Uber and the Fed’s Fakery

Posted On Oct 23, 2019 By Dave Gonigam

  • The Uber of weed: Dope delivery to your door
  • And it probably won’t be any more profitable than Uber
  • The beginning of the end of the gig economy (thanks, Fed)
  • Trump moves to “secure the oil” in Syria… but why?
  • Repo rescue redux: No excuses about “rescuing the economy.”

It’s the ultimate in convenience for urban millennials — a smartphone app with which you can have pot delivered to your door.

Yep, the Uber of weed.

“A couple of weeks ago, Massachusetts’ Cannabis Control Commission voted to allow home delivery of cannabis,” says our penny-pot stock authority Ray Blanco.

“Cannabis is a logical next step for home delivery apps — particularly because a legal framework is already in place in states like Massachusetts, California, Nevada and Oregon.”

Most of the companies competing in this space are still privately held. The lone exception is Driven Deliveries Inc. (DRVD).

“Driven Deliveries currently reaches about 94% of California’s pot consumers through its Ganjarunner brand,” Ray tells us.

We Are People Driven

To be absolutely clear, Ray is not recommending DRVD at this time. If and when he does, it will be in one of his high-end trading services as a short-term speculation — worthy only of money you can afford to lose.

That’s because the entire Uberized “gig economy” is built on a foundation of sand.

“Starting about a decade ago,” writes Derek Thompson in The Atlantic, “a fleet of well-known startups promised to change the way we work, work out, eat, shop, cook, commute and sleep. These lifestyle-adjustment companies were so influential that wannabe entrepreneurs saw them as a template, flooding Silicon Valley with ‘Uber for X’ pitches.”

In many ways and for many people, these companies have made life easier and more affordable. They also lose prodigious amounts of money.

“If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year…

“To maximize customer growth they have strategically — or at least ‘strategically’ — throttled their prices, in effect providing a massive consumer subsidy. You might call it the Millennial Lifestyle Sponsorship, in which consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base.”

For deep-pocketed venture capital and private equity investors, it all made sense as long as these companies kept growing that user base. But that couldn’t go on forever.

2019 is turning out to be the year in which it’s all blowing up.

Uber went public in May at $45 a share. It hasn’t traded anywhere near that level for three months now. As we check our screens this morning it’s $32.37.

We saw it coming here in The 5. More than two years ago, at a time the mainstream was oohing and aahing over Uber’s “disruptive innovation,” we spotlighted two financial renegades who said there was no there there. One of them, transportation consultant Hubert Horan, ran the publicly available numbers and concluded Uber was subsidizing each fare up to 61%.

Uber had to disclose additional figures when it went public last spring, but they didn’t change Horan’s analysis: There’s no way Uber “can produce their service at costs consumers are willing to pay.” Nor is there evidence “that they can ever profitably expand to any other markets (food delivery, driverless cars, etc.).”

Then there was the whole fiasco with WeWork, the “office sharing” company that had to scupper its IPO plans when investors suddenly realized, “Hey, this company’s losing $1 billion a year!”

Perhaps you saw the news yesterday that one of WeWork’s biggest investors — the Japanese tech giant SoftBank — will pour billions more into the company in exchange for taking an 80% controlling stake.

Founder Adam Neumann will be muscled aside, but there’s no need to shed a tear for him — he’ll collect a $1.7 billion payout.

The guy had a special kind of genius. He started a company in the mundane and capital-intensive business of subleasing office space. But because he created an app for it, he could convince gullible Silicon Valley types he was another “disruptive innovator.”

Tech-bro Adam Neumann being his best disruptive self at a 2017 conference in New York [Flickr photo by Noam Galai/Getty Images for TechCrunch]

Thompson’s Atlantic article tackles the phenomenon from the microeconomic level. His takeaway: “Venture capitalists and startup founders alike have re-embraced an old mantra: Profits matter. And higher profits can only mean one thing: Urban lifestyles are about to get more expensive.”

Our own takeaway is more macro in nature: None of this would have happened were it not for the Federal Reserve. The Uberized world is one gigantic hairball of malinvestment.

“Malinvestment” is a term employed by the Austrian School economists of the 20th century. The definition is simple — the flow of capital into places where no sane person would ordinarily put it were it not for the stupidity of central bankers and their easy-money policies.

The Federal Reserve’s easy money delivered us the dot-com bubble in the late ’90s and the housing bubble of the mid-2000s. Malinvestment.

The whole “Uber of X” thing, as Thompson noted, began about a decade ago. Turns out that was right around the time the Fed’s post-2008 policies of near-zero interest rates and “quantitative easing” were starting to take effect.

The too-big-to-fail banks were the first beneficiaries. But right behind them were venture capital and private equity folks who could borrow at rock-bottom rates.

They proceeded to pour this borrowed money into projects that made no economic sense except for the easy availability of credit. How easy? Here’s a long-term chart of the fed funds rate, which helps set the pace for other interest rates throughout the economy…

Adam Neumann

Consumers are always the last ones to feel the effects of the Fed’s “stimulus” measures. And a cheap Uber ride probably doesn’t make you feel as prosperous as an early-stage investment in a gig-economy startup, does it?

But that’s how the system is designed. It’s the Fed’s world. We’re just living — and scraping by — in it.

To the markets… which are levitating despite lousy earnings numbers from two of the 30 Dow stocks.

Boeing delivered a “miss”… but traders took heart when the company said it still expects regulators to approve the 737 Max’s return to service before year-end.

We’ll believe that when we see it, but for the moment BA is up 2.5% on the day.

Meanwhile, Caterpillar’s profits also missed analyst estimates… and it’s never a good thing for the global economy when there’s slowing demand for bulldozers and backhoes. Still, CAT is down only a third of a percent.

With that, the Dow is slightly in the green at 26,860.

Gold is slowly climbing its way back to the $1,500 level, the bid $1,493 at last check.

Crude has pushed above $55 a barrel for the first time this month — at a moment when Washington is asserting its authority to control Middle East oil supplies.

Yesterday, Donald Trump backtracked on his promise to withdraw all U.S. troops from Syria. “We need to secure the oil,” he said.

And so a contingent of 200 or so U.S. troops will remain in Syria’s northeast — in areas that up until recently had been held by ethnic Kurds in Syria’s multisided crazy-quilt civil war.

“We’ll work something out with the Kurds,” said the president, “so that they have some money, so that they have some cash flow. Maybe we’ll get one of our big oil companies to go in and do it properly.”

Deep state types were aghast when he said that: “It [is] just illegal for an American company to go and seize and exploit these assets,” says former U.S. diplomat Brett McGurk.

Memo to Mr. McGurk: It’s illegal for U.S. troops to be in Syria at all — under Trump now, or Obama before him. Congress never authorized it.

In any event, this might be the first time in nearly 30 years that a U.S. president has tried to justify U.S. military moves in the Middle East based on oil.

After Saddam Hussein’s Iraq invaded Kuwait in 1990, the first President Bush justified the deployment of additional troops to the Middle East on the grounds of securing the global oil supply.

That rather mercenary calculus quickly brought forth public cries of “No blood for oil!” and it was the last Bush ever said anything about oil in the run-up to the Gulf War.

Thereafter, everything was justified on bogus and often fabricated “humanitarian” grounds. (Do a search sometime for “Kuwait incubator babies.” You’ll be blown away.)

But why the urgency to “secure the oil”? Syria is not a major oil producer. Nor is the United States nearly as dependent on imported oil as it was 30 years ago.

Near as we can tell, someone bent Trump’s ear about how if U.S. troops leave, control of the oil fields will revert to the regime of Syrian President Bashar al-Assad. Assad is allied with the regime in Iran, which Trump loathes. End of discussion, the troops have to stay.

The irony is that if Assad could control the oil fields, he’d collect the revenue from those oil fields and thus become less dependent on Iran. Assad’s “alliance” with Iran was always overblown… until the Obama administration started regime-change operations in Syria and Assad needed Iranian support to hang onto power.

“Fake,” says the subject line in the first of several emails we got after our latest exploration of the Fed’s repo rescue.

“Is the whole financial system flying with one engine out and not even being fixed — or can’t be fixed and going to crash?”

“My guess,” writes a second reader, “is that a lot of the cash is going to Deutsche Bank and other large banks holding their derivatives. Kind of like throwing fake money after bad!”

The 5: Could be. Deutsche is still in deep trouble and it’s one of the 24 “primary dealers” — big banks and trading firms required to show up at Treasury auctions in exchange for a host of special privileges with the government and the Federal Reserve.

“Dave, the Platinum Reserve reader’s theory about impeachment noise diverting attention from the Fed’s repo rescue’ activities is intriguing,” says our final entry.

“That is a keen observation. This ongoing congressional theater is one big distraction wrapped in a Gong Show inside a witch hunt.

“Lately everything that makes sense seems to fall in the ‘conspiracy theory’ camp. So if I may push the envelope a bit further…

“I think this issue ties in with a related question you have raised: Where is the glaring bubble?

The notion of an ‘everything bubble’ is lazy unless we can define a specific asset class that’s triggering euphoria. Recent examples include commercial real estate, dot-com stocks and housing.

“So where is the mania now? IMHO it’s in the debt markets.

“Debt-financed corporate buybacks seem to be the main reason why stock markets are at nosebleed levels of overvaluation. But every debt sector — corporate, government, household — is now inflated beyond recognition.

“This is the ultimate stealth bubble, built on the most unexciting asset class: bonds. And wouldn’t you know, the repo rescue thing is intended to keep the music playing.

“As students of history know, fiat monetary systems always end in a death spiral. It really is a hell of a thing when banksters capture a nation’s currency and start borrowing it into existence.

“One more observation: It’s funny how the Congress’ impeachment hoax has zero transparency. This mirrors the Fed’s standard operating procedure, no?

“OK, I’ll stop before people’s heads explode…”

The intriguing thing about the repo rescue is that the mask has now fallen.

CNBC clumsily alluded to this fact in an article yesterday…

“Investors have long complained about the Fed hand-holding the market, injecting trillions of dollars in liquidity and keeping interest rates artificially low during and after the financial crisis.

“This is a different situation, though.

“Rather than looking to goose the economy back to health, the Fed is now using its balance sheet to make sure banks have enough reserves and an adequate amount of capital is flowing through the system to keep things running efficiently.”

Well, sort of. “Quantitative easing” from 2008–2014 was a backdoor bailout of the too-big-to-fails… but the Fed could justify it as essential to reviving the economy after 2008. It didn’t really work — the “recovery” is the weakest on record — but at least there was intellectual cover.

There’s no such cover with the repo rescue. The economy is still kinda-sorta strong, or at least no weaker now than it was during a similar slowdown in 2015–16. This time it’s all about the banksters. You and I don’t even enter the Fed’s conversations…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. The problem, as Jim Rickards has been telling us for years, is that there’s a limit to how much the Fed can blow up its balance sheet — as it’s doing to keep a lid on repo interest rates.

Either the masses rise up in protest against the bailouts or foreigners lose all confidence in the dollar.

For the moment, neither is happening. And it might not happen for many months or even years. But the Fed is playing a dangerous game. To be continued…


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