by Kyle Johnson
Briefly study this list of companies many investors have grown to love—or love to hate:
- AirBnB: Founded in 2008, IPO in 2020.
- Blue Apron: Founded in 2012, IPO in 2017.
- Carvana: Founded in 2012, IPO in 2017.
- Casper: Founded in 2012, IPO in 2020.
- Lyft: Founded in 2012, IPO in 2019.
- Peloton: Founded in 2012, IPO in 2019.
- Pinterest: Founded in 2010, IPO in 2019.
- Snap Inc.: Founded in 2011, IPO in 2017.
- Spotify: Founded in 2006, IPO in 2018
- Uber: Founded in 2009, IPO in 2019
- WeWork: Founded in 2010, IPO in 2021.
- Zillow: Founded in 2004, IPO in 2011.
What do these companies have in common?
They are all essentially unprofitable.
Sure, you can find “profitable” quarters here and there. There’s adjusted EBITDA and other minutiae. But that’s all word games, technicalities, and accounting tricks.
What else do these companies have in common?
Nearly all were founded after Bernanke reduced the federal funds rate in September of 2007—Zillow and Spotify being the only exceptions. Zillow was created during the mania of the US real-estate bubble. Spotify was founded in 2006 but didn’t have its first users until 2008.
These tech stocks are traded on the same exchanges as some of the biggest players in the resource sector. But they exist in separate worlds.
Companies in oil, natural gas, and mining get crushed when they fail to produce profits.
Tech companies have been floating along as if profit doesn’t matter at all.
This is “tech privilege,” to use the parlance of our time.
It’s difficult—if not impossible—to quantify how much tech privilege has grown of late, but here’s my attempt:
Pets.com is the poster child for “irrational exuberance.” It was founded in November 1998, had its IPO in February 2000, and filed for bankruptcy in November of that same year. It was never profitable during this time.
A two-year trip from birth to death.
No profits.
Today, tech companies exist for 10+ years with little to no profits. They largely failed to produce profits during the longest economic expansion in history (2009–2020). Yet most talking heads, money managers, sovereign wealth funds, and retail investors see nothing to be concerned about.
Has economic reality fundamentally changed?
Are profits no longer important?
I suspect not.
The culture in tech is one of extravagance and bloat. Just watch some “day in the life” videos posted by tech employees. When they’re not napping or meditating, many tech employees spend a hefty portion of their workdays eating and socializing. [i]
It’s one thing for this to happen at profitable companies like Facebook and Google. But it was happening at Twitter [ii] before Elon Musk’s buyout.
Competing with other tech firms on job perks seems more important than… you know, actually making money. For reasons I cannot comprehend, tech investors either support or tolerate such nonsense.
Cheap money has warped the minds of many investors, including some of best. As I wrote before, FTX proves that even legendary investors make dumb investments.
It seems fair to assume that many legendary investors are still making dumb mistakes in tech.
For decades, Wall Street has poached many of the brightest minds in math, science, and engineering to do financial modeling. And yet, few warned against issuing mortgages to people without proof of income, assets, or down payments. Even fewer warned about the now-obvious failings of Silicon Valley Bank.
It seems unlikely that all these bright bulbs got suddenly savvier. I’m sure many are making new flawed calculations regarding tech today.
I doubt you need to be reminded that central bankers and regulators haven’t been prescient either.
As best I can tell, the Federal Reserve’s Jeffrey Lacker was the first person on record to use the term “soft landing.” That was his outlook for the housing market… in June of 2005. [iii]
You’re free to trust the Fed’s current promise of a soft landing. But experience suggests that’d be unwise.
If—or when—they fail yet again, the “profits don’t matter” stage of the fiat money experiment will end.
Many tech companies and others will be exposed as zero-interest-rate illusions.
Oddly enough, tech company CEOs seem to understand that their party is coming to an end. Tech company layoffs increased by 649% in 2022. [iv] More than 100,000 tech employees have been laid off so far in 2023—a figure that represents 64% of the total layoffs last year. [v]
Will this be enough to finally make them profitable despite the coming recession?
Unlikely, though perhaps not impossible.
Elon Musk recently tweeted: “Twitter still has challenges, but is now trending to breakeven [sic] if we keep at it. Public support is much appreciated!” [vi] He later added, “Twitter is definitely not financially healthy yet, but is trending to be so. Lots of work still needed to get there.” [vii]
I’ll take his word over the countless industry experts who predicted Twitter’s demise after Musk fired 70% of employees.
Do other tech CEOs have the stomach to make similar moves? Will they have enough time when they realize radical changes are required?
I wouldn’t bet on it.
I suspect many others feel the same.
If tech companies start falling like dominoes, investors will likely flee to something more tangible—likely industries where people focus maniacally on profit, making real stuff that people need.
You won’t find many napping pods, meditation rooms, and wine on tap at mine sites.
Resources and mining are unpopular, but they are essential to modern life. Despite green opposition, someone will make money delivering the raw materials civilization requires. But investors must exercise caution. For instance, copper, oil, and natural gas perform poorly during recessions. Uranium is different, as it’s used to generate “nondiscretionary” baseload power.
And if a recession becomes undeniable, the Fed will likely cut interest rates despite inflation risks. Scary, yes. But this bodes well for safe havens like gold and silver.
Don’t forget that the the bill for central bank shenanigans is long overdue. The Fed still holds trillions of toxic assets related to the 2008 crisis. If financial institutions face insolvency once again, the Fed will likely bail them out and go back to expanding its balance sheet.
The rush to gold and silver would then likely turn into a stampede.
The bull run from late 2008 to 2012 might look tame by comparison.
Note, however, that silver is likely to lag gold at first—and not just because it’s done so in previous cycles.
There’s no denying silver’s history as money. But the green agenda and electrification of the economy have changed silver’s role. It is more of an industrial metal than ever before. Silver’s price has recently been more correlated with copper than gold.
Remember as well that silver is primarily a byproduct of mining copper, lead, and zinc. A recession would cripple production of these industrial metals, and the silver supply would drop. But a recession (or a full-blown depression) would increase safe-haven demand for silver.
This combination has delivered exceptional gains for speculators in the past.
I appreciate that gold and silver bugs are tired of hearing that their time to shine is just around the corner. But this does seem like a tortoise and hare situation to us.
We’re speculating in gold and silver miners because the finish line seems in sight.
KJ
P.S. If you’re interested in timely updates on the macro picture and its impact on speculative resource investments, you should sign up for our free, no-spam Speculator’s Digest.
https://www.nbcnews.com/news/amp/rcna67669
https://youtu.be/qkQbHyLE6Tc
https://www.federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf
https://www.cnbc.com/amp/2023/01/05/tech-jobs-hit-the-hardest-by-layoffs-last-year-report.html
https://www.computerworld.com/article/3685936/tech-layoffs-in-2023-a-timeline.amp.html
https://twitter.com/elonmusk/status/1622299765848395779
https://twitter.com/elonmusk/status/1622372516080635905
