This is how it always happens. Late Tuesday an obscure short-seller, Citron Research, announced that Twitter was the social media platform most vulnerable to privacy regulation – and its stock plunged 12% in the course of the day. All the other tech names followed, including the whole of the FANG+ Index (Facebook, Amazon, Netflix, and Google, along with a half-dozen other big names, including Alibaba). FANG+ lost 6% on the day, and MSCI’s non-Japan Asia stock index fell 1.4% overnight.
There wasn’t any news. Citron isn’t much of a market mover. Far bigger voices had offered direr forecasts in recent days, including Citibank’s equity research team with a missive headlined ‘Down the Rabbit Hole’ that warned of a 20% correction in the S&P 500. Stocks had recovered on Monday after the Trump team took to screens to assure the world that they sought a negotiated deal with China rather than a trade war. But in the end, what mattered was not Trump’s tariff shock but the simple realization that tech monopolies don’t last forever, and when they fade, they fade fast.
As I argued in this space on March 20, hundreds of billions of dollars of market capitalization hung on the illusion that driverless cars would add trillions of dollars of value within the discountable earnings horizon. The autonomous vehicle was the poster-boy for the supposed Artificial Intelligence revolution that would resemble a Second Coming of the Semiconductor. Uber’s killer car put paid to that; the real experts, as I reported, know that autonomous vehicles work only when the whole infrastructure around them is designed for them (as in China’s new cities).
Then we had the Facebook privacy scandal. Mark Zuckerberg turned out to be an unconvincing Man Behind the Curtain, reassuring users that the Wizard of FANG wasn’t stalking them. The real scandal, though, is the extent to which social media really adds value. When I click on an add for hyperphlombic sploonge, I know that Facebook will send me a dozen more ads for hyperphlombic sploonges, and that banner ads for sploonges will present themselves above whatever newspaper headline I attempt to read.
The trouble is that American wages barely keep up with inflation, and the wage growth of part-time workers (according to the Atlanta Federal Reserve) was lower than the growth of the Consumer Price Index during the past year. The American savings rate, meanwhile, hovers near its all-time low. Beam all the targeted advertising you want to Facebook users and they still won’t buy if they don’t have the money.
Wages are stagnant because productivity is stagnant, and productivity is stagnant because American companies invest in apps rather than plant and equipment. Asia is the main reason for America’s shift away from capital-intensive investments to “capital light” investments such as software. The large Asian economies, China especially, subsidize capital-intensive investments. They view a chip fabrication plant or an auto assembly plant as a public good, and reduce the cost of capital for private companies, just as the US subsidizes sports stadiums and airports.
The result is clear from a simple comparison of return on equity and capital intensity (the ratio of assets to earnings before taxes and interest) in the US and China. In China, the more capital intensive the industry, the higher the return on equity; in the US, the relationship is fuzzy, but there is a slight tendency for more capital-intensive industries to show lower return on equity.
Manufacturing has left America because it is cheaper to manufacture in Asia, because Asian governments make capital cheaper. That’s why labor productivity growth in the US hovers around the zero line.
Digital technology is changing the way Americans work, to be sure, but not necessarily for the better. The gap between the wage growth of full-time and part-time workers is widening, according to the Atlanta Federal Reserve Bank’s wage growth gauge.
S&P 500 employment stopped growing in 2015, although total employment continued to grow.
Large companies have found that they can outsource a large number of bureaucratic tasks to part-timers who are willing to work for lower compensation in return for flexible hours, just like Uber drivers. The hottest item among tech start-ups today is labor-sharing services for corporate businesses. That’s great for the millions of well-educated women (for example) who do not want to work full-time because of family responsibilities, but it does not increase productivity or wage growth.
In short, the American tech sector does a great job of exchanging photos and recipes and family photos, but it doesn’t do much for overall productivity.
Broadband, smartphones, e-commerce and e-finance play a very different role in emerging Asia.
An important facet of China’s Belt and Road foreign investment program targets broadband networks, smartphone sales, e-commerce and e-finance as a means of transforming the economies in which it invests. Two years ago I arranged a visit to the Shenzhen headquarters of Huawei, China’s premier telecommunications equipment producer, for the ambassador of a Latin American nation. After a three-hour tour through Huawei’s ample exhibition facility, the ambassador and her staff were seated in a small circular theater to hear the exhortations of a Huawei spokesperson. The Chinese told the Latin Americans that if they invited Huawei into their country to build a national broadband network and sell them equipment and bring Chinese e-commerce and e-finance companies into the mix, they too would have the sort of growth that China has enjoyed for the past several decades. More than 100 countries are now considering national broadband networks, with varying prospects, according to Huawei.
The United States is drifting towards the export profile of Brazil, with strength in agriculture commodities and energy but overall weakness in high-technology manufacturing and exports
The good news is that the prospects are good for a quantum-jump in productivity in the developing world. The bad news is that China is acting aggressively to position itself as the dominant equipment supplier, investor, joint-venture partner and technology provider in this revolution. By contrast, the United States is drifting towards the export profile of Brazil, with strength in agriculture commodities and energy but overall weakness in high-technology manufacturing and exports.
When Citron slimed Twitter, it reminded investors that today’s tech companies are monopolies, and monopolies don’t last forever. As I wrote in this space nearly a year ago:
“Tech companies now sit atop a virtual toll booth and impose a charge on a myriad of transactions. Like water and power companies, they have monopolies, although these monopolies are driven by the price of infrastructure and the network effect. Google has the Internet-advertising monopoly. Microsoft has the personal computer software monopoly. Amazon has the Internet sales monopoly. Facebook has the targeted advertising monopoly. And Apple has the oddest monopoly of all: it is the vehicle by which customers assert their individuality by overpaying the largest-capitalization company in the world.”
Both the Democratic Party and the nationalist wing of the Republican Party think that the likes of Google and Facebook should be regulated like public utilities, which would mean a sharp drop in profits. So apparently does the European Commission.
That portends the end of the second great tech bubble. But to which sectors should investors rotate? Energy is a bet on oil prices, and the US oil companies are a pricey bet. Financials have underperformed and are likely to continue to underperform. During the first quarter the total assets of US banks actually shrank, something that usually happens in recessions, and business loan volume is flat; if they can’t grow assets, they can’t make money, especially not with a flat yield curve and historically low net interest margins. What S&P calls the “consumer discretionary sector” is 20% Amazon and 7% Home Depot, two well-performing but pricey names. “Consumer staples” have done terribly as customers shift away from high-priced brands to generic substitutes. Technology ballooned to a quarter of the S&P 500’s market capitalization at the end of January, and there aren’t enough locations in the rest of the market to absorb that much market cap. That makes the US stock market dodgy for the rest of 2018.
Syed, you have a bit of a negative view on the world. Maybe a shift in your reading list might help. Jared Diamond’s "Guns, Germs and Steel" is something you have probably read. But add in "The Victory of Reason" by Rodney Stark and you might cheer up. China fell behind the west starting in about the 13th century because they were such good administrators and grew and polished the central state to the point they could completely stop free enterprise and entrepreneurial activity. Europe was a chaotic mess with people competing each other which enabled them to polish and make businesses out of many Chinese inventions. The chaotic competition in Europe, and Christian ideas of the dignity of the individual, led to value being place on individuals over central government which eventually lead to the US Declaration of Independence, autonomy and self-governance at community levels (cities and counties solving their own public works problems) and the republican system of government.
Interesting, since I agree. I live in Guadalajara, Jalisco which is at the center of electronics design and manufacturing and at the west end of the automotive manufacturing and technology hub. My son lives in Silicon Valley and has his own startup after a 10-year apprenticeship with Toyota HQ Brussels and Airbus HQ Toulouse.
At the same time I agree with your comments on US tech stagnation, living in Mexico makes me wonder about how GDP and other economic indicators are measured and if the system of measurement is actually working. Mexico uses standard international accounting practices for measuring productiving and GDP and it appears Mexico has been stagnating and standing still for the past 30 years. No significant growth. You worked with Jude Wanniski on "Mexico 2000" which was the road map for major reforms here under President Carlos Salinas. Have you looked at Mexico since? It is a transformed place, even if official measurements show little growth for the past 30 years. We see explosive growth in our everyday environment even if the GDP numbers look flat. What is your take on this?
BTW, your writing in Asia Times, over 15 years ago, and your thoughts on Rosenzwieg, Rosenstock-Heussy and Ratzinger helped me convert from atheist to traditional/orthodox Roman Catholicism about 11 years ago. Thanks.
White countries have white economies (unless they’re silly Communists).
Brown countries have brown economies (unless they have gobs of oil).
This is Goldman’s entire world view summarized:
Jewish tribalism–>good.
Gentile tribalism–>bad.
"By contrast, the United States is drifting towards the export profile of Brazil…"
The USA will continue to look more and more like Brazil in many ways, high government debt, rule by elitist class, cities rife with crime, increasingly powerful gangs and police, mob democracy combined with socialism. If you want to know the USA’s future, look at Brazil.
Thanks Syed Abbas, I think one pct is still too much, when they control central banks – actually privately managed – and governments, and the media and etc…. And consequently all that trickles down from there. But have a nice day anyway, Syed.
Luca Taramelli
No place can ever be totally "jew-free".
However, in relative sense the situation today is a far cry from the 18th, 19th, and 20th centuries when Jews were the second largest group in every European land, and very powerful, financing continual warfare.
Today, no country has more than 1% of them, and that is also dropping as Jews run away because of the fear of the growing Sunnis, just as Balfour would have dreamt. And they are no where powerful as they were.
Winnie XiPooh no guatantees. Each generation must earn it’s living by it’s own hard work and intelligence.
No comrade, we’re loaning it. We expect payment (for the next 1000yrs)
Why pay for something that can be stolen ?
To refer to companies such as Facebook and Netflix as "technology" companies is ludicrous. They are consumer companies. Technology companies make semiconductor chips and equipment. Texas Instruments, Intel, Nvidia, Applied Materials are examples of real technology companies. Apparently Wall Street cannot tell the difference.
One very dangerous fact not mentionned about the new tech bubble and artificial intelligence overwhelming position in economy it’s the trading-robot.
The famous jokes :
David : Dad, the sea rise
Elie : Buy it !
When robot buy and sell not after an analysis of the buisness model but only with the "pattern of last variation" we can see Amazon rising only because Amazon rose and because people whose own not Amazon did less profits, everybody buy Amazon … And we find that HUGE amounts are invested in some companies but it was not like before when you study the business model of a company but only with a "mimetic behaviour".
More "natural intelligence" should be welcomed.
The crucial question in Stock Exchange :
"Are they more stupids or money ?"
Dear Syed Abbas, I always appreciate your comments and I only have some doubts about your recurrent comments that Europe is now " jew free ". I don’t think so, and I would rather think the very opposite. But if you would be able to explain on which basis you state that Europe is jew free, and if I could understand that, I would really feel relieved and happy to have made a mistake.
China is goving away capital intensive infrastructure to Africa-Eurasia via BRI.
For 2,000 years 300BC-1700AD, China and India each produced 1/3 of world’s wealth, the rest (Europe, Americas, Africa, Middle East) the remaining 1/3.
The rise of the West was a fluke of history – idiocy of the Muslim/Jewish cartel of the Kaliphate that lived of Tariffs (Arabic word) by controlling the East-West trade. Crusades to free trade failed, reducing Christian population in Europe to half. Sunni/Jewish cartel ethnically cleansed Europe.
Finally Christians found courage to expell Sunnis and Jews from Spain, freeing themselves to find new routes to Asia, and new lands too, giving middle finger to Sunnis and Jews. Then, finally, brilliant Balfour found the silver bullet to pit Sunnis and Jews at each others’ throat by creating Israel. Europe is now Jew free, and Sunnis are suicidal.
Having rid of Sunnis and Jews with help of Iran and Russia, China now re-builds the Silk Road, uniting contiguous land-mass of Africa, Europe, and Asia with trade, returning to historical normal. Faraway islands America and Brazil should concentrate on their natural competitive advantage – agriculture. That is exactly what is happening naturally.
Says so factually the West’s Prophet of Doom Samuel Huntington:
” .. The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence. Westerners often forget this fact, non-Westerners never do ”
—— The Clash of Civilizations and the Remaking of World Order, p. 51 …
Finally, the West turned violence on itself. In 1914-45 madness the West committed suicide, then 9/11 punctured their balloon. Rapid Western rise will have an equally rapid fall. Interesting times lie ahead.
"Wages are stagnant because productivity is stagnant"
Until US business impimented the Powell Memorandum, wages tracked productivity. Wages flatlined–declined, actually–beginning ca.1975 while productivity in manufacturing quintupled. Finance capital scooped up all the gains and then some.
"…the United States is drifting towards the export profile of Brazil, with strength in agriculture commodities and energy but overall weakness in high-technology manufacturing and exports."
Absolutely true. Finance capital rules. Create money and lend it at usurious rates. Nothing else matters. Inflate and buy and sell assets. Double, triple house prices. Rack up debt. This is wealth creation, 21st century finance capitalist style. Factories are SO mid-20th Century!
You CAN’T run an economy this way; you can only plunder one. This plunder has been going on for four decades now, and has just about run its course. There isn’t much left to steal.
This is second article that I can agree with. I do not think US is ready for this kind of thinking yet.