The Lex Newsletter: Burning Man, burning platform, burning planet

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Dear reader,

The Burning Man festival in Nevada patronised by wealthy hedonists was washed out this week. The yearly event is, in the words of public intellectual Don Henley, “a Deadhead sticker on a Cadillac”. In contrast to Woodstock, the famous 1969 free festival, Burning Man cost $575 per ticket.

That high bar is one reason well-paid tech workers are a substantial part of Burning Man’s customer base. Some revellers fly in. The festival’s carbon burden is estimated at 100,000 tonnes.

Picture it: the agents of the tech revolution stranded in the desert by extreme weather caused by climate change. Nothing could better epitomise the two dominant megatrends of our age.

I wish I knew how to discount the former for the latter. I draw comfort from the thought that no one else does either.

Lex is bullish on US tech. We think giants such as Apple, Microsoft, Meta and Amazon have huge scale and network advantages. Disruptive innovation remains lively within the tech ecosystem. We believe regulatory challenges will inflict only minor damage on profitability.

The S&P 500 looks expensive judging from Shiller’s cyclically adjusted price-to-earnings ratio, which allows for inflation. The benchmark stands at 31 times, double its historic mean. But a price/earnings-to-growth ratio that internalises rising profits in the tech sector over the next three years looks affordable at 1.6 times.

To comment on this or any other aspect of Lex, please email me at Lexfeedback@ft.com.

Our tech bullishness has limits. Owner SoftBank set the valuation for the initial public offering of chip design company Arm at about $50bn this week. That is $14bn less than the valuation implied by a recent internal transaction. It is $20bn more than we think Arm is worth.

SoftBank will imbue the float with as much generative artificial intelligence pixie dust as possible. The disruptive possibilities of that technology are already evident. Songs generated by robots — some of which mimic real artists uncannily — are already a problem for music rights holders.

Universal Music struck a deal this week with French streaming group Deezer for higher royalties for real musicians such as the Rolling Stones, who have just released a new album. Deezer music will now cost more when it is geezer music.

Audio recordings of rain compete with Mick ’n’ Keef for listeners on streaming services. But the precipitation is the soothing type, not freak torrents of the kind that engulfed Burning Man.

Lloyd’s of London, the insurance market, has warned that extreme weather will push up insurance premiums. We agree: Lex believes the entire financial system is underestimating the impact of climate change.

Floods, wildfires and other weather disasters accounted for 56 per cent of all insurance losses in 2018-22, according to Moody’s. Reinsurers are producing paltry three-year returns on equity of 5 per cent.

The world is, to quote the dreaded cliché, on “a burning platform”. Governments and businesses need a better plan and much greater willpower if they are going to make an impact on global warming.

Deep greens hate natural gas. Lex believes it has an important part to play in the transition away from dirtier hydrocarbons. So does Enbridge, a Canadian pipeline group that is buying three gas utilities from Dominion Energy of the US for $14bn.

The UK government, meanwhile, needs to rethink its renewables pricing strategy following the failure of an important auction this week.

The issue investors have to wrestle with is that progress towards a zero-carbon economy comes in fits and starts. For example, there is now overcapacity in Chinese electric vehicle production. US chemicals group Albemarle may, therefore, be overpaying by offering $4.3bn for Liontown, an Australian lithium miner.

Credit where due

One agreeable characteristic of people who have little left to prove is a willingness to warn that trends with immediate benefits for their businesses may have longer-term downsides.

Earlier this summer, Jamie Dimon said JPMorgan Chase was “over-earning” on credit cards. Americans have run down pandemic-era cash buffers and have been popping the plastic. Delinquencies are rising.

We are close to the top of the rate cycle and there is plenty of pain in the system. Anything that smacks of financial engineering is a good place to find it. Software buyouts, for example. Here, some loans were sized according to the dangerous metric of annual recurring revenue.

That is not a fat lot of good to anyone unless the revenue produces plentiful cash flow.

Five of the largest, lowest-rated leveraged loans due in 2024 and 2025 come from software companies, according to PitchBook LCD. They include KKR’s BMC Software and Thoma Bravo’s Hyland Software.

High rates are more personally painful for British university students. Months ago, Lex predicted that base rate rises would strain buy-to-let landlords, who typically have interest-only mortgages, pushing up rental costs.

So it has proved. Young people seeking student digs are at the sharp end of the trend. Unite Group, which specialises in the sector, says there is an acute need for new rooms.

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Digs were cheap when I was a student. Some aspects of student life are unchanging, however, such as food theft from communal fridges. One of my flatmates back then wrote his name on every egg in the box in an effort to discourage pilfering.

When he was out, we seasoned omelettes made from those eggs with salty tears of penitence.

Stuff I enjoyed this week

FT Video produced a fascinating half-hour show explaining why some Premier League footballers have adverts for dubious Chinese gambling companies on their shirts.

The FT Weekend Festival last Saturday was a lot of fun, particularly an appearance by water quality campaigner and former punk rocker Feargal Sharkey.

For my part, I participated in a live session titled “How to be a Lex analyst”. If you attended, thanks.

There was no flash flooding.

Enjoy your weekend, whatever the weather,

Jonathan Guthrie
Head of Lex