We Dont Need Growth, Just Self Fulfilling Valuations – Lessons From The Market

It is harder to grow revenues and easy to grow valuations.

In the past 5 years, we learnt the easy way – valuations.

Same old company, same old house, same old building, same old watch but all at a higher price after 1 year. It is easier than doing real work.

So we had companies that IPO at 50 cts for their stock price to double in 2 months. It is almost too generous of them for if their owners had kept them private, all the profits would be theirs. Or did they need the market to chase up the valuations for them ?

A piece of land (with minerals on it) costing USD 10 million just 2 years back, intending to pre IPO at 160 million. Wow ! And from my source, almost guaranteed to be worth 400 million by the time they are through to the public.

I want a piece of that !

Nothing has fundamentally changed about the land. No extra gold or what not was discovered on it overnight. It is just the same but the value has gone up.

This is the self fulfilling and instant gratification world we are living in and if Blumont had not been so generous to its shareholders and rose 1000% instead of 4000%, it might still be at 1000% today.

Greater Fools

“Chinese investors told me that if Chinese stopped buying in areas that are popular with Chinese home buyers, the value of these local markets would fall by about 25 per cent.”

It is the same for every product.
But why always the Chinese ?
Just about everything went up in China in the last 30 years. Their SHCOMP is up about 2,100% compared to S&P 500 which went up about 500%. This does not include housing wealth from their housing price explosion. Bad loans ?
It adds up.

China Investments Abroad ($ Billions), 2005-13
Australia $59.2
US $57.8
Canada $37.6
Brazil $28.2
Indonesia $25.8
Iran $18.6
Nigeria $18.5

Sri Lanka just launched a new Chinese funded airport highway.

That is some more value for you.

Stocks, real estate and bonds. All valuation gains. Just like Tesla which is selling about 35,000 cars this year with a market capitalisation a tenth of Toyota, the world’s largest car maker which has sold 7.412 million cars in the 1st 3 quarters of this year.

One reason why valuations are so easy these days is because the opportunity cost of money is Zero and not only that, most of the time, the government will step in and assume your debt when you fail. Just looking at all the failed Chinese solar and battery companies this year to inspire more to do the same, but not before setting your offshore accounts and installing your family somewhere safe.

QE 1, 2 and 3 have injected USD3 trillion into markets so far and we are still counting because QE3 has no time frame and we have 1.6 trillion from it to date. This is not counting the arrows from Abenomics and UK and Europe’s LTROs.

Everyone who has the means is borrowing to buy up everything else, led by the Chinese in US real estate and resources. Why pay ? Just IPO, Reit or issue a bond ?

So the next time you rush in to buy the next Blumont, think about it. Valuations are an amazing windfall but surely such generosity is unwarranted ?