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How are all of these unprofitable companies staying afloat and even making big splashes with media-hyped IPOs?
Peter Schiff addressed this question, along with the supposed “failure” of capitalism in his most recent podcast.
The rideshare company Lyft had its lowest close since going public yesterday (April 9). In fact, the company has only closed above its IPO price twice – the day it went public and last Friday. This probably shouldn’t shock anybody, given that the company has never turned a profit.
Meanwhile, social media company Pinterest is gearing up for its IPO with a lot of media hype. The company has been around since 2010. It’s never made any money either.
Peter asked a poignant question. What makes people think these companies will ever make any money?
“[Pinterest] has been around for 10 years. If they haven’t figured out how to make a profit yet, are they ever going to do it? Because at least in the frenzy of the dot-com mania, people were saying, ‘Look, the company hasn’t made a profit yet because it’s only been around for a year. But don’t worry because it’s got all of this explosive growth.’ You know, ‘We’re grabbing eyeballs,’ or whatever it was. But people were willing to bet the companies would eventually be profitable, and they didn’t have a lot of data to go on because the companies hadn’t even been in existence for very long before they were going public. It was a rush to the market. But now that you’ve got these companies that have been going on for 10 years — I mean, they’ve had 10 years at Pinterest to try to figure out how to make a profit and they haven’t done it.”
But as Peter pointed out, because of the easy-money policies of the Federal Reserve and the resulting availability of cheap capital, companies have been able to continue to operate even though they don’t make any money.
“A lot of companies are able to attract funding and stay in business that under a normal free market system – a capitalist system – they would have gone bankrupt.”
This is one of the unseen impacts of central bank monetary policy. It distorts the market.
Consider Pinterest. The company has a lot of employees. It consumes a lot of resources to operate its website – land, labor and capital. These are resources that could be put to some other use if they weren’t being consumed by Pinterest. So, how do you know whether these resources being put to their best use? In a capitalist system, profits provide that information. Profits signal that resources are being well-used. The lack of a profit tells us these resources are not being put to good use. If the lack of profit persists, the company goes under and frees up those resources for better uses.
As Peter put it, if a company can combine resources to produce a product and then sell it at a higher price then the resources that it consumed, it is adding value to the economy. The consumer gets more enjoyment out of that product then the resources consumed in producing it.
“You see, resources are scarce, but demand is unlimited. And the idea behind an economy is how to satisfy unlimited demand with limited resources. And resources that are utilized for one purpose are not available for another purpose. And if a company though is losing money, then the market is basically saying, ‘Hey, you’re destroying value. You’re creating products, but your customers don’t even value those products as much as the resources were worth that you used to make them.’”
If a company is creating value, it is rewarded with profits. If it is destroying value, it is punished by losses.
The Federal Reserve and its manipulation of the monetary system short-circuits this process. You end up with a misallocation of recourses and all kinds of asset bubbles — not to mention piles of debt.
Back to Pinterest:
“I think that if during these 10 years we had normal interest rates, if the Fed was not keeping interest rates artificially low, Pinterest would already be profitable right now, or they would be out of business … The Fed has been able to keep this company and a lot of other companies in business. And all of this gambling mentality where people are willing to buy money-losing companies is only there because of the casino-like mentality that has been created by the Federal Reserve and the perpetual supply of cheap money.”
Simply put – capitalism isn’t the problem. It’s government and central bank intervention that has failed us.
In this podcast, Peter goes on to break down comments by Ray Dalio about the supposed “failure” of capitalism.
Owen Shroyer presents a local news report from the Williamsburg neighborhood in Brooklyn, New York, where a “tight knit” community of Orthodox Jews are being forced to vaccinate with the measles. Is the U.S. government conducting, yet again, secret medical experiments on their own people?
Source: InfoWars
The Dow Jones closed out Q1 2019 with its best quarterly gain since 1998, rising 10.3% through the first three months of the year. And the Dow Jones wasn’t alone in its bang-up first quarter. The S&P 500 rose 12.3%. The Russell 2000 was up 13.8%. And the Nasdaq led the entire pack with a 15.6% gain.
As Peter Schiff said in his latest podcast, the entire rally was a gift from the Federal Reserve.
“Had the Federal Reserve stayed on its course that it had set out on last year, or several years earlier, had the Fed continued to indicate that more rate-hikes were coming, three of four this year, had the Fed continued with its planned autopilot reduction in the size of its enormous balance sheet, the stock market would be considerably lower. In fact, we probably would have added to the losses experienced in the fourth quarter of last year with additional losses early this year. But the Fed, as I had been predicting it would for many years, reacted to the weakness in the stock market, and the weakness in the economy, by reversing course.”
So, the Powell Pause did exactly what it was supposed to do. It lifted the markets and puffed a little air back into the deflating bubbles. But Peter has been saying this won’t be enough. And in fact, mainstream pundits are starting to anticipate a rate cut. Peter said where they are getting it wrong is that they are underestimating the cuts that are coming down the pike. They are generally pricing in a 25 to 50 basis point reduction.
“In fact, we’re going all the way back to zero.”
Peter said the Fed is really keeping us from solving the underlying structural problems in the economy. But that would take some short-term pain and nobody seems willing to suffer it.
“It is a very healthy process that would be good for the economy in the long-run, but instead, the Fed has interfered with the market’s medicine and substituted its own quackery, just substituting a bubble to create the illusion of economic growth as the economy is actually worsening.”
Peter noted that housing starts were stronger than expected in February. This was also indirectly a gift from the Fed. The Powell Pause has pushed mortgage rates back down.
“It was the big drop in mortgage rates that gave a short-term boost to new home sales. But for that reduction mortgage rates which made these expensive new homes more affordable to buyers, we would not have seen this number.”
Peter noted that both personal spending and income both missed expectations in February. He pointed out that it’s really hard for consumers to spend today when they are struggling to pay the bills for past consumption that they put on credit cards in the past.
(Photo by geralt / Pixabay / CC0 Creative Commons)[/caption
Peter said all-in-all, it’s pretty amazing that the central bank has managed to keep the bubble inflated for this long. And he is a little surprised the Fed even tried to raise rates and shrink its balance sheet. He figured it would only try to maintain the pretense that it was going to normalize long enough to come up with an excuse not to. But ultimately, it was never possible. The Fed was never going to be able to approach normal.
“It’s not really because of the economy not being strong enough. It’s not about the strength of the economy. It’s about the sustainability of the bubble. There is no economic strength. There is a bubble that is masquerading as economic strength. And because of the enormity of the leverage in this economy, and it’s not just the existing leverage — in order to keep the bubble going, we need to take on more debt; in order for consumers to keep spending, they have to be able to keep borrowing. So, we have to be able to not only handle the debt we have, but handle the additional debt we have to accumulate in order to keep this whole house of cards from collapsing. So, that is the real reason the Fed has to stop raising rates, and that’s the reason it’s going to have to reduce them back to zero. That’s the reason it’s going to have to do more quantitative easing. It’s because we don’t have a real economy, we have a bubble. And that’s what the markets have to figure out.”
Peter also mentioned the final Q4 2018 GDP number that was released last week. With the number revised down to 2.2%, Trump missed his goal of 3% GDP growth on the year. The final number for 2018 came in at 2.9%. That equals Obama’s best year, which was 2015. But Peter said there was one big difference. Trump has created a lot more debt.
In 2015, the national debt grew by about $850 billion. In 2018, the national debt grew by $1.48 trillion.
“So basically, Trump was able to achieve the exact same growth number as Obama, yet the government had to incur 74% more debt to achieve that growth.”
Peter went on to talk about Lyft’s IPO as an example of the insanity of the asset bubbles created by Fed monetary policy.
Don’t miss this major Alex Jones report.
Source: InfoWars
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