Masters of the tech universe come crashing back to Earth

Few names are as synonymous with frothy tech investing as the Japanese investment group SoftBank, led by the quasi-cult figure of Masayoshi Son. Releasing its results last month, the group detailed its most recent $10-billion writedown of impaired assets. It will come as no surprise that this included a $100-million stake in the infamous crypto exchange FTX, revalued now to zero. In the scale of its cataclysmic losses, that stake almost seems quaintly modest.

The group’s results indeed read as a kind of who’s who of the most spectacular investment bungles of the last 10 years. If there was a chance to invest at a peak valuation in something that did not make any money, and was guaranteed never to make any money, SoftBank was there. From the now legendary tale of Adam Neumann’s WeWork – a company that was meant to “change the world”, to Uber – which continues to burn cash at an eye-watering rate, via a whole universe of now defunct start-ups, Son has redefined how to lose money most effectively.

Reviewing this sordid tale of hubris, along with the recent exploits of Sam Bankman-Fried, Elon Musk and Mark Zuckerberg, one is reminded of the great US economist John Kenneth Galbraith’s description of the concept of “bezzle”.

Coined in the aftermath of the Great Crash of 1929, it describes the temporary discrepancy between perceived asset values and their real longer-term value, which history suggests widens most during boom times and periods of irrational exuberance. More recently, market valuations became totally divorced from the true earning capacity of assets, owing to the extended period of overly easy fiscal and monetary policy.

Fundamental to the concept is the idea that in the period before the real value is exposed, both the “embezzler” (in this instance, for example, Sam Bankman-Fried) and their victims (the investors in FTX) enjoy the same sense of satisfaction of the ownership of this artificially inflated asset.

This sense of gratification defines the bezzle, he suggested, with the investors experiencing a kind of “psychic wealth” that makes them hubristically believe they have some magnificent insights into the world and human nature that other punters – obsessed with such mundane concepts as profit, cash flow and return on assets – are simply too myopic to realise.

To adopt a phrase used by the US writer Tom Wolfe to describe bond traders in 1980s

New York, these protagonists start to imagine that they are indeed “Masters of the Universe”. It would be hard to find a better description of Elon Musk, Sam Bankman-Fried and Mark Zuckerberg.

The irony is that since the meltdown of – most spectacularly – FTX, but also Tesla and Facebook owner Meta (both of which are down more than 70% from highs), there has been a slow and steady rotation away from these darlings of the tech world back to those boring companies that focus on making things and selling them for a profit.

For example, a global bellwether like the world’s largest brewer, Anheuser-Busch InBev, shrugged off being barred from selling beer in World Cup stadiums and is up 21% since late October. Caterpillar, the world’s largest maker of diggers and dump trucks, is up 45% since early October. The Dax, the German benchmark full of auto manufacturers, chemical producers and enormous industrial behemoths, has closed up every week for the past two months.

Clearly the market is betting that interest rate hikes will slow, inflation will moderate and earnings in the real economy will remain robust, with the global economy avoiding another recession in 2023.

Who knows if this will happen. Given that economic data in the US and Europe is showing signs of slowing, with the yield curve indicating a looming recession, it does seem a rather fanciful example of the market pricing in good news before there is any.

Either way, whether this recent revival of the fortunes of those companies deemed to be “old economy” lasts or not, what does seem permanent is the fall from grace of Big Tech. Sense, finally, does seem to have prevailed, with the extent of the delusionary “bezzle” becoming fully apparent.

In this instance, fortune most certainly did not favour those bold masters of the tech and crypto universe.

There has been a slow and steady rotation away from these darlings of the tech world back to those boring companies that focus on making things and selling them for a profit