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2018-04-17 07:45 by Karl Denninger
in Market Musings , 241 references Ignore this thread
Financialization Ruins Even More
[Comments enabled]

It's completely out-of-hand.

I've now seen $500/nt prices for places that are very nice, but nowhere near worth that sort of money.  Think about that folks; a "long weekend" is now over $1,500 just for the lodging.  Disney has pulled this crap with the insane escalation for decades, but it's now showing up anywhere driveable in a day (~6-8 hours) from a significant-sized city that happens to be nice.  In a couple of cases I know exactly what you're getting for the money since I've been there myself.  What sort of capitalization does this impute to these places and how does that keep escalating?  Someone has to forevermore pay more, and what's worse is that the property tax assessments get jacked too, which means the "ratchet" under the price keeps going up as does the rent.  The implied cap rates on those joints are flat-out insane.

Boat insurance?  I'm glad I sold my large boat when fuel prices started to ramp before the '07 blowup.  Reports of 45% includes in hull insurance prices this year are happening.  Again.  The same **** happened a number of years ago after Katrina (and has after other storms) and the cause of it is the intentional acts of some "owners" to basically sell their boat to the insurance company for more than they could get for it on the market, never mind any pesky negotiations or people finding the flaws in it (and thus either significantly adjusting their offer downward or walking off.)  Those quotes never go down either -- again, it's a ratchet function, and only goes one way.

Insurance generally?  Ha!  There are reports in my recent "health insurance" post of schools figuring out some kid is on Medicaid and then billing the system for services that are not only unnecessary they're not actually performed.  That's outright fraud and yet nobody is interested in doing anything about it; I'll bet there are tens of billions being stolen this way.

Netflix just reported.  Their stock soared and is a few bucks from an all-time high. The company has negative cash flow, a forecast of negative cash flow for the foreseeable future, an escalation in debt and revenue that implies the firm will never have positive cash flow and, to break that the company would have to expand subscribers (without spending a single additional dollar) by something like a factor of five, quadruple the subscription price (!) or some blend of the two -- all without having to spend even more on content.  They have an alleged "enterprise value" (market cap) of some three hundred times EBIDTA and are carrying roughly three times as much debt off their balance sheet as reported on it.   This is true even with the insane cross-subsidy they forced ISPs to collect from non-customers during the Obama years -- and which persists to this day in the United States.

Tesla is another example of the same sort of thing except in their line of business there is no such thing as a "free" customer since they sell a physical product.  "Make more and lose more" has been their motto forever.  Both they and Netflix survive only because some fool continues to step up and throw money at them under the belief they'll get both the principal and coupon back.  Unlike ENRON neither firm is hiding their losses or any of these figures; both declare them proudly and then go back to the trough for more and more money and, so far, they are being showered with it!

Nobody is talking about this in realistic terms.  Any of it.

Leverage is a bitch.  When you structure something in a fashion that leverage is inherently necessary for that thing to "work" then you're betting that at no time will that leverage become unprofitable and need to be unwound.  If you lose the bet then whatever equity you had in said thing goes "poof" like a fart in a church -- you're done.

What used to be places and things that were expensive but doable for someone of middle-class means are rapidly becoming a total lockout for all but the extraordinarily wealthy as a consequence of this garbage spreading literally everywhere.  Yeah, I get it, the rich have their playgrounds -- but when essentially entire cities or even counties turn into this for months at a time, well...... good luck with that.

It'll work for a while -- as long as the Netflix's and Teslas keep powering higher like this -- but for exactly how long?  About until the next bust, that's how long -- at which point all those who participated in this crap will find out that the tax base they have to cover has been permanently ratcheted up along with the property assessments but the income from same to support it has disappeared.

Then you're done twice -- you can't afford the taxes and you can't sell for anything close to what you got in it either.

There is a mass of bankruptcies that have already happened but not been recorded yet.  As I've pointed out numerous times while you can delay recognizing the loss a transaction dependent on this sort of thing has made the loss when the original acquisition or ratchet upward in operating expense occurs.  Your only hope is to find some greater fool that bails you out before it all goes to crap -- in other words the best you can hope for is that "time is on your side."

Maybe it is and maybe it's not.  We shall see, but at this point, given the outrageous nature of what I'm seeing pop up more and more often and how far it has spread, my money is on "NOT."

Further, it is my sincere wish that every single one of the people involved in manipulating, profiting from or "marketing" any element of this find themselves on the receiving end of a very angry, and hungry, horde of people armed with cases of lump charcoal, seasoned salt and pepper when it all comes apart.  The vast majority of them are high fat and moderate protein as well and thus are a perfect match for a ketogenic diet although more pepper and seasoning than usual may be necessary due to the foul taste.

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Rollformer
Posts: 271
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"Streaming Content
At December 31, 2017, the Company had $17.7 billion of obligations comprised of $4.2 billion included in "Current content liabilities" and $3.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $10.2 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not yet meet the criteria for asset recognition."

Now I know what I'll spend my day trying to understand. At least they aren't pulling a GE and booking all of the profit expected to generate from each customer over the course of eternity as soon as the customer is acquired.

Or at least, I haven't noticed it disclosed yet
Tdurden
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I see similar **** where I work, but not nearly to the degree of those unicorns. After the most ham-fisted merger of the many where I've had a front row seat, me and a few others here are just waiting for the earth-shattering kaboom. Debt higher than the market cap, an absurdly large dividend that exceeds earnings every year, a CEO choosing to "retire" a year earlier than planned and turning down the chairmanship...I'm thinking someone has been playing a nasty game of hide the salami.

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"I'd like to live just long enough to be there when they cut off your head and stick it on a pike as a warning to the next 10 generations that some favors come with too high of a price." -Vir Cotto Babylon 5
Marquiri
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The cost of hotels and the like is a big reason why I have made the switch to backpacking for vacations. Once I have all the necessary gear, it's just a matter of paying to get there and the nominal daily fee (if I'm in a national park). I'll be taking my first two or three trips this summer/fall.
Demosthenes
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Good morning, Karl et al. My personal favorite are those who think the problem of how much everything costs these days can be easily handled by not having children until one is a financially comfortable 30-something professional.

You know, America used to be such an economic wonder that any common laborer could afford modern luxuries. Barbers and railroad workers had a car in the driveway and a television in the living room. We bragged about it, and rubbed the Russians' and Koreans' noses in it (and they thought we must have been lying, since it was an astonishing feat that they could not manage).

Now we tell people who don't have half a million in debt that they can't afford the basic biological function required for our species to be viable.

I bet that ends well. Haha! But that's kind of how humans are. "I can afford $500 hotel rooms and a $270,000 starter home, and if others can't then this proves that I am superior. I WIN THIS GAME."

Oh, boy, just wait until folks see that the prize is to ratchet prices until even the "superior" human specimens are broke AF. Personally, I am waiting for a few bright sparks to realize that humans have been successfully housing, feeding, educating, and propagating themselves for thousands of years, and that mayyyyyybe - JUST MAYBE - what we have going on is unnatural, externally imposed by the self-serving, and inefficient as hell.

Great topic, Gen.
Tickerguy
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It would be one thing if these sorts of asking prices were worth it. In one specific instance I know what you're getting for the money because I've stayed there before, a number of years ago, in the same property and subset of it. It hasn't been materially upgraded; it's the same place and is NOT new.

It neither begins or ends there, but this much I do know -- the guy who runs the place WAS an ******* decades ago AND STILL IS. That doesn't mean I wouldn't pay him for a place to sleep at a rational price, because I have and would. But he's a five-alarm DICK and in cahoots with plenty of OTHERS, including some I know, they merit asteroid strikes or bear attack (and there are those in the area) only SLIGHTLY less than Mordor on the Potomac does.

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Winding it down.
Supertruckertom
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@ Tdurden, are you looking for your next job?

Sure sounds like that place will be closing up after it has been bled dry.



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Preparing to go Hunting.
Aquapura
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What gripes me about hotels is all the ancillary fees. Parking? That's another $25/night. There's a theme park down the street, pony up a resort fee, that literally adds nothing. Then there is the taxes which can add as much as 20% in some places I've seen. While I've been able to find some decent published hotel rates the actual price is always much more.

I do think this is a big reason for the rise of AirBnB and others. Cross shopping them with traditional hotels there is real savings, albeit more risk to the traveler.


Tdurden
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I was looking for a job when I found this one. After having been here for around 17 of the last 20 years, I'll stick around for the finale. I figure if it goes this time like it did after the dot-com train wreck it might turn out like my ex-wife's family reunions...loud, ugly but sort of entertaining.

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"I'd like to live just long enough to be there when they cut off your head and stick it on a pike as a warning to the next 10 generations that some favors come with too high of a price." -Vir Cotto Babylon 5
Marquiri
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I understand Disney has started to charge $25 a night for parking at their resorts. I guess it shouldn't come as a surprise, as the parks are the only thing keeping that empire afloat.
Tickerguy
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@Marquiri - Oh now that's a nice screw job -- not that I'm surprised.

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Winding it down.
Aztrader
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Scottsdale, AZ
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When the Fed and SEC approved of removing MARK TO MARKET valuation, it sent the market straight up. How many companies have issued more debt then their book value and shielded it from the balance sheet with this BS accounting trick?
We all know how these companies keep beating earnings using NON-GAAP accounting tricks along with their stock buybacks. I believe it would be easier to find Obama's college transcripts then to find actual GAAP earnings on most of these companies. The fraud is massive and everyone is doing it.
Marquiri
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As it turns out, my numbers were a bit off. It ranges from $13 a night to $24 a night depending on the resort.

I can somewhat tolerate paying for parking when the establishment had to build a parking garage (as is the case with several of the newer Universal hotels), but in the case of Disney (where there is plenty of land for parking) it's just theft, and I will stay elsewhere given the choice.

Nadavegan
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I have started using VRBO and Airbnb more and more, unless it is for business travel. Either prices are better, or you will actually find something worth $500 per night.
Redjack
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I left my last job because of a merger.

First off, jack up the debt! Then start cutting staff, quality, and services as part of "lean" (God I hate that term).

I was an engineer involved in just about everything. Told my boss, his boss, and a few up the food chain that with this debt load and our product mix we were going to have issues servicing the debt. So what did they do? Say that when commodities went up we would be fine!

Ag commodities have a pretty regular cycle. When people are doing all sorts of games on paper to cover the actual stuff (pork in our case) that is needed to make the product, the experienced plants would start to back down because a crash is coming. Crash came, about a year after I left, and they have been struggling ever since. I expect the fund that bought them to divest soon and the place to close down.

People get greedy, and greedy people get stupid.
Rollformer
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I myself wonder how much of this is AirBnB and VRBO taking over. Business travelers are a lot less price sensitive than the average consumer. I have done some traveling this year, and rather than book ahead of time, I'll pick up a last-minute deal on Expedia when I decide it's time for rest. I can get a $200 - $300 room for $100 usually. Of course, this works until it doesn't.

I also wonder whether the new reduction in entertainment expense destructibility has to do with this? Hotel needs to make up for reduced bar tabs and porn somehow. (I admit to not knowing much about business taxation; I spent most of my career so far at a general partnership, and my attitude was "TAXES?!? TAXES!?! We don't pay no steenking TAXES!").
Tickerguy
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The most-egregious examples I've found of this are NOT in business-related areas.

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Winding it down.
Flappingeagle
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TSLA is selling for around $290 a share.

There are Jan 2020 put options available at a strike price of $20. Think about that for a minute. There's an active market that represents a 93% loss of value in the next 21 months.

Flap

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Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Asimov
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Flapping: They're balanced out by the call options for double the price.

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It's justifiably immoral to deal morally with an immoral entity.

Festina lente.
Nitrium
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Acclaimed and respected British journalist Robert Fisk (https://en.wikipedia.org/wiki/Robert_Fis.... has been to the alleged site of the attack and interviewed people (including one of the doctors in the video) and seriously doubts any chemical weapons were used.
https://www.independent.co.uk/voices/syr....
Nw_dude
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when we get to the "angry mob" phase they will be coming after you and/or me or anyone else who saved a few cans of sardines for a rainy day. they are far too stupid to understand even the basics of what is happening.
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