Investment bankers are very slow learners. That’s the only lesson that can be drawn from the catastrophic failure of the Uber Inc (NYSE:UBER) initial public offering. As this column has been writing for years, it was perfectly obvious that a loss-making taxi service with software attached was never going to be worth $100 billion. Frankly, despite all the cheap money thrown at venture capital, the IPOs in this cycle (which I take to be more or less over) have been very dull indeed. Will we get something more interesting next time around?
IPOs go in cycles, like the economy in general. In the last 25 years we have seen three of them: an exuberant over-the-top cycle in the late 1990s, then a subdued cycle in the 2002-07 boom (the most important IPO of which was Alphabet Inc. (Nasdaq:GOOG)) then a 2-phase IPO market this time, with an early exuberance containing Facebook Inc. (NYSE:FB) and Twitter Inc. (NYSE:TWTR) followed by a second burst this year. Following the belly flops of Lyft Inc. (Nasdaq:LYFT) and Uber, that second phase should soon be drawing to a close, at least as far as the large issues are concerned.
This cycle of IPOs has been very uninteresting. Facebook and Twitter never appeared to have much point and have now become engines of social control by our society’s less desirable elements. Uber and Lyft are mere taxi services; their software is clever but is in no way unmatchable by other companies — the New York taxi system’s Curb performs the same functions. When you compare previous bursts of IPOs, the innovations appear pathetic. As Peter Thiel said in 2011: “We wanted flying cars, instead we got 140 characters.”
Compare the IPOs available during the baseball career of Ty Cobb, when that clever baseball player managed to be an early stage investor in both General Motors (NYSE:GM) and Coca-Cola (NYSE:KO) and you will see what I mean; there is just no comparison. Indeed, if Cobb had been traded to the Yankees he could also have invested in IBM, which went public in 1911. Even in the 1980s in the tech sector alone, we got Apple (Nasdaq:AAPL) Microsoft (Nasdaq:MSFT) and Oracle Corporation (NYSE:ORCL).
The quality of 2029’s IPOs is unlikely to be as high as that of the burst around 1910, but we can at least hope for something better than the current cycle’s miserable showing. What kind of IPOs we get will depend on the macroeconomic and monetary policies followed in the decade between now and then. There appear to be three main possibilities:
- Bernie Sanders and Alexandria Ocasio-Cortez dominate the next decade. In that case, we will get IPOs chosen by government, if we get any at all.
- We continue to have low or ultra-low interest rates, with the Federal Funds rate reduced to zero or even below in the next downturn. In that case, we will have economically unproductive IPOs, of the kind seen in the last decade.
- (very unlikely) Policies in the next decade could include higher interest rates and a cleansing of the current vast collection of bad investment. In that case, the most interesting but least likely, we may move towards the 1910 situation and have IPOs that represent true progress.
In the first case, the Ocasio-Cortez economy, IPOs will be few and far between, as the market will probably be at best subdued, however stimulative the socialists’ monetary policy. IPOs will be chosen by government; they will include well-connected “clean energy” companies like Solyndra. Another favorite will be data manipulation companies in healthcare, which by that stage will be controlled and paid for by government, thus subject to massive cost overruns. What we will not get is innovation; if you can imagine an IPO market in the 1970s Soviet Union, that’s what we will have. By definition, Gosplan doesn’t innovate, because innovation requires the unplannable.
The next case, a basically capitalist economy but with continued low interest rates, is the most likely trajectory for the next decade and will not give us useful innovation. Decade after decade of government setting interest rates artificially a long distance from their equilibrium level will have reduced productivity growth to zero and focused investment on real estate and scams of one kind or another. The Cantillon Effect, identified three centuries ago by an observer of France’s failed Mississippi Scheme, will drive yet more money into unproductive assets and away from true innovation.
IPOs in a low interest rate economy will be concentrated on evading borders and regulation and extracting rents from bloated government-distorted systems. In healthcare, for example Big Data will be used to produce ways for healthcare providers to game government and insurance company reimbursement systems, providing insurance only for those known to be healthier than average, or treatments from which the returns are known to be higher than average. Genomic data mining will be especially useful in both these endeavors. Large amounts of money are already being devoted to this area, which is proving especially scam-productive. Regulations will be introduced against these practices, but the regulations will themselves be gameable. In addition, smartphone therapies will be introduced for non-fatal but chronic conditions, such as mental illnesses, where consumer fears can be played upon to extract additional returns.
In education, Big Data will be used, not to provide students with better educational opportunities, but to enable education providers to get round national and regulatory obstacles, earning returns for the providers out of proportion to the cost of inputs. Likewise, Big Data will be used as a mechanism of social control, both by governments and by monopolistic data providers such as Google and Facebook; IPOs will be undertaken, not for competitors to these behemoths, but for suppliers to them, enabling them to carry out more effectively their self-appointed mission of social control.
Finally, in the least likely of the three trajectories outlined above, somebody or some economic event will have convinced governments that real positive interest rates, near their natural level, are an essential input to a healthy economy. In this case, we will have doubtless suffered a massive stock market meltdown in the intervening decade, but hopefully by 2029 the market will be beginning to recover and, more important, the human resources of entrepreneurship and innovation will be devoted to fields that truly provide opportunities for the advancement of civilization and the betterment of mankind.
By definition, truly innovative IPOs are the most difficult to predict. An observer in 1989 would not have predicted that most IPOs in 1999 would relate to the Internet, which in 1989 was an obscure communication channel between scientific laboratories. Similarly, fifteen years earlier, few would have predicted the personal computer revolution. Conversely, we have been predicting the advent of household robots since the late 1950s, yet none have ever appeared at more than the simplest level.
Nevertheless, we can at least express some aspirations as to what we would like to see in a 2029 IPO boom, recognizing that in some cases technology simply will not move that quickly while in other cases the dead hand of government will regulate away possibilities that would otherwise exist. We can at least assert that in a truly innovative 2029, IPOs will not be confined to the realm of clever software applications; if that’s all we have, we will know that macroeconomic or regulatory policies have gone terribly wrong.
In a truly free market, it is likely that the biggest IPO opportunities of 2029 will occur in the field of genetic engineering. It is now almost two decades since the human genome was sequenced, yet few truly innovative technologies have emerged from that achievement. The most likely such advance before 2029 is the advent of techniques that will enable parents to detect defects and susceptibility to diseases in the genetic makeup of their potential offspring, eliminating such possibilities. An ability to detect and eliminate Trisomy 21 without abortion would for example be highly attractive to the many rich country older parents there will be in 2029. Beyond that, what genetic manipulation possibilities emerge is a question of what Western-country regulation will allow; there is no question the market is there and not much question that the technology could fill the need if it were allowed to.
A second area of 2029 IPOs is robotics. We still will not have general-purpose home robots – those are probably 20-30 years away, but robotics in all areas outside the home will explode. Retailing and wholesale distribution in particular will make great use of them. Automated shopping services will be more popular, because we will no longer be dependent on a dozy minimum-wage human to select the goods on our list, but instead will have it done by a capable robot. On the other hand, we probably still will not have self-driving cars except in carefully limited areas, because of the problem of rain and more particularly snow in most of the United States. Indeed, my own hometown, with ample rain and snow, but also steep hills, badly marked streets and giant potholes, is a kind of self-driving car nightmare, probably the last place in the United States where the technology will be applied.
In the software field, 2029’s IPOs are likely to include protections against data intrusion, that lock up your data so Facebook, Google, the government and Russian/Chinese bots cannot get hold of it. In a society increasingly resembling George Orwell’s “1984” protections against Big Brothers of every kind, government and commercial, will be essential and the market will doubtless provide them.
Finally, we are currently at the same state with regard to commercial space exploration as the Elizabethans were with respect to transatlantic colonization. We have the basic technology, and decades have been spent developing it further, but the costs and risks are still too high. However, by analogy with the Elizabethans, by 2029 there may be the first chartered companies, which buy the rights to mine a particular asteroid, fund themselves through an IPO, and then set out to do the rocket development and robotized geological work necessary before an asteroid mining operation can begin. If 2029 offers you such an opportunity, and the asteroid chosen looks promising, you should take it!
To assume another decade of “funny money” or, worse, socialism, is to condemn the future to be less interesting than the past. Let us at all costs resolve to avoid that.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)