I want to know, want to know, want to know now. I got to know, got to know, got to know now.
– Bob Marley, Is This Love
DUBLIN – Yesterday, the stock market held its breath… waiting… waiting… waiting… for Fed chief Jay Powell to lay his cards on the table today.
Will he cut? Won’t he cut? Why would he cut?
That last question is the most provocative one.
Cutting interest rates is the Fed’s Mistake #3. It usually happens only after Mistake #2 (raising rates) has done its damage, by causing a recession.
We’re not there yet. The Fed began “normalizing” interest rates two years ago. But it got nowhere near normal before putting the whole program on hold.
As soon as the markets gave a hint of trouble, by selling off late last year, the idea of ever getting back to normal was discarded. This economy can’t survive normal anymore.
And now, with the federal funds rate barely 18 basis points (0.18%) above the rate of consumer price inflation, the Fed is said to be preparing to shift to Mistake #3.
Why? Why cut rates with unemployment under 4% and stocks at an all-time high?
“The best way to take out recession or slowdown insurance would be for the Fed to cut interest rates by 50 basis points over the summer and by more, if necessary, in the fall,” opines former Treasury Secretary Larry Summers.
It’s an “insurance cut,” say the geniuses running U.S. monetary policy.
It’s a swindle, says your editor.
We walked around the Silicon Docks in Dublin yesterday. It is a large section of town along the river Liffey, leading down to the shipping terminal.
There, you find millennials from all over the world working in consulting firms, tech companies, banks, and other prestigious outfits. The buildings are new, made of glass and steel.
There are footbridges over the river and the canals… chic apartments… coffee shops… bars… restaurants – everything that appeals to young moderns with time and money on their hands.
There, too, on the quay, is a WeWork installation. It is there, not by the grace of God, but courtesy of a massive disgrace… committed by central banks.
Were it not for the Fed’s ultra-low interest rates, the world we know today wouldn’t exist. Most likely, no one would know who Jay Powell is; instead, today, he is front and center in the news.
And most likely, WeWork – a shared office-space company that encourages you to be part of the “greater We” – wouldn’t be on the Liffey quay.
Had it not been for the Fed’s Mistakes #1 (leaving interest rates too low for too long) and #3 (cutting them to avoid a real correction)… its growth might have stopped in Brooklyn, where it began.
Instead, WeWork is in major cities all over the world. It is a major acquirer of commercial property, driving up prices wherever it goes.
“WeWork is revolutionizing the way people and companies work,” says the company. “Get flexible workspaces, agile services, and leading technologies to move your business forward.”
“And get a lot of cheap money,” we add.
It has also branched out. It now has WeLive (apartments) and WeGrow (for kids). There is Rise, too, which used to be called WeWork Wellness.
There appears to be no aspect of life immune to the WeWork hustlers’ revolutionizing tendencies. The company is going to change its name to simply “The We Company,” which should cover just about everything.
But WeWork does not work at all. That is, it doesn’t grow by making money. It grows by losing it. Last year, it burned up $2.3 billion in capital.
The Financial Times figures that between March 2018 and April 2019, the company lost $219,000 every single day. And it’s projected to need another $20 billion or so before it breaks even, an event that is said to be scheduled for 2026.
Still, it is said to be worth nearly $50 billion, a valuation the CEO justifies by referring to the company’s “energy and spirituality.”
We went to WeWork Dublin to visit a business associate. It reminded us of one of our own office buildings in Baltimore! A few millennials sat at their work stations or on couches in a common area… or lingered around the bar area.
Many of them were spending money, no doubt buying advertising from each other. Profits may not matter, but market share does. They spend cheap money on expensive advertising space to acquire customers on whom their employers, grosso modo, lose money.
According to press reports, 40% of the capital raised by these internet-based startups is spent on internet-based advertising… pumping more EZ-come, EZ-go money into the whole magical bubble system. (Just as WeWork jacks up real estate prices, its customers jack up advertising revenue for Facebook, Google, and others.)
“We moved in here because it’s a new facility,” explained our friend.
“And they’re so desperate to get tenants, I guess, that they cut us a very good deal. It saves us the trouble of dealing with our own offices, internet, and that sort of thing.”
Cutting good deals for tenants is a way to get a lot of tenants. It’s not necessarily the way to be a profitable landlord.
But this is the Age of Money Miracles. Why else would people buy a 100-year bond from Austria with a 1.7% yield or a 100-year bond with a 20% yield in Argentina, a country with 40% inflation?
Why else would IBM pay 65 times pre-tax earnings for Red Hat, a software company that has been around for a quarter of a century already? Why else would the Federal Reserve be thinking about cutting rates when it has so few rates to cut?
And WeWork is a miracle. Cheap financing allows the WeWork team to take real things – cement, steel, plastic, time, and people – and incinerate them.
Without the discipline of honest money and honest interest rates, the entrepreneurs have no way of knowing whether their project is worth doing or not.
The WeWork business plan imagines that it can establish a brand so powerful that it becomes the go-to source for hip office digs.
But throughout the Silicon Docks, new buildings are going up… each one more modern, more cool, and more attractive to the millennial workforce than the last.
The miracle is that this world exists at all. But it can only exist as long as WeInflate.
Inflate or Die.