Folks... this is an essay each and every one of you
should read... and contemplate.
How long can this shit go on...???
I'm not an economist. I don't boast an MBA. But, geez...
Stockman's case seems pretty damn well made to me!
* * *
* * *
On Friday Alibaba gained $65 billion of market cap in 5
minutes! And that was on top of the $170 billion IPO price - a valuation that
was not all that shabby to begin with. In fact,
BABA weighed in for the opening bell at 20X its $8.6 billion in sales.
Well, the above red hot multiple was not actually with
reference to the company’s results, but to its drop-box financials. That is,
before the day was over it was trading at 27X the LTM sales posted for a shell
in the Cayman Islands - an entity on the word processor of a law office located
there which may or may not receive actual cash dividends and honest accounting
statements from a myriad of entities that do countless things in China.
Ah, yes, in China - the most stupendous bubble of
unsustainable construction, borrowing, speculation and corruption known to the
pages of history!
So with regards to BABA’s $230 billion market cap at
week’s end, you can say this: None dare call it price discovery!
What it shows is that Wall Street is well and truly off
its rocker.
The Chinese swindlers behind BABA didn’t even have to tap
their home market. These preposterously over-valued shares were sold
overwhelmingly to Wall Street - to the gamblers, speculators and robo-traders
that have occupied what was once a reasonably honest capital market.
(*PURSED LIPS*)
It's not just that the $25 billion raised in the offering
will go in part to insiders and in part to a blind pool for the acquisition of
anything operating in China or not in China. That isn’t the real red flag.
(*HEADACHE*)
The real one is, well, an actual red flag. Namely, the
utterly unexamined idea that China is just another capitalist economy like the
US, UK or even Italy, for crying out loud; and that it is galloping off into a
glorious future and a middle class consumption orgy that will make what takes
place daily in America’s 3,800 Walmarts look diminutive.
The Wall Street brokers thus threw up a storm of
statistics about BABA’s GMV (gross merchandise volume) of $300 billion being 3X
that of Amazon.
* CHINA ISN'T AMERICA. BABA ISN'T AMAZON.
And that the number of customers at 279 million is more
than the number of adult Americans.
* UNLESS THEY'RE BUYING AMERICAN GOODS AND SERVICES... SO
WHAT...??? (YEAH... YA DIDN'T THINK OF THAT, DID YA?!)
In short, the pitch is a modern version of “a billion
lamps to China”.
Well, I’m sorry kids. China is a monstrous house of economic
cards and an inherently unstable polity that will blow sky high in a matter of
time - and probably not that much more time.
You can’t capitalize what is nothing more than a proxy
for everyday retail commerce in China’s maniacal economy with a PE meant for
real capitalist enterprises that have invented something of profoundly
transformative significance, such Google - or in their day, Microsoft, Intel,
IBM and the Ford Motor Company.
By contrast, Alibaba is a purely derivative mass merchant
of e-commerce. It is a Chinese copy of Amazon, eBay, PayPal, YouTube, Twitter
and the New York Yankees - all rolled into an opaque and convoluted financial
pyramid that would have made Goldman Sachs ill-fated schemes of 1929 look
reasonable.
(*NODDING WHILE SIGHING*)
Moreover, even its Cayman Island grade financials prove
that there is absolutely nothing unique and non-replicable about the business
model of this purveyor of stupendous volumes of cheap stuff to China’s retail
masses.
(Stated differently, there is no known capitalist market
in which a mass merchandizer with no inventories, no stores, no warehouses, no
patents, no state monopoly and virtually no fixed assets whatsoever is worth
$230 billion.)
Indeed, BABA has virtually no working capital and the
only assets visible on its balance sheet are cash, $300 million worth of
un-depreciated computer software and equipment and $6 billion of "intangibles"
and advances spread among the archipelago of entities that comprise the house
which Jack (Ma) built.
(Yes, it's all new age retail – that is, an internet based
purveyor of e-commerce!)
That’s very different than Amazon, for example, which
carries $8 billion of inventories and $12 billion of fixed PPE — mainly in its massive and virtually
irreplicable warehousing and distribution system. That’s not just a barrier to
entry — it's a veritable bricks and mortar wall.
Alibaba is just a cyberspace broker that even in a real
capitalist economy would have an impossible time warding off competition and erosion
of its currently super-fat first mover margins.
BAMA isn’t remotely worth $230 billion because even in
China its 40% broker’s margins cannot possibly endure the tsunami of
competition it is likely to face — even in the near future.
(Honest PE multiples and capitalization rates are driven
by the longer-term future, and China’s middle class doesn’t have one!)
This is just another version of Japan Inc. — a
state-built house of debt, export mercantilism and fabulous over-investment
that eventually came to a dead stop 20 years ago.
(And Japan at least had some rudiments of true capitalism
such as law, contracts and some vestiges of market discipline.)
As to the case of China’s red capitalism, however, there
is no place in the history books where you can find a booming economy that is
so artificial, fragile and prone to cataclysmic accident. It has not grown
organically from the grass roots owing to capitalist enterprise. Not in the
slightest. Instead, it has been concocted from the center by communist party
bureaucrats who discovered the miracle of an unhinged printing press; who
adopted the economic arithmetic of Keynesian GDP accounting under the slogan
“if you build it, we will count it;” who created a vast pyramidal apparatus of
credit distribution down a cascade of corruption that is pleased to call itself
a banking system; and which is now swamped in mindless, debt-fueled speculation
and building without any semblance of economic discipline, efficiency or
rationality.
* GOD HELP THE WORLD WHEN THE CRASH COMES...
(*SIGH*)
Folks, that is how a backward economy which was until
recently run according to the precepts of Mao’s little red book managed to
balloon its total credit outstanding from $1 trillion to $25 trillion in just
14 years after the turn of the century.
That is how an orgy of construction resulted in more
cement production in China during 2012-2013 than in the USA during the entire
20th century - a time which witnessed the building of the New York subway, the
Hoover Dam, the vast expanse of Army Corps of Engineers waterways, the
Interstate Highway system, the sprawl of American suburbia and its 13 billion
square feet of mall space, among countless others.
(*BREATHING...REMEMBERING TO BREATH*)
It is also how China ended up with upwards of 70 million
empty apartments, thousands of miles of bridges and roads that are virtually
unused, notorious and proliferating ghost cities, and thousands of miles of
hastily built high speed railways that are unsafe and mired in corruption.
(It is also the well-spring of a precarious system of
local government finance that is based on little more than monumental
speculation and inflation of the price of the lands which were seized by the
state 65 years ago.)
And the list goes on and on.
That there will be a thundering collapse of China’s stupendous
borrowing and building spree is only a matter of when, not if. And in that
event, the mirage of China’s booming middle class will become painfully
evident. Indeed, it is the very same frenetic buyers of stuff on BAMA websites
who have jobs which will vanish when the building boom stops and who have asset
ledgers which will violently deflate when China’s towering debt bubble finally
bursts.
So why did Wall Street capitalize an opaque mass merchant
operating in a precarious economy at 27X sales?
The answer is that Wall Street is a momentum driven
casino that is now over-valuing everything that moves and all that stands
still.
(*NOD*)
That’s the ultimate evil of monetary central planning.
Having destroyed honest price discovery in the financial markets, the Fed now
“accommodates” the speculators one meeting at a time — in deathly fear of a
hissy fit that will bring down the entire phony edifice of insensible asset
inflation that it has mid-wifed since the last financial crisis.
You would think that absurdities like the Alibaba IPO
would finally get the attention of our clueless monetary politburo. But
apparently not. As they watch the market climb the precarious chart pattern
shown below, you wonder where they think it will all end.
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