Tuesday, July 29, 2014

The U.S.’s 40 Year Depression, The Massive M&A Bubble And The Zillow-Trulia Merger Of The Walking Dead

We are again in a mergers & acquisitions mania.   The amount of mergers in the last 20 years is literally unbelievable.   I don’t have the data at my fingertips but a quick mental note has to put the number around $20 trillion or possibly much more.   Think about numbers that large.   What could this nation have done with $20 trillion?  M&A doesn’t create any wealth.  Frankly, it destroys it.  Nor does it create any net new jobs.  Instead, this is an industry that essentially used to be illegal.   We now pretend that it is legal and that has enabled financial criminals to mint untold amounts of profit while contributing greatly to the destruction of our nation’s economy.

The Sherman Act, the Clayton Act, the Celler-Kefauver Act, the Wallace Act, the Hart-Scott-Rudino Act, the enforcement agencies of the SEC, DoJ, various worker rights and protection acts and on and on made what we see today in M&A a literal impossibility.   If you were able to traverse this maze that was created to stop corporate control from becoming a tyranny, then you might be able to acquire a company.   Good luck with that. 

So, why are we then witnessing two decades of what is effectively an illegal M&A boom?  The same reason Obama now unconstitutionally legislates from the Oval Office.  Because the laws of our nation mean nothing anymore.  We are living under the tyranny of the rule of man.  We are past having a constitutional crisis.  This nation is a constitutional crisis.  We are now witnessing what it was like to live under the British crown in 1776.   Or under Nazi Germany.  Or any other nation where predators made up rules to allow them to dominate, control and loot with impunity. 

The nature of law is to maintain justice. This is so much the case that, in the minds of the people, law and justice are one and the same thing. There is in all of us a strong disposition to believe that anything lawful is also legitimate. This belief is so widespread that many persons have erroneously held that things are "just" because law makes them so. Thus, in order to make plunder appear just and sacred to many consciences, it is only necessary for the law to decree and sanction it. Slavery, restrictions, and monopoly find defenders not only among those who profit from them but also among those who suffer from them.  -- Bastiat

Our masters have shredded our laws and make it up as they go along.  Whether that is Al Gore, Bill Clinton, George Bush I or II, Ronald Reagan, Dick Cheney, Joe Biden, Barack Obama, the Congress, the courts or the bureaucrats running our enforcement agencies, both political parties and their adherents have contributed to the wholesale destruction of our nation’s laws under the duress of megalomania’s power, greed, money and all of the corruption the rule of man can muster. 

There is a fair amount of ignorance in our society surrounding the topic of mergers & acquisitions just as there is about anything finance-related.  That is because our masters wish this to be so.  In one past post excoriating M&A, I received feedback that M&A allowed economies of scale.   You mean like massive, Soviet-run corporations?  That is nonsense, goes against economic facts and fails to take into account one hundred years of laws that were placed on the books through experiences.  If a corporate business model is not viable, then it should fail.   Failure is one of the most necessary dynamics to rebirth and renewal.  Nature’s laws are founded on this principle and we see it everywhere.  If we are to have an economic system based on merit, failure must be part of that system. 

Instead, M&A has created massive, state-owned monopolies in our nation.  Just like the Soviet Union.   Mind you, our corporations are also state owned.   Too big to fail is no different than Soviet Union state-owned businesses.  They only survive through the force of the state.   They are propped up bureaucracies that only survive through girth used to dominate society.  They have lost the ability to effectively service markets or society long ago. 

These massive bureaucracies  cannot be managed no matter how many Harvard MBAs are grinding the company into the dirt.   Mind you, with the gibberish they are taught, they do try.  Do you think Jamie Dimon actually runs JP Morgan with a quarter of a million employees?   What he has created is a personal empire to sooth his inner demons and power-mad megalomania.  And he did it via the destruction of the rule of law that is M&A. 

Our economy is very much akin to the centrally-planned Soviet Union as I have written in very detailed posts. 

Long ago companies used to be held to very tight controls in their charter.  Often those charters were only temporary to serve a specific purpose like building a bridge or such.  Our founders knew the evils of permanent corporations through experience with the king’s private for-profit bankers and corporations.     Corporations were not allowed to deviate from that charter.  Permanent corporations can only exist by extracting rent.  If a company cannot survive within the framework of its original charter, then under this system, it should fail.  Then, new citizens could be allowed to bid on any remaining intellectual and physical assets to organize for new purposes.   Existing corporations should not be allowed to buy another company for their own personal interests of survival created by their own mismanagement, incompetence or because society deems their products and services of no value.  If a company wants to buy goods or services from another company, that is fine.  But buying the company should be verboten.  New citizens only.  New ideas only.   

As noted on here in past posts, that we are witnessing the largest M&A bubble in the history of the world is a very telling dynamic.  It portends future doom.  Because these corporate bureaucracies have hit the wall in their ability to grow and even survive.  A dynamic that is so inherently necessary for corporate capitalism to survive is growth at all cost.  So, instead, they threaten the natural cycle of birth, death and renewal by buying up everything they can to diworsify (diversify) and take out their competition for their own self-interested survival.   That we are in an M&A boom of incredible proportions is a sign that the U.S. economy is and has been in systemic failure.   That there is not enough intrinsic demand remaining and really hasn’t been for decades.   When it comes to economics, there are very few rules that can be proven as fact.  I will prove the decades-long depression I have been writing about for years (four decades to be exact) that the U.S. has been in beyond any doubts in future posts.   And that it means future doom for these massive corporations.

This has all been talked about on here for nine years.  It was a major contributor to the Great Depression as noted in one of my first posts.   If Jamie Dimon or any other bumbling and bungling too-big-to-fail firm cannot manage their own business today, (and they can’t) how exactly are they going to manage a larger business created through M&A?   They aren’t.   They won’t.  And, they can’t.  They are simply pushing the inevitable down the road of their ultimate failure.   That is what M&A is doing.  Large companies often buy literally thousands of smaller firms.  Cisco, as one example of a bumbling and bungling bureaucracy, has bought well in excess of ten thousand companies in the last decade.  They have essentially retired ten thousand competitors while stifling innovation, economic vibrancy and employment growth that drives demand for higher wages.

As an aside, for those who believe the Koch Brothers are out to destroy America, they are another too big to fail, state-owned bureaucracy probably headed for failure.   So too is the Russian economy that is still dominated by the massive, state-run bureaucracies that have simply transferred hands to oligarchy capitalists.  

This dynamic is a major contributor to the coming demise of the corporate state.  Enforcing the M&A laws would have meant the past forty years of union busting and associated wage and benefit collapse would have not been possible.  At least to the degree we see.  Offshoring of democracy’s capital by private interests would not have been possible.   Yes, democracy owns that capital.  Not some corporate bureaucrat that believes they can move intellectual capital, jobs or even the company to another place on earth.  Unemployment would likely be a small fraction of what it is today.  And, localization would still be in play.  Just a few of many dynamics that would be different if the rule of law had not been destroyed by politicians and public officials from both parties.

So, let’s look at Zillow and Trulia.   Two companies that have merit in some attempt to break the monopoly and its subversion of the free flow of information of the bumbling, incompetence realtor industry.  But neither one is actually making any money and never has.   Additionally, the results of both firms are inflated substantially in what is clearly a massive real estate bubble.    So, we can expect their future results to be even more unprofitable.  And, in actuality, both firms may eventually go bankrupt as that bubble is deflated.   This ties in directly with the forty year depression dynamics.  If this system completely unwinds, I have noted in prior posts we could see both real estate and stocks return to forty year ago levels.  

Both Zillow and Trulia report large numbers of unique visitors to their site yet they are unable to turn these numbers into profit.  With nearly 90 million unique visitors to Trulia in one month, this is almost certainly a sign of the real estate bubble.  There are only about 150 million households in this nation.  People are actively looking to acquire real estate as investments, second homes and such.  Foreigners who have built up trade surpluses with the U.S. have massive amounts of dollars and nothing else to do with them other than buy U.S. real estate, Treasuries or weapons of mass destruction created by the military-industrial complex.  

Japan was in this situation in the early 1990s and now it is China.  Japanese companies, firms and their wealthy, also considered invincible, ended up selling U.S. real estate back to us at extremely distressed prices.  China will too as they ignorantly pile in at the peak.  As I have noted time and again, there will come a day when China, as just one example, is starved for dollars.  That will precipitate an unwinding of their dollar purchases be that Treasuries or U.S. real estate.  Don’t bet on the yuan taking out the dollar either.  Signing deals with Brazil and Russia to settle trade in their respective currencies doesn’t recognize that most exports in their nation are by American and European companies that report their profits in dollars and euros.  They won’t be using rubles and yuan for that trade settlement.   They will be using dollars and euros.  I was a first to write this trade settlement system will fail and so too will likely be the failure of U.S. empire.  But as noted on here in the past, the U.S. is probably responsible for at least $50 trillion in annual global trade.  Signing swaps deals with New Zealand or South Korea isn’t even on the radar.   People just don’t understand how massive the U.S. empire is.   Empire is likely to fail from within.  But I will give you a greater glimpse into that at some point.

Wall Street investment banks (that’s an oxymoron for banks to bill themselves as investment since they only make money by rent extraction)  pump firms like Zillow and Trulia to make these acquisitions.  They create models and push economic promises that are no different than the models that destroyed Wall Street in 2008.   And they do so for one reason; to create massive fees of M&A.   

Additionally, the stock market bubble encourages M&A booms.  Companies that have no earnings like Zillow and Trulia, all of a sudden have a wealth of stock bubble they can use to buy other companies.   Both of these companies have only a few hundred million dollars in sales and no earnings.  Yet, they are merging for the issuance of $3.5 billion in stock.  Or, monopoly money created out of thin air.  

These two companies couldn’t dream of merging with the exchange of even a nickel without stratospheric stock bubble prices.  They don’t literally have a nickel of profit between the two of them.  So, are you going to buy something with revenue?  Umm, all of the revenue in the world won’t buy you a cup of coffee.   Try it sometime.  Walk into Starbucks and tell them you want a tall coffee for $1.60.  Tell them you don’t have any earnings to pay for it, but you will pay with revenue.  You know, like Whimpy who always wanted a hamburger today in return for some mythical future payment when he did have earnings.

So, for the price Zillow is paying Trulia, what would be the payback period just to get the original money used in this deal?  Well, they have no earnings so we can’t use any measure of profit unless we make it up like Whimpy.   But if we take a quick and dirty of Trulia’s enterprise value to free cash flow, and then take the reciprocal of that number, we get a free cash flow yield.   Taking this yield, we see that it would take one thousand years for this deal to pay for itself.  Of course, both firms are “betting” on a better future.   I’m not a betting man so I would have to say their future expectations are probably well too optimistic given the real estate bubble we are in.  But, regardless, in a system where capitalism doles out money to society and not the other way around, the money is available to do an asinine deal like this while Americans rot.  While 25% of Americans don’t have a job.  And, 50% literally own nothing.   Where is their money to piss away on completely useless endeavors like Wall Street does?   That’s a good question for our king. 

Private, for-profit capital does not serve the fundamental human  needs of society.  It never has and it never will.  Wall Street criminals and corporate bureaucrats have stolen so much of our money that they can piss it away on corrupt, worthless deals like this, well, and encouraging the unlawful illegal immigration scandal, waging war and spying on Americans while many American worry how they are going to survive till tomorrow. 

Karma is indeed a bitch.

posted by TimingLogic at 1:51 PM

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