This may not be the most popular view among everyone reading this column, but I absolutely love asset market crashes.
For two reasons. Hear me out.
Reason one: Bubbles make stupid people seem smart
An asset bubble inherently requires the price of an asset or asset class to diverge from its inherent value. The inherent value of an asset is based on the value (adjusted for time) of the cash flows that asset is able to return to its owners.
In an asset bubble — like the ‘everything’ bubble we’ve been experiencing for the last few years — speculators and gamblers (or just outright frauds) come up with new ways of convincing speculators that they shouldn’t value an asset based on future net cash flows, but rather, come up with other, ‘smarter’ ways to value the asset. A common method (which was also popular in the 1990s dot.com bubble) is ignoring net cash flows and simply using a multiple of sales or revenue to value an asset.
What will the election mean to you?
Sign up to our free newsletter, including this weekend’s coverage of the election.
The beauty of using a price-to-sales multiple for someone selling an asset is that profit or input costs can be totally ignored. Instead, the person buying the asset is told to look at how fast sales are growing and place a multiple on what is in many cases a misleading data point.
To be sure, sales are not totally irrelevant — in determining the cash flows of a business, sales are the first thing you need to look at. However, it’s not the only thing. There’s also the less good stuff — that is the costs incurred by a business in generating those sales — which are equally important.
When you’re only focusing on sales, the person managing the asset is highly incentivised to spend lots of money on things like marketing and staff to generate more revenue. This creates an almighty agency cost — managers and founders run a business at a huge loss using investors’ money, grow revenues, sell shares to new investors who get bamboozled by a rising share price. The founder then gets rich, buys a Ferrari and holiday home and spends a few years giving TED talks. (A few years later the business will probably go bust, but by then, the founder and executives have quietly moved on to run their family office.)
Just look at the increasing list of publicly listed stocks that have been decimated, many of them likely to finish at zero.
The buy now, pay later sector, which collectively is worth less than nothing, has led the charge: Zip is down 90%, Openpay is down 82%, Sezzle is down an even more impressive 93%.
Afterpay (remember them), now hidden away as part of Jack Dorsey’s Block, is effectively down around 75%.
Unlike most founders who too easily got caught in the hype, Afterpay’s Nick Molnar and Anthony Eisen are far too smart, selling the largely worthless Afterpay business at just below its peak and they would likely have offloaded most of their Block holdings by now.
Had they not sold, Molnar and Eisen’s shareholding would have fallen from $2.7 billion to around $750 million.
And there is even more good news. Remember Beforepay, a favourite of this columnist? The rapacious payday lender that masqueraded as a buy now, pay later business all while furiously burning capital like an out-of-control wildfire? Its share price is down 84% and worth a fraction of the capital that inept speculators donated to it.
And don’t forget Robinhood, the Silicon Valley-created beast that backed by the biggest names in venture capital that was so avaricious, it refused to employ customer service operators, which led to its young clients literally, dying. Well, Robinhood shares are down 88%. Good riddance.
And lest we forget the biggest con of them all: crypto. Led by Bitcoin, crypto was meant to be a store of value (it isn’t), then it pretended to be a hedge against market risk (it is the opposite). BTC, the best of a very bad bunch, is now down almost 60% from its peak. (Many people who used leverage to buy BTC, a key feature of the crypto fraud, would be ruined, hence the very quick unravelling).
Many other cryptos are totally worthless. NFTs, that totally bizarre concept that at one point, saw a JPG being sold for US$60 million ($87 mllion) has also cratered, highlighted by the moron who paid US$2.9 million ($4.22 million) for a NFT of Jack Dorsey’s first tweet last year, and this year couldn’t sell it for US$7000 ($10,000) — a handy tax loss of 99.77%.
Reason two: Crashes help poorer people, bubbles help people who are old and rich
When an asset price increases in value sharply during a bubble, the beneficiaries of that value gain are those who already hold that asset — in the case of property and businesses, that’s almost always older rich people. When the price of residential property goes up, it becomes increasingly harder for young people to buy a house (and if they do, they face decades of a high debt burden).
It’s very good though for old people who own multiple properties who profit at the expense of those who don’t yet own the asset.
The same is the case for companies. I love Netflix, Google, Airbnb, Amazon and Apple (and even Peloton) as businesses, but late last year, they were grossly overpriced (in the case of Peloton, comically so).
A market crash that sees their share prices drop by as much as 90% suddenly makes a business like Netflix or Peloton almost fairly priced. Even with Airbnb, which is announcing record EBITDA and revenue is down around 50%, that gives young investors the chance to purchase at a semi-decent price.
That’s the simple reason why politicians, who work for baby boomers, create a string of policies that try to prevent markets from properly adjusting. From the US government’s TARP program in 2008 to JobKeeper (a donation from future taxpayers to the rich), to virtually every property tax incentive like negative gearing or the principal residence tax exemption. Or utterly stupid central banks (and our RBA is probably the most idiotic of them all) keeping interest rates at the lowest rate in a millennium while inflation was clearly skyrocketing to 40-year highs all to protect over-leveraged property owners.
Eventually though, even the worst intentioned policy makers run up against a market adjustment that their boondoggles and theft can’t prevent, giving young people a chance to buy assets at fair prices.
I love crashes. You should too.