ACTV - Asset Bubble Is Coming Home

2023-03-06 09:25:55 ET

Summary

• The tech space is now showing financial weaknesses that can be directly associated with the vast amounts of money the Federal Reserve drove into the economy in 2020 and 2021.
• In 2022, the evidence indicates that many of these firms "burned through" massive amounts of money, with only a handful of corporations making a net profit for the year.
• As reported in others posts, the results of the tech industry are consistent with the results in other areas and point to a reversal of fortunes that existed earlier.
• This factor lies behind the news that the U.S. economy continues to remain relatively strong despite the efforts of the Federal Reserve to combat inflation.
• But investors must continue to be aware of what is going on below the surface.

Yes, the asset bubble created by the Federal Reserve in 2020 and 2021 is coming home.

Nicholas Megaw, writing in the Financial Times , states that:

"High-growth, lossmaking groups dominated the market for initial public offerings in 2020 and 2021, with 150 tech groups raising at least $100 million each in the period...."

"Technology groups that have recently listed in tech U.S. burnt through more than $12 billion of cash in 2022, with dozens of companies now facing difficult questions over how to raise more funds after their share prices tumbled."

"As the proceeds from the dealmaking frenzy start to run low, however, many face a choice between expensive capital raises, extreme cost cutting, or takeover by private equity groups and larger rivals."

The proof of this movement?

"Of the recently listed tech groups that have reported results so far this year, just 17 reported a net profit."

"On average, cash-burning companies spent 37 percent of their IPO proceeds during the year."

"About half of the 91 were operating at an operating level--meaning they could not simply cut back on investments if they needed to conserve funds."

"Meanwhile their shares have declined an average of 35 percent since listing, making further share sales appear expensive and dilutive for existing investors."

In other words, what goes around comes around.

The bubble is bursting.

The Recent Past

The recent past is somewhat of a mystery.

The world is not quite working out the way it has worked out in the past.

The Federal Reserve is now fighting inflation. It has been visibly fighting inflation for about 12 months now.

Yet, the world seems to be going on.

As several writers for the Wall Street Journal express it, " The World Economy Is Doing Well--This Is Bad News For Central Bankers ."

It is bad news for central bankers because it is putting more and more pressure on the central bankers to tighter up their policies even further than they have gone up to this point.

It seems to be hard for economists and analysts to put together a story that the efforts of the central banks are working and that inflation is coming under control.

The question is being asked all over the world, "Just how high do interest rates have to go to in order for the central bank policies are able to bring inflation under control?"

The answer may be coming into the light.

It is not just U.S. tech companies that are beginning to feel the consequences of the Fed's asset bubble.

I have written several articles over the past month or two, discussing areas in the financial space that are experiencing the other side of the asset bubble.

One of these areas has been the SPAC space. SPACs or Special Purpose Acquisition Companies, or, "blank check companies" represented a "new" tool for channeling lots and lots of "new" money into vehicles to acquire corporations that could move off aggressively into the new decade.

They boomed for a time. And, then they began to recede into the shadows.

The deals just could not be sustained, and prices dropped and dropped.

Another area that benefited greatly from the asset bubble created by the Federal Reserve was the crypto-currency world.

Things hummed along until the work of FTX hit the wall last November. Many failures have followed and valuations have been lost, and the whole crypto-world has slowed down or stopped.

And, there are several other areas that could be pointed to.

The Tech Industry

But, here we are talking about the tech industry.

The tech industry has been the core of the foundation of the economy that was still staying strong.

Now, the story seems to be that the tech industry has also had its "asset bubble" created by the Federal Reserve and the major movements of the 2020 and 2021 periods were founded on a base not unlike that achieved by SPACs and cryptocurrencies and others.

Furthermore, it has been the tech world that investors have been putting their faith in...as well as their money...to get through this "special" period of economic distortion.

Tech was solid.

Tech is the foundation of the future.

Mr. Megaw is not saying that tech will not be the foundation for the future.

Mr. Megaw is saying that tech, like many other industries, took advantage of the Federal Reserve's largess and captured as many of the funds being created as was possible.

And, asset prices in the tech world rose...and rose...and rose.

Now, we are finding out that the tech world is just like any other world.

Its prices can go up. But, its prices can also go down.

Especially if the price rise was the result of an asset bubble created by the central bank.

Mr. Megaw writes:

"What the public are now seeing is something that was [previously] digested in the [Venture Capital] space...[companies] are proving out on the public stage whether or not they have a viable product or market for their products...."

The result, however, may have much greater implications for the whole economy than just a reversal of an asset bubble.

The concern is that it is not just one sector that is seeing the other side of the asset bubble. The number of sectors now showing such weaknesses is growing.

Yes, the U.S. economy seems amazingly strong, but what is going on below the surface?

This is the scary part of the narrative.

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