Financialization Ruins Even More
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2018-04-17 07:45 by Karl Denninger
in Market Musings , 243 references Ignore this thread
Financialization Ruins Even More
[Comments enabled]

It's completely out-of-hand.

I've now seen $500/nt prices for places that are very nice, but nowhere near worth that sort of money.  Think about that folks; a "long weekend" is now over $1,500 just for the lodging.  Disney has pulled this crap with the insane escalation for decades, but it's now showing up anywhere driveable in a day (~6-8 hours) from a significant-sized city that happens to be nice.  In a couple of cases I know exactly what you're getting for the money since I've been there myself.  What sort of capitalization does this impute to these places and how does that keep escalating?  Someone has to forevermore pay more, and what's worse is that the property tax assessments get jacked too, which means the "ratchet" under the price keeps going up as does the rent.  The implied cap rates on those joints are flat-out insane.

Boat insurance?  I'm glad I sold my large boat when fuel prices started to ramp before the '07 blowup.  Reports of 45% includes in hull insurance prices this year are happening.  Again.  The same **** happened a number of years ago after Katrina (and has after other storms) and the cause of it is the intentional acts of some "owners" to basically sell their boat to the insurance company for more than they could get for it on the market, never mind any pesky negotiations or people finding the flaws in it (and thus either significantly adjusting their offer downward or walking off.)  Those quotes never go down either -- again, it's a ratchet function, and only goes one way.

Insurance generally?  Ha!  There are reports in my recent "health insurance" post of schools figuring out some kid is on Medicaid and then billing the system for services that are not only unnecessary they're not actually performed.  That's outright fraud and yet nobody is interested in doing anything about it; I'll bet there are tens of billions being stolen this way.

Netflix just reported.  Their stock soared and is a few bucks from an all-time high. The company has negative cash flow, a forecast of negative cash flow for the foreseeable future, an escalation in debt and revenue that implies the firm will never have positive cash flow and, to break that the company would have to expand subscribers (without spending a single additional dollar) by something like a factor of five, quadruple the subscription price (!) or some blend of the two -- all without having to spend even more on content.  They have an alleged "enterprise value" (market cap) of some three hundred times EBIDTA and are carrying roughly three times as much debt off their balance sheet as reported on it.   This is true even with the insane cross-subsidy they forced ISPs to collect from non-customers during the Obama years -- and which persists to this day in the United States.

Tesla is another example of the same sort of thing except in their line of business there is no such thing as a "free" customer since they sell a physical product.  "Make more and lose more" has been their motto forever.  Both they and Netflix survive only because some fool continues to step up and throw money at them under the belief they'll get both the principal and coupon back.  Unlike ENRON neither firm is hiding their losses or any of these figures; both declare them proudly and then go back to the trough for more and more money and, so far, they are being showered with it!

Nobody is talking about this in realistic terms.  Any of it.

Leverage is a bitch.  When you structure something in a fashion that leverage is inherently necessary for that thing to "work" then you're betting that at no time will that leverage become unprofitable and need to be unwound.  If you lose the bet then whatever equity you had in said thing goes "poof" like a fart in a church -- you're done.

What used to be places and things that were expensive but doable for someone of middle-class means are rapidly becoming a total lockout for all but the extraordinarily wealthy as a consequence of this garbage spreading literally everywhere.  Yeah, I get it, the rich have their playgrounds -- but when essentially entire cities or even counties turn into this for months at a time, well...... good luck with that.

It'll work for a while -- as long as the Netflix's and Teslas keep powering higher like this -- but for exactly how long?  About until the next bust, that's how long -- at which point all those who participated in this crap will find out that the tax base they have to cover has been permanently ratcheted up along with the property assessments but the income from same to support it has disappeared.

Then you're done twice -- you can't afford the taxes and you can't sell for anything close to what you got in it either.

There is a mass of bankruptcies that have already happened but not been recorded yet.  As I've pointed out numerous times while you can delay recognizing the loss a transaction dependent on this sort of thing has made the loss when the original acquisition or ratchet upward in operating expense occurs.  Your only hope is to find some greater fool that bails you out before it all goes to crap -- in other words the best you can hope for is that "time is on your side."

Maybe it is and maybe it's not.  We shall see, but at this point, given the outrageous nature of what I'm seeing pop up more and more often and how far it has spread, my money is on "NOT."

Further, it is my sincere wish that every single one of the people involved in manipulating, profiting from or "marketing" any element of this find themselves on the receiving end of a very angry, and hungry, horde of people armed with cases of lump charcoal, seasoned salt and pepper when it all comes apart.  The vast majority of them are high fat and moderate protein as well and thus are a perfect match for a ketogenic diet although more pepper and seasoning than usual may be necessary due to the foul taste.

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