May 22, 2012, 12:02 a.m. EDT
How Facebook could destroy the U.S. economy
Commentary: Too-big-to-fail mentality replays the dot-com bubble
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By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) — Facebook just joined a “troubled club,” warns the Economist. Now it’s just another “endangered public company.”
Yes, endangered. The number of public companies has declined 37% since 1997. The number of IPOs has dropped from 311 annually before 2000 to 99 the past decade. Meanwhile, the smart CEOs and the Super Rich are “going private,” to avoid government red tape restricting capitalism.
Reuters
Over at BusinessWeek they’re warning investors that the growing number of “cutesy mascots” is a dangerous reminder “of the dot-com boom’s irrational exuberance.” They’re also red flagging new reports that “more Chinese investors are betting on U.S. start-ups.” And feeding the flames.
What’s going on? Facebook’s in trouble, that’s what. Now in the crosshairs of public scrutiny, everybody’s taking potshots. And the warnings are just beginning:
Everything from Facebook FB -8.90% being “too big to fail or succeed” to a Chicago attorney warning that the stock could “crater” if Facebook can’t grow revenues 41% annually for five years to “sustain its value” to a warning that Facebook’s one of the “Black Swans” that could eventually bring down the global economy.
Let’s begin, shining the bright light of behavioral science and psychology on what’s going on:
Facebook’s billion ‘friends’ in denial — deja vu the 1999 bubble mania
Behavioral economics is the new “psychology of denial.” Yes, it’s like falling in love. You can’t hear, can’t see the warning signs. Till after. After months of hype building up to this IPO, you’re convinced Facebook is your soul mate, that not getting shares in that IPO would leave you devastated, rejected by your true love. And nothing anyone says about the risks will change your mind. That’s the “psychology of denial.”
There are four main reasons for this pervasive psychology of denial among Main Street’s 95 million investors: First, investors hate admitting we’re irrational and ill-informed, cling to the fiction they’re rational. Second, optimism is the investor’s worst nightmare, but Americans still act optimistic no matter the odds. Third, Wall Street loves investors who are irrational, uninformed and optimistic, they’re easy to manipulate. Fourth, American investors are by nature trusting folks, want to believe Wall Street’s telling the truth, even though most of the time they aren’t.
The Facebook mystique is so powerful today that in our minds Facebook truly is too big to fail. Facebook will never fail, Facebook will just keep growing indefinitely at rates that would remind us of the old dot-com mindset of 1999, hail Facebook, you are too big to fail and nothing will change our minds.
And paradoxically, that’s exactly why Facebook is the ultimate economy-killer.
Could our friendly Facebook really bring down the economy?
Global economy-killer? Yes, Facebook has now been added to my list of global macroeconomic triggers (deadly unpredictable Black Swans like the dot-coms in 2000, subprimes in 2008) that the denial system driving the collective brain of American investors will simply tune out, till it’s too late. Till a crash takes the economy down again.
And, yes, it may take years, or trigger in 2012. We watched the same kind of buildup to the 2008 crash for a few years in advance, as credible warnings were ignored. Yes folks, Facebook is that dangerous to our economy and to the global economy.
You think I’m kidding? Not one bit. In fact Facebook is now one of my top-12 economy-killing triggers, any one of which could ignite a firestorm.
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By Paul B. Farrell, MarketWatch
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These include: euro zone ills, overpopulation, China, climate crisis, Peak Oil, Fed’s cheap money, 2012 elections, austerity vs growth, high-frequency trading, extreme capitalism, and the Black Swan nobody ever sees coming till it hits, you know, a trigger like the 1914 assassination of an unknown archduke that ignited a world war.
Facebook’s user success is a classic example of investor denial
In today’s new age of behavioral economics all this extreme denial creates an illusion that misleads us by minimizing risk in our brains. Remember Treasury Secretary Hank Paulson’s classic remark before the 2008 meltdown, “best economy in my career.”
Seriously, you keep asking, does our beloved too-big-to-fail Facebook really have that kind of economy-killing power? You bet. At least one of our too-big-to-fail banks like J.P. Morgan has trillions in hard assets, hundreds of billions in capital, and huge leverage with the Fed and Treasury.
But Facebook is just the opposite, it is too big to succeed. The cash value is now in the pockets of the insiders who are cashing out with the IPO. The real “value” is in the minds of a billion friends, which is still a collective illusion that must be kept alive with future cash.
There’s a huge possibility Facebook will lose big in the aftermarket and eventually our love affair with the stock will evaporate. That’s short-term thinking, like a day-trader.
Here we’re more concerned with the big picture long-term issues, where American investors are blowing a newer, bigger bubble, a Black Swan that truly can bring down the economy, bigger than 2000 and 2008 combined.
Don’t say I didn’t warn you. Oh … I almost forgot, you can’t see or hear any warnings, you’re still in love with Facebook.
Is Facebook the sock puppet of today’s new dot-com bubble?
When the honeymoon euphoria wears off (remember Kim Kardasian’s 57 days of bliss), and reality sets in, please remember the following remarks we just got from Andrew Stoltmann, a Chicago attorney and investor advocate. And remember that 93% of the time Wall Street insiders and their pundits are happy talking and can’t be trusted, so listen to some facts and perspective from the other side:
The “Facebook IPO poses huge risks for retail investors. Facebook may have millions of users worldwide and plenty of investment sex appeal, but beyond the sizzle … I can virtually promise you there will be thousands of small investors that get burned bad on Facebook and lose money on the investment. How? Market orders like the ones so many investors made back “in the early 2000s “ by “people who made that error in … hot tech stocks at the time.”
Yes, another 2000 crash triggered by Facebook, 2012’s new sock puppet.
But Stoltmann sees through the dark veil of denial that shields most of America:
“Virtually any slip up in performance by Facebook and the stock will crater.” Yes, “crater,” as in bottom, crash, meltdown. “If Facebook is valued at $100 billion, its valuation would be 33 times its advertising revenue, compared with 5.5 times for Google. To sustain its value, Facebook would need to grow its revenues by 41% percent per year for the next five years. That is very hard to do for any company, especially one of Facebook’s size. … Even a minor hiccup in the business model could lead to significant losses for purchasers.”
More risks: Facebook “operates in an extremely competitive industry with many major, deep-pocketed rivals, including experienced, well-financed rivals like Google.” The fact is, investors forget “most of the gains people hear about when it comes to IPOs are not enjoyed by the retail investor buying the shares in the secondary market but rather the company founders and angel investors.”
Remember 2012’s hot dot-coms, Groupon and Pandora. Their shares fell “48% and 41%, respectively, from their IPO prices.”
Investors in denial about Facebook’s future as a public company
Now that $16 billion changed hands and Facebook has a thousand new millionaires, Stoltmann’s counting the days expecting “thousands of retail clients with significant losses in Facebook in the next three months even though the IPO will be a resounding success for the company. … This could get very ugly.”
Remember, behavioral economics is the “psychology of denial,” but at some point reality will set in.
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