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May 17, 2019 | Here’s What Uber Is Really Worth

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

PARIS – Wall Street continued its recovery yesterday, the Dow rising 116 points.

Investors believe – as we do – that the trade war will blow over… or at least calm down into tweety skirmishes. The Donald himself is already backing off, calling it only a “squabble.”

The Trump administration also signaled that it would not step up its trade war with Europe (over autos)… and that it was ready to back away from steel and aluminum tariffs, too.

And faced with a collapsing stock market, there is little doubt – Trump will retreat… and turn his guns on the Fed.


Triple Top

But only the old-timers bother to worry about a stock collapse.

Three times, the Dow has tried to beat its October 2018 high of 26,800. And three times, it has failed. This “triple top” formation is a bad sign. It foretells a bear market, they say.

The latest news from Reuters shows Main Street weakening too:

U.S. retail sales unexpectedly fell in April as households cut back on purchases of motor vehicles and a range of other goods, pointing to a slowdown in economic growth after a temporary boost from exports and inventories in the first quarter.

The moderation in economic activity was underscored by other data on Wednesday showing a drop in industrial production last month as manufacturers, especially in the automotive sector, worked off stockpiles of unsold merchandise. Growth is slowing as the stimulus from the White House’s $1.5 trillion tax cut package fades.

And the Atlanta Fed is now predicting a big drop in GDP growth. From CNBC:

The Atlanta Fed’s closely watched GDPNow tracker is pointing to a 1.1% gain for the economy in the second quarter, according to a revision posted Wednesday. That comes on the back of a strong first three months that saw a 3.2% gain and is substantially lower than CNBC’s Rapid Update survey, which puts the GDP tracking estimate at 2%.

But nobody pays any attention to old-timers… or to warning signs… anymore. That’s what financialization is all about – separating the real world from the financial world… and allowing fantasy and fake money to replace facts and real earnings.

This week, we’ve been exploring the real causes of America’s trade wars… and its turn toward uncivilized win-lose deals. American democracy was once a “light unto the world” – with its emphasis on personal freedom, free markets, and live-and-let-live foreign policy.

It’s hard to say when, exactly, the lights went out. But now, the U.S. has the highest tariffs in the developed world, the tightest border controls (along with Israel), and the biggest military budget. Now, nobody – not Iran, not Russia, not China – throws its weight around like the U.S.

Why? Why now? Those are our questions. And we will answer, tomorrow, by taking you first to an ancient graveyard in Poland – dating back more than 4,000 years.

But today, we’re going back only 30 years. That was when financialization really got going.

Greenspan Put

When Alan Greenspan announced his famous Greenspan Put in 1987 – in essence, promising investors that the Fed would step in if stocks fell too far – U.S. GDP was $4.8 trillion. Now, it’s $21 trillion – up four times. The Dow was only around 2,000 in 1987. Now, it’s 25,000 – up 12 times.

In other words, the financial world – measured by stock prices – has grown about 3 times faster than the real Main Street economy.

We know why that happened; the feds rigged the game, providing Wall Street with trillions in fake money lent at fake, artificially low rates.

The fix has been in for years. And investors believe it will stay that way. Stocks may go down. But in a selloff, Trump will cave in to the Chinese… the Fed will cave in to Trump… and stock prices will recover.

Or not.


Grown Apart

Meanwhile, the “unicorns” show how far Main Street and Wall Street have grown apart. Last week, Uber went public and immediately saw itself shorn of 20% of its market value.

But even after the decline, it is still supposed to be worth $69 billion. The CEO explained to employees and stockholders that while there were a lot of “possibilities” in the marketplace, investors value stocks according to “the profits they are expected to generate in the future.”

Typically, investors, being a hard-headed and canny lot, simply multiply current profits, expecting the future to continue more or less on the same road.

But if Uber stays on the road it is on now, it will end up in the ditch, along with all the other failed businesses.

It generates no profits at all – only losses. It does not create wealth; it destroys it, at a rate of about $4 billion per year, which at a reasonable price-to-earnings ratio of 10, makes the company worth NEGATIVE $40 billion.

That gap – between the Wall Street valuation of $69 billion and our MINUS $40 billion valuation based on Main Street earnings – will close some day.

No one knows when the correction will come; but it should be fun to watch… from a safe distance.




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May 17th, 2019

Posted In: Bill Bonner's Diary

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