The Twitter In The Coalmine: The End Of Asset Price Inflation?

So Twitter (TWTR) released some user figures, and they are not good. Bottom line, the company is losing money, and its user-base is shrinking—which is why the stock took an 11% tumble in after-hours trading as I write these words. From a high of 71.31 back in December 2013, to 42.62 at the close on Tuesday (April 29)—and then down to 37.83 in after-hours trading once the news came out.

In other words, Twitter’s stock has fallen nearly 50% in four months. Eeesh

For those of you keeping score, this is the second internet bubble, or “Bubble 2.0”. And unlike the first internet bubble (which at least had the decency to be based on actual profits and revenues), the “social media revolution”—Facebook, Twitter, WhatsApp, etc.—eschewed profits (or even revenues!) for the sake of building traffic and user bases. Users and traffic has been the metric to measure the value of a social media company.

I know—crazy. Yet somehow, by some weird mind-control power, all the social media companies—Twitter among them—convinced Wall Street and Main Street investors that their actual revenues and profits didn’t matter: All that mattered were the numbers of people who used their services. Twitter made no money? So what! It had 200 million users, and growing.

So from the point of view of investors, they would never see a profit via a dividend or some other yield—they would only see a profit if the stock price rose.

In other words, people weren’t investing in social media companies—they were speculating, hanging their valuations on user numbers and traffic.

Twitter, of course, failed to deliver on the metrics. So Twitter’s stock has taken a beating. And will probably continue to take further beatings, as its numbers flatline.

But Twitter and its situation aren’t important—what’s important is, the fall in Twitter’s stock price points to the single big problem we have been having since 2008: Investors don’t care about yields, only asset prices.

In other words, and to repeat: No one is investing—they are all speculating. Nobody is buying an asset—be it equities, bonds, real estate—and sitting back contentedly receiving an 8% or 9% yield. No, everyone is buying with an eye to a sale—hopefully soon—without even bothering to cash the laughably tiny dividend check.

The reason is simple: Since the Federal Reserve has implemented the zero interest-rate policy (ZIRP) and kept Treasury yields absurdly low by way of Quantitative Easing, nothing—no investment class at all—is delivering yields much above 6%. By flattening the yield curve on the Treasury bonds, the Fed has also flattened the yield curve of every other asset class.

So investors depend on the rise in the asset’s price—and not the dividend, rent, coupon or yield it can produce—for their profit.

The Fed has created asset-price inflation—it was their avowed intention! They wanted to shore up Treasury bond prices and keep their yields low.

But from the point of view of investors, constantly rising asset prices is actually a speculative mania: Investors are chasing rising asset prices, and instantly dumping them the second they fail to deliver on whatever arbitrary metric their valuation depends on.

Twitter’s price is tanking not because investors suddenly realized it didn’t produce a profit—after all, it never did: Twitter’s price tanked because investors realized that the jig was up. I am writing on Tuesday evening, but I have no doubt that by the time you read this on Wednesday after the markets open, Twitter’s share price will have fallen even further.

Because of the Fed’s policies, investing has essentially become a game of musical chairs: Nobody knows when the music will stop, so the winners turn out to be the nimble, not the wise. Your market acument matters little—what matters is your ability to get in and most especially get out as quickly as possible from the markets.

And this is happening across all asset classes. Because you see, all asset classes are overpriced, all of them a single announcement away from a bad, bad tumble.

Now what happens when all asset prices collapse at the same time? Or maybe not all, but just a bunch, all at once?

We’re tracking this at LiraSPG, and planning for when this inflated equities market will end. The whole point of our shop is to game-play and strategize contingent events—but this crash in asset prices isn’t a “maybe”: It’s an inevitability. Asset price inflation will end.

Why will it end? Because all bubbles end: Nothing can rise perpetually in price, all the way to infinity.

Now, when will it end? When everyone realizes that they have all been playing a game of musical chairs. The winners will be the ones who sell first—and everyone will realize this. So once the first few sell, everyone will be rushing for the exits—and that’s when the crash will happen.

Twitter is the blue-canary in the coalmine. It is a warning investors—especially equities investors—should heed.

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