What the Facebook IPO Says About Your Most Valuable Asset

Did you hear that social networking site Facebook may go public this week? This is important. Facebook has 800 million users (who pay nothing). The fact that the company is ready to sell shares to the public and Wall Street is underwriting for the initial public offering (IPO) can only mean one thing: the age of superficial communication devoid of real content and real meaning may be peaking…as soon as tomorrow!

We’ll get to how Facebook diminishes the quality of your thought in a moment. But first, Mark Zuckerberg is about to find out that in order to cash in you have to reveal. The upside of an IPO is that your equity in a private enterprise is now liquid and usually trades at a much higher value than what you paid for it. That’s the good news.

The downside of becoming a public company is increased transparency. Your shareholders know how you make your money and how you spend it. The public can see where you generate your revenue and how (or if) your business model works.

This is problematic for Facebook. The company probably makes some hefty coin selling space to advertisers. But Facebook’s most valuable asset is harder to value. Its most valuable asset is the data it’s accumulated on you…what you look at…what you buy…where you live…who you’re friends with.

CNBC’s Jim Cramer reckons Facebook is a buy with a market value of $70 billion but a sell if it goes public at $110 billion. Bless him. IPOs like this can only happen when the public has an appetite for growth stories. But the stories can’t be too detailed. That would get in the way of an accurate valuation. IPOs are about the future. And you can’t put a price on that, can you?

The image below (ironically captured from a friend’s Facebook page) shows this tension between how Facebook is perceived and what is really going on under the hood. Facebook is valuable as long as users pour their time and information into it. The data you generate as a user is what’s making Zuckerberg rich (and good on him, by the way).

Data broker of the year vs. terrorist

Data broker of the year vs. terrorist

Source: Facebook

We bring up the Facebook IPO because we warned about it last year. In June of last year, Pandora, another Internet darling, went public. So did Glencore, the Swiss-based commodities trader. We argued that IPOs are a sign of a market top. We wrote the following:

Has the coordinated reflation of stock markets by central banks since Lehman Brothers collapsed in 2008 actually been a giant pump-and-dump exercise? Were QEI and QEII like mini-IPOS for the stock market in general, a kind of re-selling and rebranding of stocks as an asset class?

Here’s an argument: The insiders – mostly financial institutions – have used their control over monetary policy to flood the market with cheap bank reserves. Those excess reserves have been put to use in financial markets to run up stock, bond, and commodity prices and generate trading profits for banks and investment houses. The upward momentum in markets (more or less) has given anyone who can see the writing on the wall a chance to liquidate their positions into a stable market and leave the shareholding public with all the risk.

Nefarious? Paranoid? Conspiratorial? Or just the same as it ever was?

It’s not much different than the exercise Jesse Livermore described in Reminiscences of a Stock Operator. If you’re a large seller wishing to liquidate a position (the Money Power wishing to sell the assets it bought with credit it created, at no cost, for a high price) the first thing you do is become a buyer and create some buying momentum in the stock.

Once the public begins to bank on that momentum and get back in the market with conviction, you can liquidate your position into a rising trend. Then, when the public is all in and you’re all out and the Fed is set to exit the market and Greece is set to crack, you’re in the perfect position to buy up all the good assets cheap, after the crash, when there are no other buyers to compete with and the streets are littered with globs of yogurt and broken bottles and shattered middle-class dreams.

Are we at the big moment now, where the wealth transfer is accomplished? As we’ve said all along, the Fed needs a proper stock market crash to justify another round of asset purchases. That could mean even steeper stock falls. What will follow is an even more aggressive monetisation of government debt-or outright default.

How will you know when the whole system has descended into farce and fraud? Look for the Facebook IPO.

And so here we are, eight months later. Greece is still cracking. The Fed has committed to keeping US interest rates low until the end of 2014. Central banks are expanding their balance sheets. This could inject lots of low-cost money into the stock market and risk assets to keep financial asset prices from collapsing. Into this wave of confidence in stocks, Facebook goes public.

In point of fact, the All Ord’s are down about 5% since we wrote that article last June. The S&P 500 is up 3.5% over the same time. Of course, an Aussie-dollar-based investor would have done far worse in real terms buying US stocks because of the strong Australian dollar over the same period.

Stocks before the Facebook crash?

Stocks before the Facebook crash?

Source: StockCharts

We’ll have to wait and see whether the Facebook IPO takes on any historical significance. Is it really the high-water mark for the age of superficial communication? Are we being too hard on it? After all, what’s wrong with people sharing inspirational sayings or taking pictures of their food for the rest of us to see? There’s nothing sinister in it.

But it IS telling that the biggest American business success story of 2012 – at least in IPO terms – could be a company that doesn’t really make anything. It sells data. And that data is only valuable as long as you continue to consume, or as long as the world’s growth is driven by consumption. When you look at it that way, it DOES seem like a high-water mark for the age of credit-driven growth.

We’ll get back to that subject tomorrow. But yes, there is a more interesting angle here. Facebook isn’t all fun and games. Our growing belief is that the human central nervous system is not evolved to survive when bombarded by so much useless, time-consuming news and information. And we’re referring to the whole world of online and mobile information, of which Facebook is just the most visible example.

This kind of mediation of reality could be making everyone crazy, or at the very least, uninteresting to talk to. The neurochemistry of the human brain is pretty sophisticated. But it evolved for a world where the kind of information we processed didn’t change for tens of thousands of years.

That information was primarily sensory: big tiger footprint ahead in the mud. Hmm. Tiger must be near! Great Caesar’s ghost! Tiger must be near! Fight? Flight!

The human brain produces cortisol to heighten focus during stressful situations, like being hunted by a tiger. The brain alters its own chemistry so that we can concentrate on the immediate threat. But over time, heightened stress levels impair other cognitive functions and may even affect our memory. A brain under constant life/death/threat pressure is not a healthy brain.

In fact, human beings can only operate under highly stressful conditions for a limited period of time before we’re physically and mentally exhausted. Cortisol is a stimulant to promote survival in life or death situations. But like anything, too much of it over time is not good.

Besides, operating at maximums stress all the time would prevent us from doing other things with our frontal lobes, like developing speech, inventing the steam engine, serenading Juliet on her balcony, painting the Sistine chapel, or curing polio.

In other words, it would be a colossal disappointment for our species, in evolutionary terms, if information overload – with its constant stream of mostly superfluous but mildly stressful news items – degraded our cognitive capacity over time.

What if the Internet is making us more dumber?

At the very least, processing a large quantity of mostly irrelevant (non-threatening)information occupies more of our conscious thought and time than it used to. We have less time to think deeply about things. If we fall into bad habits, we spend more time watching videos or responding to stimuli of an unimportant nature.

On the plus side, at least tigers aren’t chasing us. The Apex Predator in the human ecosystem is now the State, not the lion, tiger, or bear. And there are some amazing, collaborative things that are only possible on the Internet. Check out this Star Wars Uncut project, in which hundreds of strangers re-created a 15-second segment of the original Star Wars movie to create something incredible. It’s amazing the power that story still has to inspire interest and wonder.

But at the worst, if we persist with our modern way of gadget-mediated living, it’s possible we’re actually reprogramming/adapting our brain to operate in a world of information overload. This probably does not promote our survival as a species. The Markets and Money is valuable information, of course. So it is exempted from this discussion.

Your best survival strategy? Turn off the wi-fi, shut off the ringer on your phone, pick up a book or go for a run. Time is your most valuable asset. And it’s the one asset we all have equal amounts of. How we use it is what distinguishes us from one another. We’ll need other survival skills in the 21st century, and they won’t include writing a clever status update on Facebook.


Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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11 Comments on "What the Facebook IPO Says About Your Most Valuable Asset"

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Nathan Chattaway
I’m liking the 2012 edition of Dan Denning! Your closing paragraph hints at a growing acknowledgement that modern western life isn’t all it’s cracked up to be. Voluntary Frugality. It’s real, you can adopt it now, and it’s better than Forced Frugality when you least expect it. I always conjure up this mental picture of the last loud, obese, redneck seppo driving his brand new 3 ton 8 litre SUV home from the dealer as the global oil rationing reaches US shores. Despite his many failings, George W Bush really nailed it with “This sucker could come down”. Remembering your… Read more »
I really hope this spells the beginning of the end for facebook. Love this article Dan, will be forcing the wife to read this in order to reiterate what I’ve been telling her since before she joined when poor old My space was all the go. If the downturn in domestic productivity and physical (voicebox) communication in my house is multiplied by 800 million it’s no wonder I can’t help but feel bearish on humanity. I would go to church before I join facebook. On a separate note have you guys chatted with the Steve Keen machine lately. Another poor… Read more »

“The Daily Reckoning is valuable information”

Is it? I hate to tell you guys but Mark’s ZuckeredYourBerg. He’s probably snorting quality cocaine & banging quality hookers as I write.


Has anyone noticed how the facebook logo looks like a cross, mostly submerged, with a persiscope on top? Just an obesrvation. There’s an ocean of metaphores there…


Excellent article Dan…I knew you would bounce back from your brief sojurn into the solar system. I was going to ask you to be my friend but guess thats on hold now..I even thought that..if you were set up and agreeable that maybe I can try to tweet you occasionally to let you know what colour shirt I was wearing..But from the tone of your article thats likely on hold now too. Guess I’ll just have to keep reading and maybe send the occasional comment by e-mail.


I want to know how many Facebook comments this article inspired?

Ivor Evans

As Dave Allen the late Irish comedian used to say. “There is nothing more fearful that fear it’s self” As for increased cortisol levels I think there is a hint of projection in your article Dan. Never or less a very good one at that. Don’t watch TV,don’t read the paper,don’t use the computer then there will be no stressful bad news. There that was easy. All good absolute bliss in utopia. Right fixed that and put the world right now lets do some work to earn some money so to buy the latest tablet that connects to the cloud.

Ivor, I believe (excusing the typo) that it was FDR that used the line in his inauguration speech. Dave (small finger) Allen was borrowing the phrase. Personally, I joined facebook to look for professional contacts. Didn’t find any, used the account for about 2 months, had everyone under the sun want me as a friend (which did not reassure me) and eventually got sick of invites and notifications about some stupid farm, so deleted my account and have never returned. The reality is, I am not interesting enough to want to tell people about all the un-interesting stuff that I… Read more »
I find it quite amusing that people rail and snarl against corporations, branding them evil, immoral, untrustworthly etc etc etc. But when it comes to facebook they treat it as if it is their best mate and beyond reproach. They unthinkingly type in sensitive information such as their date of birth and other personal details that any hacker would be pretty happy with, all with a warm fuzzy glow. Facebook is a company, it is there to make money, it is not your friend and people should treat it with suspicion based on our collective experience with such enterprises. This… Read more »
Phew !! and i thought i was paranoid. All those questions, and my refusal to answer with the rejoinder, if you’ve nothing to hide, what are you afraid of? or one of its many substitutes. When of course i do have something to hide, my privacy. Some thing the younger generation do not understand, what with facetwitter, or whatever, its no wonder they don’t. All that personal stuff on line, and you would not believe the information passed around,it is an identity thieves playground. Which brings me to the nub of the matter, I think these so called social media… Read more »
I was once told (in the late 80’s and early 90’s) that if you wanted to contact a politician and be heard, that you were wasting your time if you attempted to telephone them as you’d be fobbed off by their secretary, the same too with writing a letter or fax, it would have been responded to by an assistant and the subject of your communication would be unlikely to have reviewed your correspondence or heard your voice. No the way to contact a pollie and be assured he would not only read it but respond, was to e-mail them.… Read more »
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