facebook, Twitter, Groupon. How do these companies generate revenues? How much value are people willing to give up to use these services?
The problem is speculative valuation. The question of whether these tech companies will actually deliver the advertising dollars is still out. A valuation is only as good as its assumptions. Valuations based on discounted cash flows rest on some limited tentative assumptions, specifically: basing projections that the past will be like the future, variable discretionary capital expenditures, as well as the uncertainty of discount rates and growth rates. What if the market suddenly decides that companies like Instagram are no longer “cool” and stop using the product? What’s going to happen to that billion dollar valuation?
The tech industry is experiencing a speculative bubble, similar to the one witnessed preceding the real estate bust and the resulting financial crisis. What is the real value of information technology? I know it increases efficiency, it provides us with superficial pleasure as we peruse the internet, look at Facebook pictures, and the like, but what happens when we no longer derive value from these things? What happens when suddenly Instagram is no longer cool? The value will disappear along with everyone’s money.
I also believe that the education system, specifically higher education, is experiencing a boom and will eventually bust. What is the real value of going to college? You accrue massive debt that you can’t ever escape, your income is increased marginally, and there’s no guarantee you’ll get a job. What happens when people simply decide that the price tag isn’t worth it, they don’t want the loans, they don’t think college is worth it? The value disappears.
What other industries are suddenly thriving? Health care? Is health care an over valued industry?
As this article mentions, and I believe and have said for a long time, that our economy’s worth is built on distorted valuations. The financial industry is over 21% of our economy. That’s right: twenty-one percent. What value are they actually producing? Financialization leads to decreased real asset investment, so I argue they produce no value. Instead, financialization increases speculation, risky investment, decreases private savings, and increases debt, among other things.
Our economy is a house of cards. Where is the real value? What things possess real utility? When shit hits the fan and people have no more money, no more surplus income, no more savings: what will they be spending their money on? What good or services will people include to satisfy their necessary consumption for sustenance? Will people prefer to spend their money on services or goods? I suspect real-asset goods. Is technology a good or service? It is intellectual capital, but does it possess any tangible value? No. If people are broke, you think they’ll spend money to use Instagram? I bet not. And what if Instagram decided to use advertising? And what if those people are so broke that they don’t buy what they advertiser is offering? Why would a company advertise with Instagram, or Twitter, or Facebook, or similar companies?
Service industries are the result of past increases in productivity that lead to equal distributions of rising income which created a larger middle class; this middle class created a demand for services that were previously only available to the upper class; but as income distribution widens and wealth accumulates at the top while everyone else gets poorer, people will not be able to afford services. They won’t spend money on luxury goods. They won’t go out for dinner as much anymore.
But this will only occur when people can no longer borrow on credit. At present, debt is solely responsible for our sustained domestic demand and aggregate output over the years. Financial liberalization (cheaper borrowing through regulation) has allowed consumption to remain relatively stable as real wages stagnanted and inflation rose.
Only when lenders can no longer extend credit will our country experience massive stagflation (high inflation, high unemployment), eventually leading to a massive economic collapse. We may be witnessing the beginning of such a stagflationary period.
How can someone prepare for a bubble collapse? Where should they invest their money? Commodities? How can someone bet against the market? Which goods will be in higher demand as incomes continue to drop and inequality worsens?
I’ll be posting a massive paper on inequality within the next few days and I’ll elaborate in depth on how inefficiencies within various channels lead to economic inequalities that reduce socioeconomic equity and decrease economic growth.