Social Media: Stick A Fork In It

Authored by Mark St.Cyr,

Let me make one thing clear before I start: It’s not that I’m saying “social media” is going away, as in no longer will be around or, will not have any use or value going forward. What I am stating is this: Everything that you’ve been told, as well as sold, about social media as it is currently argued and used, along with why the companies or platforms that supply it (i.e., the Snapchat™, Facebook™ Twitter™ et al) should be valued not just mere $Billions, but rather $10’s and $100’s of Billions is over. The signs are there for anyone paying attention…

The only ones (in my opinion) that have yet to grasp this are: the “experts”, fund managers, and analysts still telling, and selling its “So worth it!” drivel. Because, as I implied above: the signs are everywhere for those willing to look for themselves rather, than waiting for some “news flash” appearing in their “social feed” or “groundbreaking development” via the main stream business/financial media.

Hint: Remember when all the media went crazy touting why everyone needed to be on, and read their “expert” commentary on LinkedIn™? You know, right before its stock value suddenly plummeted facilitating the need or rescue via Microsoft™ for its very survival? It’s a point worth remembering for context.

Over the last few years I have not only taken the opposite view of what was once considered “gospel” in “The Valley” such as “the eyeballs for ads” model being the be-all, end-all metric for $Billion dollar valuations. But rather, in openly declaring such, I’ve been marked via that same congregation as a heretic for doing so. And that’s being kind.

Over the years their defence against such allegations were, of course, such things as IPO’s, stock valuations, and more. These “touchstones” at the time were touted to show why I was wrong – and they were right. Again, at the time, it all appeared or seemed irrefutable. After all, how could I question anything about what these “miracles” of tech provided, along with the near insatiable demand for their stock. For even an agnostic must surely agree, “tech” was proving and laying bare even the most skeptics’ arguments beyond the shadow of any and all doubt. However, that was when the manna-of-QE flowed freely.

Then – QE ended. And guess what else ended with it? Hint: “It’s different this time” went from holier-than-thou rhetoric to, “WTF is happening!” agnosticism. And it’s getting worse – much worse. Regardless of how many gnashing-of-teeth induced stupor one displays to the contrary.

Back in March I penned the article “Silicon Valley: From Rarified Air To Exhaust Fumes” which presented the following chart. To wit:

The reason why the above did as Rod Stewart famously stated “Every picture tells a story, don’t it?” Is because of just that. As I stated in that article as to why one needed to pay attention was the following. Again, to wit:

“The issue here is that process has one key attribute: It’s the same pattern we’ve seen before, but now it’s represented in days. From IPO to today. What had once taken well over a year has morphed from months to now days.”

What truly puts the stamp of reality on what it says today, is the fact, that even as the “markets” have since (once again) risen to never before seen in history all time highs since that post some 3 months ago. The above have done nothing but either vacillate right where they stood, or worse, have lost even more value. (See “IPO to save the IPO world” Twilio’s current value for further clues.) And two of the three were supposed to be the “proof” that proved all the naysayers such as yours truly wrong. In retrospect, it seems they have done just the opposite.

But making or implying such a blasphemous statement as “social media is dead” and not arguing the same for one of this “religion’s” most cherished houses of worship without addressing it squarely would be insincere. Of course that would be the “idol” commonly known as Facebook™(FB.) And yes, I still believe (and have continually argued) FB along with social media in general – is the AOL™ equivalent of the dot-com era. Here’s why…

Remember all the fanfare they released just prior to the latest earnings report? For those having a hard time it was a statement declaring they had reached “5 million” small business advertisers. Here’s what I stated in a subsequent article. To wit:

“As of today all the estimates are that they’ll handily beat and some analysts are raising their targets. It’s very well they could, especially in today’s world of earnings reporting alchemy. However, one thing which caught my attention was the sudden touting a few weeks back that they had hit “5 Million advertisers.” Small businesses noted as the “key driver.”


“Sound great!” many are saying, and, in-truth, it is a worthy milestone. However, I see the timing as possibly a little suspect, here’s why… (I make this point for it has become near laughable how nearly all upcoming “tech” earnings reports now suddenly coincide with an ever-growing list of preceding announcements of grandiose ideas that are alluded to be right around the corner (like next week!) of flying cars, self driving trucks, rocket rides to space, virtual reality, just to name a few.)


Facebook as of late has been in the news with nothing but negative reports with a slew of horrendous acts being broadcast via their platform. e.g., Rape, kidnapping, beatings, and others. One of the concerns over all this (apart from the issue itself) was a possible backlash from potential advertisers. And who could blame them, and there lies the possible rub…


As I implied with the sudden “5 million” hoopla, what I’m asking is this: Is the addition of these stated 1 million plus new small business advertisers a replacing (therefore a diversion as to squash attention) for the potential of 1 or 2 (or more) large buyers who may have pulled ads?


In other words, if they’ve added so many “new” small business users – shouldn’t the ad revenue explode this report with all things being equal? I believe this is the metric to watch for.”

As per FB CFO Wehner: He once again reaffirmed ad growth will come down “meaningfully.”

Is that a “Wait…what?” moment, “Oh…oh?”, or combination of the two? For it just seems a little confusing on how such a statement could even be expressed (via the CFO no less) when you’re told both the “buyers” (see above “5 million” reference) of those ads, along with the users (see the only metric that’s supposed to matter e.g. 1.94 billion MAU) to view them have both increased.

But not too worry. Because in what seems to be the now “playbook” (See Elon Musk and Jeff Bezos for clues) for all that is “tech”, there’s a reason why one should not pay attention to such things and focus on others. To wit:

Facebook now has a plan to eat another $350 Billion IT market.

Or said differently (as in my opinion) – Zuck and crew found another narrative they believe they can spend money on and keep all the “happy” talk perpetually happy. After all – spending $Billions on companies that seem to never produce a nickel in net profit warranting that spending is what FB has come to do almost better than anyone else. See WhatsApp™, Instagram™, and more for clues. Or, if you want to think of this way: Snapchat is supposedly the Instagram killer – and how’s that business model working out? Sorry, too soon?

Isn’t it funny when it comes to anything involving “The Valley” it always seems it’s about the next big “buy” that’ll be the reason why some insane P/E or valuation will be, “So worth it!” Never the core product that is/was supposedly its raison d’être. And it’s always just around the corner, or as close as the shareholders checkbook. Funny how that works. Or shall I say, “did?”

But then again it does seem so old-fashioned to worry about things like net profits when all one needs to do is use or follow the example below as a guide for growth in the #1 metric touted via “The Valley.” To wit:

“A Russian Went Inside A Chinese Click-Farm: This Is What He Found”

Makes you wonder how much further “value” all that “Asia” growth means to advertisers going forward. But then again…

It’s different this time, no?  Especially if advertisers themselves are beginning to see the light. See P&G™ for clues.

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Criminal Minds

One of my simple pleasures in life is reading the Daily Post, which is Palo Alto’s own little daily newspaper. It’s a morning tradition for me to walk the dogs, grab the (free) paper from a newstand, and read it during my pre-dawn breakfast.

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German paper: Iraqi forces are ‘monsters not heroes’

Iraqi forces “are monsters not heroes” and the US stood by and watched as they tortured civilians, German magazine Der Spiegel reported. The publication’s German-Iraqi journalist, Ali Arkady, who accompanied the forces at the start of the Mosul offensive, returned with numerous stories of torture, looting, rape of both men and women and executions. Arkady stated that he was an eye witness to the first torture and execution session on 22 October 2016 when the Quick Reaction Force arrested two young men at the Qayyarah Airfield south of Mosul and tortured them for several days before executing them. He said civilians were regularly assassinated for mere suspicion without concrete proof of their guilt. In the case of the village of […]

OPEC “In Terrible Bind” As Monitoring Committee Proposes Nine-Month Extension

In the end, the OPEC Vienna meeting – which technically won’t conclude until tomorrow – was anticlimatic, with the recommendation by Joint OPEC-Non-OPEC Ministerial Monitoring Committee in line with what was “trial ballooned”, and leaked in advance:

The JMMC considered several scenarios presented by the JTC regarding the extension of the Declaration of Cooperation and decided to recommend that the production adjustments of the participating countries be extended for nine months commencing 1 July 2017. In this regard, the JMMC should continue monitoring conformity levels as well as market conditions and immediate prospects, and recommend further adjustment actions, if deemed necessary.

As such, OPEC and non-member producers are likely to “clinch” a deal on Wednesday extending output cuts by nine months in hopes of clearing the huge global stock overhang and prop up the price of crude.

In advance of the formal recommendation, there was a lot of noise as OPEC summits tends to create, and non-stop headlines from the newswires.

Saudi ally Kuwait signaled on Wednesday OPEC could discuss deepening the cuts, in what would come as a positive surprise for market bulls, but hopes quickly faded after a key committee recommended keeping the curbs unchanged. Two OPEC sources told Reuters the ministerial committee comprising OPEC members Algeria, Kuwait, Venezuela, current OPEC president Saudi Arabia and non-OPEC producers Russia and Oman recommended keeping the cuts “at the same level.”

Further, according to Reuters, Saudi Energy Minister Khalid al-Falih gave the thumbs up when asked whether the committee had agreed on a nine-month extension.

Most other OPEC ministers including Iraq’s had already voiced support for extending cuts by none months. One potential last minute wildcard is Iranian Oil Minister Bijan Zanganeh, who clashed with Saudi Arabia in many previous OPEC meetings, and has so far kept a low profile, saying extensions of six or nine months were possible. Zanganeh is due in Vienna later on Wednesday. As a reminder, Iran has already received an exemption slightly to raise output, which has been curtailed by years of Western sanctions. Iran’s production has been stagnant in recent months, suggesting limited upside potential at least in the short term.

Before the end of the year, prices may go above $55 a barrel,” Algerian Energy Minister Noureddine Boutarfa told Reuters before the committee meeting, saying an extension by nine months should help clear the glut by the year-end. Of course, they may also plunge to $45 or lower, where they were as recently as two weeks ago following the violent liquidation of all of Pierre Andurand’s long oil positions at steep losses.

Justifying the extension, Saudi Arabia and Russia said that prolonging output curbs by nine months rather than the initially planned six months would help speed up market rebalancing and prevent crude prices from sliding back below $50 per barrel, even though as we showed last week, the math behind a 9 month extension still does not work out.

Despite the seeming consensus, a gray cloud lingered throughout the Vienna meeting, with one main question unanswered: is OPEC still the “marginal price setter”, or has OPEC lost control of the market and the “war with shale”, as the following recent chart from Goldman suggests:

Some quickly came to the cartel’s defense: “OPEC has already achieved a lot. They stopped the oil market surplus from building even before they started cutting,” said Gary Ross, head of global oil at PIRA Energy, a unit of S&P Global Platts.

Others, however, such as Erik Norland, senior economist at CME Group unloaded on OPEC, telling Bloomberg in an interview that “OPEC is in a terrible bind, they’ve lost control of the market, they’ve lost control of prices and are trying to figure out the least bad option.”

His complaints should be familiar: the increase in non-OPEC production, particularly in U.S., has cost the group market share while deeper output cuts would worsen that situation.  Norland sees OPEC extension of cuts priced in, even as U.S. production likely to increase further, with significant downside risk:

“It wouldn’t surprise me to see oil prices re-testing $40 or $35 a barrel.”

He also predicts that OPEC is more likely to cheat on cuts in 2H, despite strong compliance so far, citing a “natural tendency” of OPEC members, especially Iraq to fib. He also predicted that barring any major supply disruptions, he sees lower prices, though sees risk from “political disturbances” in producing nations

“Calling it fundamentally bearish but geopolitically bullish is probably the right combination.”

* * *

Finally, while the probability is small, there is a modest chance of surprise in tomorrow’s final statement and according to Reuters, a substantial additional cut was unlikely, one OPEC delegate said, “unless Saudi Arabia initiates it with the biggest contribution and is supported by other Gulf members“. However, this is where our “math”, and Norland’s skeptical assessment come into play: “Production cuts cause higher prices which will incentivize more production for the U.S. shale oil and reduce the impact of the production cuts. So it’s a bit cyclical,” said Sushant Gupta, research director for consultancy Wood Mackenzie.

Judging by the commentary from OPEC members, a surprise cut is unlikely. Algeria’s Boutarfa said he believed stocks remained stubbornly large in the first half of 2017 because of high exports from the Middle East to the United States. “Thankfully, things are improving and we started seeing a draw in inventories in the United States,” Boutarfa said, adding he believed that inventories should decline to their five-year average by the end of 2017.

There is one problem: it’s not the US where the marginal demand is currently set, but China, and as we reported last night, Chinese demand may be about to fall off a cliff if early indications that China’s Strategic Petroleum Reserve is approaching capacity are confirmed. Should that be the case, some 1.2 million in oil demand is about to be eliminated overnight, forcing OPEC to quickly sit down again and hammer another, far deeper production cut. For now, keep an eye on the price of crude – should the recent jerk higher start to fade as the “news is sold”, OPEC will be forced right back to the drawing board on very short notice.

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Lebanon’s Aoun rejects Arab-US summit declaration

“What the (Lebanese) Foreign Minister said about the Lebanese position regarding the Riyadh Declaration is 100 per cent correct,” Aoun said in an interview with the Press Club delegation. Lebanese Foreign Minister Gibran Bassil announced that his country was surprised by the content of the Riyadh Declaration which was issued on Sunday after the conclusion of the summit in Riyadh. “We were not aware of the Riyadh announcement. We understood that no statement would be issued after the summit, and we were surprised by its issuance and content while on the airplane back,” Basil said. “We say that we adhere to ministerial statement and the policy of distancing Lebanon from external problems to preserve Lebanon, its people and its unity,” […]

Private Equity Employs Unusual New Strategy In Oil & Gas

I’ve written a lot recently about the surge in private equity for natural resources. With PE firms in the energy space being particularly dominant — holding an estimated $156 billion in funds for global projects. And this week, one major investment group cut a unique deal to deploy those funds. With the terms suggesting some interesting shifts underway in how these buyers pursue new assets. The investor is Carlyle Group. And the target is not a buyout — but rather a joint venture, with major U.S. shale player EOG Resources. Carlyle…

The Keynesian Cult Has Failed: “Emergency” Stimulus Is Now Permanent

Authored by Charles Hugh Smith via OfTwoMinds blog,

Can we finally admit that eight years of following the Keynesian coloring-book have not just failed, but failed spectacularly?

What do we call a status quo in which “emergency measures” have become permanent props? A failure. The “emergency” responses to the Global Financial Meltdown of 2008-09 are, eight years on, permanent fixtures. Everyone knows what would happen if the deficit spending, money-printing, zero interest rates, shadow banking, asset purchases by central banks and all the rest of the Keynesian Cult’s program stopped: the status quo falls apart.

Keynesianism Vs The Real World

Let’s start by reviewing the core contexts of the economy.

1. The dominant socio-economic structures since around 1500 AD are profit-maximizing capital (“the market”) and nation-states (“the government”).

2. The dominant economic theory for the past 80 years is Keynesianism, i.e. the notion that the state and central bank must aggressively manage private-sector consumption (demand) and lending via centrally planned and funded fiscal and monetary stimulus during downturns (recessions/depressions).

Simply put, the conventional view holds that there are two (and only two) solutions for whatever ails the economy: the market (profit-maximizing capital) or the government (nation-states and their central banks). Proponents of each blame all economic and social ills on the other one.

In the real world, the vast majority of Earth’s inhabitants operate in economies with both market and state-controlled dynamics in varying degrees.

The Keynesian world-view is doggedly simplistic.  The economy is based on aggregate demand for more goods and services.  People want more stuff and services, and as long as they have the means to buy more stuff and services, they will avidly do so (this urge is known as animal spirits).

The greatest single invention of all time in the Keynesian universe is credit, because credit enables people to borrow from their future earnings to consume more in the present. Credit thus expands aggregate demand for more goods and services, which is the whole purpose of existence in this world-view: buy more stuff.

But credit, aggregate demand for more stuff and animal spirits make for a volatile cocktail.  The euphoria of those making scads of profit lending money to those euphorically buying more stuff with credit leads to standards of financial prudence being loosened.  In effect, lenders and borrowers start seeing opportunities for profit and more consumption through the distorted lens of vodka goggles.

Lenders reckon that even marginal borrowers will earn more in the future and therefore are good credit risks, and borrowers reckon they’ll make more in the future (i.e. the house they just bought to flip will greatly increase their wealth), and so borrowing enormous sums is really an excellent idea—why not make more money/enjoy life more now?

But the real world isn’t actually changed by vodka goggles, and so marginal borrowers default on the loans they should never have been issued, and lenders start losing scads of money as the value of the collateral supporting the defaulted loans (used cars, swampland, McMansions, etc.) falls.

Oh dear! The hangover of credit expansion is brutal, as lenders go bankrupt, wiping out their owners, and borrowers go bankrupt as they are unable to make their payments or sell the collateral to pay off the loan.

Just as credit expansion feeds on itself—everybody’s making a fortune buying and flipping houses, let’s go buy a house or two on credit—the hangover is also self-reinforcing: the value of collateral falling pushes more marginal borrowers into insolvency, and the lenders who made the loans are pushed into insolvency as defaults increase and collateral melts like ice in Death Valley.

In the Keynesian universe, this self-reinforcing contraction of imprudent credit and widespread losses of speculative wealth are Bad Things. Very Bad Things.  Important, Powerful People tend to own issuers of credit (banks), and losses are not something they signed up for.

If all the Little People stop borrowing more money, the Powerful Owners of the credit-issuing machines (banks) can no longer reap enormous profits from issuing more credit, and that is a Very Bad Thing.

As a nasty side-effect of the credit hangover, businesses that depended on people borrowing more money to buy more stuff also shrink, and this contraction is also self-reinforcing: as sales decline, businesses must cut costs to stay solvent, which means laying off employees, abandoning under-utilized offices, closing factories, etc.

The euphoria of credit expansion turns to painful contraction.  Nobody’s happy in the hangover phase, and people naturally cry out, Somebody do something to stop the pain!

The Keynesian answer is simple: the government should borrow and spend lots of money to replace all the money that the private sector is no longer borrowing and spending, and the central bank should lower interest rates and create a lot of new money that private banks can borrow cheaply to loan out to private-sector businesses and consumers.

In the simplistic Keynesian Universe, the credit contraction is like a temporary drought: all the government and central bank have to do to fix the drought is release a flood of new money onto the parched landscape of the credit-starved private sector, and aggregate demand and new loans will blossom like spring flowers.

Horray for central states and banks! Given the power to borrow (or create out of thin air) as much money as they need to flood the private sector with fresh money and credit, the drought ends, animal spirits are revived, people get to buy more stuff by promising to give their future earnings to banks and Powerful Owners of banks are once again earning great gobs of cash from lending to the Little People (i.e. borrowers in danger of becoming debt-serfs, whose earnings go largely to service their debts).

In the crayon-coloring book of Keynesian ideology, this is The Way the Universe Works. The problem is always a temporary drought of aggregate demand caused by a temporary drought of private-sector credit, and the solution is always a state-central-bank issued flood of money and credit: the government borrows and spends more money to replace declining private spending, and central banks make it cheaper and easier for private banks to issue new loans to enterprises and Little People.

That this coloring-book ideology no longer describes the problem or solution is incomprehensible to the Keynesians.  That neither “the market” nor “the government” can solve the current set of problems is equally incomprehensible—not just to Keynesians, but to everyone who unthinkingly accepted that the market and/or the state can always fix whatever problems arise.

Oops! The Flood of Money and Credit Didn’t Fix the Economy

The post-credit/asset bubble crashes in 2000 and 2008 and the state/central-bank responses–fiscal and monetary stimulus, a.k.a. flood the land with borrowed money—seemed to confirm the Keynesian world-view: marginal borrowers, lenders and collateral all went south and the stimulus restored animal spirits, which promptly inflated a new credit/asset bubble.

But this time around, the drought never ended, no matter how much money was poured into the economy, and the earnings of borrowers stagnated or declined. (Recall that debt is borrowed from future earnings; if earnings decline, it becomes much more difficult to service existing debt, much less borrow more.)

Federal debt has more than doubled just since 2009 (and tripled since 2001) as the government flooded the land with fiscal stimulus:

Central banks have flooded the global economy with trillions of dollars, euros, yen and yuan, and continue to do so to the tune of $200 billion per month:

Central banks have dumped over $1 trillion in new monetary stimulus in the first four months of 2017—eight years after the “emergency” stimulus began:

Meanwhile, wages are stagnant or declining for the vast majority of wage-earners—even the highly educated:

Household income has fallen across the board:

Stagnating incomes is not a new issue for the bottom 90%; it’s a structural reality going back four decades:

Clearly, fiscal and monetary stimulus policies that were supposed to be temporary are now permanent.  That isn’t what was supposed to happen.

Earnings were supposed to rise once private-sector credit and consumption returned to expansion.  As we see here, bank credit and consumer credit have surged higher, but the incomes of the bottom 90% have gone nowhere.

Meanwhile, total debt—government, corporate and household—has rocketed higher, more than doubling from 280% of GDP in 2000 to 584% of GDP in 2016:

As if these weren’t bad enough, wealth and income inequality have soared during the era of permanent fiscal-monetary stimulus:

In sum: nothing has worked as the Keynesians expected.  Instead, state/central bank measures that were supposed to be temporary are now permanent, and the expansion of private-sector debt has failed to “trickle down” to earnings.

The Keynesian solution—borrowing from future earnings to “bring consumption forward”—has expanded consumption at the cost of enormous increases in debt throughout the economy, which has exacerbated income-wealth inequality and declining real incomes.

Can we finally admit that eight years of following the Keynesian coloring-book plan have not just failed, but failed spectacularly, and not just failed spectacularly, but made the economy even more vulnerable and fragile, as more and more future income must be devoted to service the skyrocketing debts?

Isn’t it obvious that there are deeply structural problems in the economy that inflating yet another credit/asset bubble won’t fix?

Clearly, the real-world economy does not function like the simplistic Keynesian coloring-book model.

What Comes Next: Contraction

Given the extraordinary failure of both Keynesian stimulus and private-sector credit growth to create a self-sustaining cycle of expansion whose benefits flow to the entire workforce rather than to the top few percent, what can we expect going forward? Can we just keep doubling and tripling the economy’s debt load every few years? What if household incomes continue declining? Are these trends sustainable?

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