Lyft-Off To Melt-Down, Part 1

We heard some knucklehead on bubblevision this morning saying there is nothing to sweat regarding Lyft’s $24 billion valuation because, well, it’s “only 10X trailing”.

Needless to say, he wasn’t referring to earnings. Actually, he was referring to the product of the $3.1 billion of VC cash that Lyft consumed on drivers, insurance, marketing, employees, overhead etc. during 2018.

The product from that great tide of expense, of course, was just $2.2 billion of revenues (which left $911 million of red ink on the bottom line), and it is that fractional return on expense for which the mullets flocking to Friday’s IPO will have the privilege of paying 10X.

We will dissect the lunacy of the Lyft IPO in Part 2, but here it must be observed that the current manic phase of the third great financial bubble of this century is not the financial equivalent of immaculate conception—that is, something which just happened out there in the markets when traders got too frisky.

Nor is it evidence that Wall Street traders have gotten greedier and stupider with the passage of time.

To the contrary. The world’s $80 trillion stock market bubble, of which the high flying tech sector and the next in-line VC fostered Lyft-style Unicorns are only the leading edge, has a sire, as it were.

He/she/it resides in the Eccles Building and its fellow-traveling central banks around the planet. The fact is, their radical interest rate repression policies (ZIRP/NIRP) and years of massive bond-buying (QE) have deeply and systematically falsified the price of all financial assets, thereby breeding an unhinged speculative disorder that exceeds all historical precedent.

At the heart of it is a rogue posse of Keynesian central bankers who have been given unrestricted access to the most dangerous economic weapon known to mankind—-state-sanctioned monopolies on counterfeit credit.

To be sure, central bankers have always been dangerous. But at least during the gold standard era their lattitude to run the printing presses was sharply constrained by the ability of investors to dump the currency and demand gold, which, in turn, produced immediate adverse repercussions in the banking system and interest rate markets.

Moreover, even during the 16 years after Nixon closed the gold window at Camp David in August 1971, central bankers still believed that their job was about Money—-its supply, value and integrity. And while the Fed Chairmen of that era—Burns, Miller and Volcker—-all tried different policy models and operating tactics and made numerous errors in the process, their central focus at the end of the day was on maintaining the purchasing power of the dollar.

As a practical matter, that meant minimizing the CPI inflation rate to the extent judged to be feasible—without unnecessarily sending the economy into the recessionary drink.

As it happened, neither Burns nor Miller figured out how to accomplish that—so by the time Volcker came along there was no choice: He knowingly administered the bleeding cure because he understood the danger of bad money and that the main job of the Fed was to restore an approximate condition of price stability in order that the private sector could do its job of generating growth and wider prosperity.

We had the privilege of working with both Burns and Volcker, and to also observe at close hand (as a Republican member of the US House of Reps) the stagflationary disaster which occurred during William Miller’s short-lived stint as Chairman (March 1978-August 1979), when he was persuaded by White House Keynesians to attempt to macro-manage the US economy.

Apart from the Miller interlude, however, the focus of the Fed was on sound Money, as we learned upon being summoned to a breakfast meeting with the imperious Arthur Burns upon the announcement by the Reagan transition office that we had been selected for the job of budget director.

By then, Burns was long out of office and during his eight year tenure had made a hash of his sound money principles by being way too quick to accommodate Richard Nixon’s bullying in behalf of a Fed stimulated boom in the run-up to the 1972 election.

But perhaps he had learned his lessons, By December 1980 he was petrified that the wild-men supply-siders around Ronald Reagan were about to unleash massive deficits that would make the Fed’s job of quashing inflation and restoring sound money tantamount to impossible.

He wasn’t exactly wrong in his reading of what the trio of Art Laffer, Jude Wanniski and Jack Kemp had in mind—since they foolishly believe that in the perennial budget race between outlays and receipts, tax cuts would grow the economy and revenue faster than the politicians could pump-up spending.

So Burns was at least relieved to learn that the incoming budget director didn’t believe in that kind of fiscal voodoo and was as keen about slashing spending as cutting tax rates.

The point, however, is that back in those times, the very idea of monetizing massive chunks of the public debt was anathema. Sound money men didn’t want the central bank backed up against the wall by big deficits and the temptation to monetize them. But they also knew that if deficits were financed honestly from the available supply of real money savings available in the bond pits that interest rates would be forced higher and that ultimately business investment and household spending would be crowded-out.

In short, when the central banks where in the business of pursuing sound Money and in possession of a principled opposition to debt monetization, the danger of a central bank fueled runaway asset inflation spree in the canyons of Wall Street was minimal.

Even the incipient stock market boom of 1984-1987 was crushed in its cradle when crowding out in the bond markets owing to the giant Reagan deficits caused treasury yields to soar from 7.0% to 10.0 % during the first nine months of 1987, thereby precipitating the 22% stock market crash on Back Monday.

But then came the great pivot on the road to Bubble Finance. Newly appointed Fed chairman and lapsed gold bug, Alan Greenspan, initially opened up the printing presses full throttle; and also sent his henchmen out to bully Wall Street dealers into stopping the liquidation of their underwater trading inventories—even as the Fed heads pushed corporate America into huge, semi-coordinated stock buyback spree (a new thing back then which had only become legal after 1983).

But at that point his purpose was to quell the panic and keep the Republican administration which had appointed him in the good graces of the electorate (Greenspan was a heavy-duty closet GOP partisan then, despite his latter posturing as the great bipartisan Maestro).

Unfortunately, the power of the printing press and the adulation it generated for the new Fed chairman paved the way to something far more insidious. By May 1989 the S&P 500 index had fully recovered from its 30% peak-to-trough plunge, and Greenspan was soon off on what became his 19-year mission.

Namely, the pursuit of an  heterodox “wealth effects” doctrine that made him the toast of the town in Imperial Washington, but which he was pleased to rationalize as a post-Bretton Woods proxy for the gold standard!

As preposterous as it sounds, of course, it is indubitably the case that Greenspan was taking the leading central bank of the world in the opposite direction of gold standard discipline. Yet all the while he was rationalizing the Fed’s new interventionist policy and massive debt monetization—the Fed’s balance sheet grew from $200 billion to $800 billion on Greenspan’s watch during a period of China-driven global deflation during which its balance sheet should not have increased at all—as the second coming of gold.

In truth, of course, what he was really doing was making a fatal substitution of purpose right at the center of central banking policy.

To wit, sound Money soon gave way to Economy; and as the Fed become more and more invested in and entangled in attempting to macro-manage the total GDP and all its major components via the elastic Humphrey-Hawkins mandates on inflation and full employment, the slide into full-fledged Keynesian monetary central planning became irreversible.

But here’s the thing. Keynesian central banking inexorably leads to massive asset inflations on Wall Street and recurring financial meltdowns because it is inherently incapable of hitting inflation and full-employment targets in one country. That’s true even for the $20 trillion GDP of the US economy and the 25% share of the world output which it represents.

We have elsewhere addressed the foolishness of the U-3 unemployment metric in a world in which labor is dispatched by the hour and the gig—including, ironically, in the case of the ride hailing industry at hand—and in which there is still an unlimited supply of cheap labor off-shore.

And that is no less is true of inflation. We can’t even be accurately measure it, as perhaps illustrated by the fact the new auto prices are up by 35% over the last two decades according to the index of the auto dealers association, while the BLS says they have risen by 0.0% (due to the hedonics of airbags and voice-activated navigation systems, for example).

In truth, of course,  commodity and consumer inflation courses through the global economy with gale-force, regardless of the Fed’s tinkering with its primitive tools of interest rate pegging and balance sheet expansion.

So what has happened is that the Economy obsessed Keynesians who have been self-selected into the Fed system have soldiered ahead pounding square pegs into round holes, and inventing increasingly whacky theories to explain what they are doing—even as it has manifestly failed to work.

That’s why we have the current Powell Pivot and the inexplicable Pause on interest rate normalization barely 25 basis points after money market rates have turned positive in real terms for the first time in more than a decade.

Needless to say, that foolish reversal nipped in the bud still another attempt at self-correction in the casino during the three months between Peak Trump (Sept 20) and the X-mas Eve plunge. That, in turn, paved the way for this afternoon’s insanity of pricing an IPO for a company that has no visible path to profitability, as we will demonstrate in Part 2, at $24 billion.

Yet what exactly is the Economy benchmark which has midwifed this latest round of insanity?

That would be the colossal scam of r-star or the neutral rate of interest. And mind that what the alleged neutrality applies to is not some theoretical rate purportedly compatible with sound Money.

No, it’s all about Economy, and the preposterous belief that there is a money market rate that can cause the buzzing, blooming mass of a $20 trillion GDP, which is fully integrated into an $80 trillion global economy, to achieve a near perfect level of stable full employment; and at the decreed 2.00% inflation rate as measured by the sawed-off ruler called the PCE deflator, with or without food and energy, as the Fed heads from time to time, aver.

In part 2 we intend to make mincemeat of r-star because it’s essentially the policy evil-doer that is setting up main street for the next financial meltdown. But leave it to Janet Yellen Powell, bedecked in trousers and ties, to let the cat out of the bag.

Apparently, r-star is an invisible sign-post lurking somewhere in the deep macroeconomic mist:

“…we can’t directly observe the neutral rate. We only know it by its works”.

Stated differently, they are flying blind, but are ahead of schedule just the same.

In part 2, we will attempt to fathom how the data summarized below adds up to $25 billion of value.

Lyft IPO Economics



Forecast Operating Income

Lyft IPO Sensitivity Table

Source: Grizzle Estimates, Lyft Prospectus