Two recent, small stories should give us pause when thinking of capitalism as a system of wealth creation. There are conditions that go along with success and different conditions that lead to failure. How well do we discern conditions and adjust to them? No guarantees at all that we will be astute and properly adaptive.
A once celebrated company that invested in providing flexible office spaces has gone bankrupt. WeWork was once valued at $47 billion. On November 6, 2023, WeWork filed for bankruptcy.
In August, three members of the WeWork board resigned in disagreement over governance and strategic direction. On October 2, the company did not make interest payments to its bondholders. The company has $10 billion in lease obligations due from last year through the end of 2027. The company used $530 million in cash during the first six months of 2023 and had only $205 million on hand, as of last June.
In a September call with its landlords, WeWork’s CEO asked for adjustments to its rent commitments because “the office real estate market has fundamentally changed.”
Then, the emergence of new drugs to reduce obesity has triggered enticing speculation among investors – assumptions are being made about companies which have profited from selling to obese Americans and other companies which may pivot from selling junk food to more healthy products, such as carrot sticks. Share prices for Eli Lilly and Novo Nordisk have risen more than 50% this year. Share prices for Dexcom, Zimmer Biomet and Insulet have, to the contrary, dropped from 20% to 60%.
But again, there are no guarantees in capitalism. Manias and asset bubbles have ridden the back of free investment markets since the tulip mania broke out and then collapsed in Holland 400 years ago.
When is an asset bubble based on disinformation or misinformation or just wishful thinking? When is a bubble not a bubble, but a reflection of well-considered valuation of a company’s prospects?
Caveat emptor – “Let the buyer beware” – and “trust but verify” are still sound advice when dealing with other people in open societies.