Peak Absurdity

In the wee hours last night the Donald carried through with his threat to body-slam the US economy with huge tariffs in order, apparently, to teach them Chicoms a lesson!

But then – at least for a few hours – the market turned green with a vengeance. And as Zero Hedge explained, the reasoning could not have been more convoluted.

Eager to “explain” the bizarre market (non) reaction, the WSJ went into full blown narrative-building mode, and wrote that stocks shrugged the tariff hike for these reasons:

  1. Hike was priced in
  2. Negotiations are still ongoing
  3. This could accelerate agreement.

Let’s see. After months of market-moving “solid progress” bulletins from Kudlow and Mnuchin, we actually thought there were several thousand Dow points (higher) of a “done deal” priced-in. Apparently, the opposite – no deal and a thundering tariff hike – was priced-in, too (higher).

Who knew! The Great Deformation:... David A. Stockman Best Price: $2.00 Buy New $9.95 (as of 09:55 UTC - Details)

That is to say, the casino is so rigged that there ain’t nothing which can’t be made to come up green when the algos and day-traders put their buy keys to it.

As for the ongoing negotiations with the Chinese, as far as we can tell those have been going on almost without interruption since the late 1990s. So like “money on the sidelines”, apparently “trade talks on the sidelines” have become another evergreen reason to buy.

And that seems to be the case even if there are actually no talks on the sidelines. As Secretary Mnuchin confessed to CNBC after a short, wholly inconclusive meeting with China’s chief negotiator, Liu He:

I just saw Treasury Secretary Mnuchin in the West Wing and I asked him what’s next on the schedule for trade talks with the Chinese. He said: “Nothing planned as of now.”

And just in case the slowwitted Mnuchin missed the nuances of the thing, Vice Premier Liu left no doubt:

Vice Premier Liu He just left his DC hotel on the way to the airport, and no talks are scheduled from here; in fact the best that the Vice Premier could say is that “talks will continue at some point.”

Yes, in the great scheme of things “some point” is at least a form of “ongoing”. But over the course of 50 years of filtering political double talk, we recall no occasion when “nothing planned” and “at some point” had any relationship to any time soon.

With regard to #3, however, the notion that poking Emperor Xi in the eye with a stick of hornets would actually help him to get his head right was an idea we really hadn’t considered. After all, the man idolizes Mao, who ionized upwards of 45 million people.

Then again, when you are at Peak Absurdity, just about any cockamamie notion is as good as the next.

What we are saying is that Peak Absurdity has arrived, and while the Donald is leading the way, the crowd behind him on both ends of the Acela Corridor is fully infected. With foaming lips, even.

After getting slammed last evening by the huge tariff hike that was purportedly never going to happen, in fact, the speculators were right back at it during today’s cash market.

The Donald’s straw-for-brains Secretary of the Treasury no sooner mumbled (again) the word “constructive” than the robo-machines literally erupted with buy orders – causing the Dow to swing by 500 points from dark red to bright green in no time flat:

Stocks rebounded Friday after Treasury Secretary Steven Mnuchin told CNBC the most recent trade talks were “constructive,” a positive for investors hoping discussions will eventually yield a deal.

We are not sure whether the Wall Street Journal “reporter” covering this action, one Amrith Ramkumar, is a headline reading algo or a newly arrived practitioner of English as a third language. But we are quite confident that back in the day, he/they/it would not have been hired by the WSJ to write such naïve stupidity as this:

Still, in one sign that some analysts remain optimistic that a deal will spur further economic and profit growth globally, the Shanghai Composite rose 3.1% Friday.

For crying out loud, by every account you can find, Chairman XI was not about to be humiliated in the wee occidental hours by a meltdown in his home stock market in response to the Donald’s midnight Tariff Demarche. So he called out the Red Ponzi’s version of the Plunge Protection Team with guns aimed at any and all sellers, and blaring menacingly loud, too.

But really? This is a sign that somebody knows something?

Actually, it’s just further proof that the dumbing-down of the system has metastasized so far that nobody really knows anything.

Indeed, they whole kit-and-caboodle of traders, politicians, media stenographers and, perhaps, even the real Deep State rulers, too, have been reduced to hopium.

As indicated above, the market bounced back from last night’s shock on the hopes that this is all some kind of fleeting moment of clarification, and that the two sides will get back to doing what the must do.

That’s because Wall Street demands a trade deal, and Wall Street has long believed – ever since the second TARP vote in September 2008 – that it always and everywhere gets what it needs to keep the bubbles aloft.

Yet, here is what Mnuchin told another reporter who was actually listening. We’d call it an economic time bomb with a four-week fuse:

According to Edwards Lawrence, Mnuchin also told Vice Premier Liu He “they have about four weeks until just about everything else China imports into the US gets a 25% tariff. The President says that is $325 Billion worth of items. In other words, the US is ever so gently reminding China it has a gun to its head and the clock is ticking.

Actually, that’s no gun at all. It’s a $140 billion time-bomb that would splatter all over the US economy and the entire China-focussed global supply chain, which now ships $7.2 billion worth of goods into US ports each and every day, counting Sundays, holidays and snow days.

Yes, some paint-by-the numbers Keynesian economists or sell side strategist stock peddler is likely to say not to worry because the Donald’s potential 25% tariff on China’s $563 billion of exports to the US amounts to only 0.7% of GDP.

Then again, stuff doesn’t happen on the macroeconomic average; it happens on the microeconomic margin, and on the endless cascade of one-thing-impacting-the-next.

So if we even get near to the full monty Trumpian Tariff four weeks from now – and who can say we won’t after this week’s shocks and after contemplating the new Trump tweets copied below – it will be katie-bar-the-door time.

That’s especially the case because the Donald is apparently throwing down the mega-trade gauntlet at a time when Wall Street and Washington have run out of room to kick the can – and not only on trade but with respect to a host of other incendiary issues.

It is now plain to see that:

  • the Fed has become a confused tower of babel that is sure to destroy confidence, not instill it;
  • Washington is bitterly divided and paralyzed politically like never before;
  • the national debt and US treasuring borrowing are soaring – with zero political will to arrest the hemorrhage; and
  • the Orange Swan in the Oval Office is close to being completely out of control and off his rocker.

These conditions would be problematic enough in normal times – yet this moment is anything but normal. The system just can’t take any BIG SHOCKS because the Fed is out of dry powder, main street is buried in debt and Wall Street is feverish with end-of-the-bubble speculation,

Yet given the chance to get out of dodge by last night’s warning shots, the casino today showed every bit of the intelligence of a moth heading for the proverbial light bulb. Honest price discovery, in fact, is so dead that the prospect of an uncontrolled trade war between the two largest and most completely integrated economies on the planet registered with no more resonance than a tree falling in an empty forest.

Nor was this insouciantly complacent response to the Donald’s dramatically escalated Trade War the only outbreak of Peak Absurdity today.

The ballyhooed Uber IPO this morning actually puts the Trade War threat to shame because it’s the ultimate poster boy for the giant tech and so-called unicorn bubble that is the next in rotation source of the calamities ahead.

You only need four figures to grasp the madness. The first is $33.2 billion and that represents how much money Uber has spent on operations and overheads over the last three years (2016-2018). The second number is $23.1 billion, and that reflects the far lower amount of net revenue that was actually generated by all of this spending and disrupting.

The third is pure math – the company’s cumulative operating loss of $10.1 billion during the last 36 months, which figure appears to be escalating sharply owing to the $1.1 billion operating loss posted in the quarter just ended.

Needless to say, the fourth figure is $86 billion, and it amounts to a “go figure”. That is, it’s the opening market cap of an IPO where neither the company’s history nor it’s own hyped-up talking points about its future show a roadmap to even a single dime of profits.

Still, the boneheads on the CNBC desk summed it up nicely. After noting Uber’s giant past and prospective losses, and the admission of its CEO that peak losses have not yet been posted, Joe Kiernan pinpointed the problem.

They will never make money, said he, if they have to keep paying drivers!

You can’t make this stuff up. Uber is a ride hailing service but it will never make money if the hailees have to get paid.

The only thing crazier than that, of course, is the cover story. To wit, Uber’s prospective perpetual losses are claimed to be a good thing because it will only hasten the day when it gets rid of its very last driver and becomes a global fleet of fully autonomous driving vehicles.

That is to say, the technology does not yet even remotely exist – it’s at stage 2 (super-cruise control) in at least a five stage evolution. Nor have the political, regulatory and safety control regimes that will be needed hardly been imagined. And that’s to say nothing of consumer adoption in a world where even auto-controlled commercial airliners still have human pilots in the cockpit.

In a word, the so-called stock market was being asked to buy an $86 billion pig-in-a-poke – that is, a business model and company that does not yet exist in an industry which hasn’t even been invented. And it nearly did.

Then again, Uber was only the poster boy, albeit perhaps its IPO also happened at the moment of Peak Absurdity. To that end, just consider the bald-faced malarkey that the buyers of today’s IPO – even if at a slight discount by the end of the day – were being asked to swallow.

In 2014, the company’s operating and overhead expenses were $1.14 billion but that figure had exploded to $14.3 billion by 2018, thereby representing a $13.2 billion gain.

Over and against its awesome capacity to spend money, Uber’s revenue grew from $495 million in 2014 to $11.27 billion in 2018. That is, its $10.9 billion growth of revenues did not remotely keep up with $13.2 billion eruption of spending.

Worse still, its rate of revenue growth is slowing sharply, meaning that if it couldn’t out earn its expense growth in the last four years, what chance does it have going forward?

After all, year/year revenue growth plunged from 80% in Q1 2018 to 54% in Q2, 28% in Q3 and just 13% in Q4.

Moreover, you only need to digitally hail an Uber nowadays to know exactly why revenue growth is heading for single digits – even as the company remains swamped under a $4 billion run-rate of losses. To wit, every Uber driver is also answering calls from Lyft, Juno and a passel of upstarts, which are actually cherry-picking Uber’s best drivers and customers with better wages to the former and lower fares to the latter.

In that context, the chart below is particularly damning. Uber’s Take Rate, or the percentage of Gross Bookings it captures as Core Platform Adjusted Net Revenue, has been in steady decline throughout 2018.

And the reason its take rate declined from 22% in Q1 to 18% in Q4 is no state secret. It was losing too many drivers and fare opportunities to its legion of competitors, and therefore had to ease up the pressure on drivers who barely make the minimum wage anyway.
Uber’s Take Rate is Falling

Moreover, its declining Take Rate has flowed right down the income statement. The chart below shows the amount of profit Uber makes from its core platform business, divided by revenue.

Alas, in the fourth quarter of 2018, that number turned negative!

Still, as a final example of Peak Absurdity, consider Uber’s patter about its $12 trillion “addressable market”.

That’s right. In a kind of second cousin to the 14 billion addressable eyeballs of the dotcom era, the company claims to be in the early stages of capturing what it estimates to be a $12 trillion total addressable market that includes personal mobility, food delivery, and freight shipping.

For context, global GDP is about $80 trillion. So after burning billions of cash in the last three years, Uber is unbowed. It’s actually aiming to capture 15% of global GDP!

In fact, the company’s S-1 showed that it has generated $9.3 billion of negative free cash flow over the past three years alone, including $2.5 billion of negative free cash flow in the year just ended.

Needless to say, we don’t know what multiple on $2.5 billion of red ink gets you to an $86 billion valuation. But, of course, why should that matter?

During 2018, 81% of US companies floated their IPOs as loss-making entities. The graph below shows the percentage of IPOs with negative earnings per share since 1980. Pre-Greenspan it was 15-20% and has been rising steadily ever since.

For tech firms last year, the figure was even higher at 84%, driven largely by biotech companies raising money.

Not surprisingly, the last time that large a percentage of tech firms were going public without making money was in 1999 and 2000. Back then, 86% of the internet companies that turned to Wall Street were unprofitable.

Perhaps there are still some old timers around who recall how well that worked out.

So, yes, we are getting real tired of the Donald’s Trade Wars. And that’s especially true when he rushed off to tweet the following utter rubbish after he had already lit the match last night.

Then again, the Donald may be a complete ignoramus on economics and trade, but, really, what is the more ludicrous?

The twitter ravings below or the talking heads of Wall Street who today were buying the dip on the Trade War and piling into the stock of a company that has no past or foreseeable relationship to the antiquarian idea of profitability.

Talks with China continue in a very congenial manner – there is absolutely no need to rush – as Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars worth of goods & products. These massive payments go directly to the Treasury of the U.S….

….The process has begun to place additional Tariffs at 25% on the remaining 325 Billion Dollars. The US only sells China approximately 100 Billion Dollars of goods & products, a very big imbalance. With the over 100 Billion Dollars in Tariffs that we take in, we will buy…..

….agricultural products from our Great Farmers, in larger amounts than China ever did, and ship it to poor & starving countries in the form of humanitarian assistance. In the meantime we will continue to negotiate with China in the hopes that they do not again try to redo deal!

Tariffs will make our Country MUCH STRONGER, not weaker. Just sit back and watch! In the meantime, China should not renegotiate deals with the US at the last minute. This is not the Obama Administration, or the Administration of Sleepy Joe, who let China get away with “murder!”

Tariffs will bring in FAR MORE wealth to our Country than even a phenomenal deal of the traditional kind. Also, much easier & quicker to do. Our Farmers will do better, faster, and starving nations can now be helped. Waivers on some products will be granted, or go to new source!

Actually, what’s “quicker to do” at the tippy-top of an aging business cycle and a debt and speculation saturated economy is to bring inflame the whole house of cards by lighting the match.

That the Donald has now surely done. Peak Trump has arrived at his own hand. (

Reprinted with permission from David Stockman’s Contra Corner.