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WeWork and Counterfeit Capitalism

mattstoller.substack.com

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Re: WeWork and Counterfeit Capitalism

#231

Post by short_sells_poo »

VHRanger wrote: post #115
BWStearns wrote: post #46

Earlier quoted context omitted.

> The subprime crisis is completely unrelated! And if anything it was proof that money-making assets should be scrutinized more. I think the connection here is that the assets themselves were money losing but they passed them off as safe assets despite knowing they weren't safe. If I make money by producing counterfeit bills and circulating them then it makes money. It's still counterfeiting. The underlying assumptio…

The CDO assets were money losing but in a much more obfuscated way. They acted like a bet where you make a dollar if you roll 1-19 on a d20, but lose $50 if you roll a 20. And because they had higher-than-sp500 returns, short sighted investors flocked to them. The one point where WeWork is similar to those CDOs is the stack of complexity used to obfuscate the fairly simple business financials

CDO assets were money losing for people who mispriced them. CDOs are a class of instrument similar to insurance in terms of payout. You collect very regular premium and occasionally have to pay out big when a claim cones in. This is a valuable investment vehicle for people who know what they are doing. They all come under the umbrella of negatively skewed investments, that is, the distribution of returns on these investments have a negative skew. They are fat tailed to infrequent but large drawdowns. Short selling options is another strategy with this profile for example.

In this respect, I'd argue that We is very much playing the CDO game. They enter into long term leases and sell short term leases, harvesting the spread. They take on the risk of finding enough short term tenants to pay for the long term commitments, and their profit is the premium for this risk.

This trade will make a reliable but small margin during good economic environments, but they have to leverage it up a lot to actually make money over fixed costs.

What happens when recession hits? Nobody knows, but it is fair to assume that people will cut high cost, easily broken contracts first - exactly We's revenue source. On the other end, We is on hook for all the long commitment contracts.

Sure, they can just atop honoring the leases and shutter the subsidiaries who actually signed the leases, but this is signing their own death warrant because who will do business with them afterwards?

So I'm seeing a lot of indications of a negatively skewed pnl profile, with not a peep about how We plans to hedge them.

Re: WeWork and Counterfeit Capitalism

#232

Post by jcroll »

> And if we restore laws against predatory pricing and centralized financial control, the entire counterfeit capitalism model will go away.

What's something the average person can do to help make this a reality?

Re: WeWork and Counterfeit Capitalism

#233

Post by austenallred »

cfors wrote: post #139
jamiequint wrote: post #40

> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market. This is false. First, Amazon is far from controlling the whole market. They control close to 50% of e-commerce which itself represents less than 12% of total retail sales. Second, Amazon didn't predatory price, or if it did, it didn't for long, certainly not long enough to achieve its current m…

I think you have it reversed, AWS accounts for most of Amazon's profit and is used to fund other ventures. > AWS revenue came accounted for 13% of Amazon’s total revenue. Of Amazon’s total $3.1 billion in operating income, 52% came from AWS. [0] [0] https://www.cnbc.com/2019/07/25/aws-earnings-q2-2019.html

Yes, so 52% of Amazon's operating income came from AWS.

Which means, conversely, 48% came from Amazon retail and other services.

In other words, it's not true to say that AWS subsidizes the rest of Amazon, or that the rest of Amazon runs at a loss.

Re: WeWork and Counterfeit Capitalism

#234

Post by short_sells_poo »

40acres wrote: post #74

For me, this whole WeWork fiasco has shown just how valuable the SEC and the S-1 filing process is. Let's be clear -- Neumann was fired because any investor who read the S-1 was mortified and wouldn't touch the company with a 10 foot pole. If anything, this shows how lawless the private markets are and the lack of guardrails that are present to protect private investors -- perhaps this will lead to some reform in the…

I think it also shows the stunning level of mass delusion in the SV VC space.

To this day I don't know whether the people who throw around and parrot the valuations actually mean it.

I mean, take the price of a small portion of an asset that is illiquid and in short supply, and assume the same price would apply for valuing the whole?

This sort of crap wouldn't fly amongst kids in kindergarten, so I'm astounded that it is being perpetuated on this scale.

I really feel like a massive reality distortion field has been pulled over our eyes by the inflow of easy money.

I don't know, it feels like deja vu. The same mistakes were done in the early 2000s, then 2008. Except we all think that back then people were idiots to not see it.

Re: WeWork and Counterfeit Capitalism

#235

Post by WalterBright »

munk-a wrote: post #224
WalterBright wrote: post #204

Earlier quoted context omitted.

I'm pretty sure Amazon was profitable all along - it's just that the profit was all spent on expanding the business. Hence, there was no taxable profit. Amazon was also able to make money selling products at little or no markup by taking advantage of the float. They'd collect money from the purchaser immediately, and would pay the vendor after 90 days. Then, Amazon would make interest on that money for the 90 days. I…

Bookstores provide a lot of service value, a decent bookstore will allow you to find similar material, allow you to browse as you please (instead of the skimpy sample pages), usually contain an expert that can offer advice and allow you to walk out with your purchase. Additionally it's common to see a heavy effort at investing in the atmosphere. Amazon has succeeded at beating bookstores in none of these categories -…

I buy a lot more books from Amazon than I did before Amazon existed. The reasons are simple:

1. I can get pretty much any book ever printed, not just newly printed books.

2. Prices are usually better.

3. The friction to buying them is very low.

If I want to buy books by the lot, such as every book in a series, I usually go to ebay.

Re: WeWork and Counterfeit Capitalism

#236

Post by lliamander »

munk-a wrote: post #224
WalterBright wrote: post #204

Earlier quoted context omitted.

I'm pretty sure Amazon was profitable all along - it's just that the profit was all spent on expanding the business. Hence, there was no taxable profit. Amazon was also able to make money selling products at little or no markup by taking advantage of the float. They'd collect money from the purchaser immediately, and would pay the vendor after 90 days. Then, Amazon would make interest on that money for the 90 days. I…

Bookstores provide a lot of service value, a decent bookstore will allow you to find similar material, allow you to browse as you please (instead of the skimpy sample pages), usually contain an expert that can offer advice and allow you to walk out with your purchase. Additionally it's common to see a heavy effort at investing in the atmosphere. Amazon has succeeded at beating bookstores in none of these categories -…

My favorite Pratchett book is probably Men at Arms, though he has many greats (and I have not even read all of them yet).

Re: WeWork and Counterfeit Capitalism

#237

Post by rossdavidh »

streetcat1 wrote: post #187
hef19898 wrote: post #143

Earlier quoted context omitted.

Totally agree with the last pint, people completely tend to ignore the effort and attention to detail Amazon puts into executive and planning. That plus a very sound strategy. Also Amazon was profitable, even if just barely, for the most time while growing appr. 20% constantly. Not comparable to, say, WeWork from what I know. But it shows how powerful that narrative can be.

The only difference between wework and amazon is the way they finance their money-losing ventures. Wework does that via the private market, hence the game is up when it needs access to the public markets. Amazon does that via AWS. AWS is the money that fuels the eCommerce side. The game will be up when: 1) Kubernetes will move AWS customers back to on-prem, or at least turn clouds into a commodity. Amazon knows that…

It's interesting that you bring up the importance of AWS to Amazon, nowadays, because...companies like Uber, Lyft, and WeWork spend a lot on AWS.

In other words, like Yahoo getting a lot of their late-90's advertising from dot-com bubble companies that evaporated in 2001, AWS is massively exposed to the current bubble in "we have so much VC cash we don't know what to do with it" companies. When that goes away (i.e. the next downturn), AWS will lose a huge chunk of their business all at once. It will be interesting to see what Amazon's bottom line looks like at that point.

Re: WeWork and Counterfeit Capitalism

#238

Post by pdonis »

munificent wrote: post #130
janee wrote: post #78

Earlier quoted context omitted.

> with the idea of profiting later on via the surviving monopoly I don't understand...if you undercut your competitors so you're the sole survivor, I don't see how profiting is a obvious end result. When you return prices to market value wouldn't competitors just appear again. Is predatory pricing really such a bad thing, I'd assume the market would just corrects itself later?

> When you return prices to market value wouldn't competitors just appear again. No, because they won't be able to raise enough capital to cover startup costs when investors know that the dominant player can just price dump long enough to starve any new company out. Relatively unregulated capitalism works OK when the product area naturally approaches a perfect market: - Simple easily compared products - Consumers hav…

> "Market" isn't magic fairy dust that spontaneously causes efficiency to appear from nowhere.

Neither is regulation. While it is true that "market failures" (imperfect markets) are common, it does not follow that regulation will improve them. In fact regulation usually makes things worse due to a combination of imperfect information (the regulators can't find out what they need to know to regulate efficiently) and regulatory capture (the regulators end up acting in the interests of the regulated industry instead of the consumers).

Re: WeWork and Counterfeit Capitalism

#239

Post by BenoitEssiambre »

lwb wrote: post #215
BenoitEssiambre wrote: post #30

This doesn't excuse WeWork being excessively unprofitable but low or negative returns don't directly imply anything "Counterfeit". I like to point out that low or negative real returns on stores of value have historically been the norm. Before financial systems existed, almost all investment had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or lan…

His assertion here is that "Endless money-losing is a variant of counterfeiting". I just don't see how that claim stands up to any real scrutiny. Counterfeiting is a totally different thing. To your point about negative real returns: just because it's been that way in the past doesn't mean that it's not a tragedy or that it's not possible to have reliable assets that keep their value over time. This is an especially…

>This is an especially desirable quality in currencies

This is an especially UNdesirable quality in currencies.

A deflationary currency cannot become mainstream without causing a huge amount of instability.

Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity.

When this trend becomes widespread enough, it causes global production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these very tokens.

Eventually when token stashes become too big and seemingly valuable, there will be people who want to buy real things with their stock of tokens. These tokens will be chasing fewer goods which will mean prices for stuff will rise (tokens will lose value). This may happen suddenly when people with large stockpiles of tokens notice that value is dropping and see that there are tons of other tokens waiting on the sideline ready to make it drop even further.

Hoarders are likely to rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This kind of drop brings the tokens closer to their natural intrinsic value of zero and resets the cycle, which can then start again, such is aggregate economics.

The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough.

It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly).

It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility will keep the speculation wild and cryptocoins unstable.

Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market real returns (risk adjusted, liquidity adjusted,) compared to real productive investment will always fluctuate increasingly wildly as they get more popular.

Re: WeWork and Counterfeit Capitalism

#240

Post by eldavido »

rossdavidh wrote: post #142
janee wrote: post #78

Earlier quoted context omitted.

> with the idea of profiting later on via the surviving monopoly I don't understand...if you undercut your competitors so you're the sole survivor, I don't see how profiting is a obvious end result. When you return prices to market value wouldn't competitors just appear again. Is predatory pricing really such a bad thing, I'd assume the market would just corrects itself later?

It depends on how hard it is to get going in that business. For example, in some markets (e.g. computer operating systems), it takes a big ecosystem of 3rd party companies making applications for your OS to be viable, so if you drive Blackberry out of business, you can own the smartphone market and crank up prices later. But, Google saw that coming and sponsored Android to prevent it, because they recognized that pat…

I don't know why this is so hard for people to understand (you obviously seem to get it).

WeWork is basically a hybrid bank/retailer. They take big, complex, slow-moving long-term commitments, just like a car rental company or a bank, and repackage them into shorter-term, small commitments, while managing risk and adding a bunch of value-added services.

I don't know about all this governance stuff or their growth rates, but on its face, that activity clearly DOES add economic value, and might be a viable business if executed well.

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