The markets are at an analytical crossroad. Central banks around the world have all signaled that their bouts of monetary largess will be coming to an end. Assuming the central banks really carry this out, for many this is a bear signal for the global stock markets. Those investors, who believe the rallies of recent years are the result of a surfeit of central bank moneys pushing up stock and bond prices, are taking these central bank warnings as a sell signal.
But there are those who will choose to ignore this signal. They will argue that accelerating technology and globalization and slowing population growth in advanced countries will continue to act as powerful deflationary forces. They might also argue that the generous dollops of central bank money added to the world economies have only wound up sitting idly at the central banks themselves. Thus the reduction of monetary excesses will not result in any serious rise in interest rates.
I am in the latter camp. So long as central bank actions turn out to be gradual and not draconian, the acceleration of technology will continue to propel a stock market rally, especially in the US.
That is, unless the politicians and the public turn against Big Tech.
Success Breeds Enemies
The Big Tech companies have made an extraordinary contribution to human progress. Current calls to break them up or regulate them as utilities are misguided. Big Tech has been an engine of globalization and supply side driven “good” deflation. These companies have come to dominate their respective niches by offering lower prices, achieving ever greater efficiencies through technology and by exploiting network effects that the internet offers.
Barring political interference, Big Tech will remain on the forefront of innovation. What the politicians, the regulators, the journalists and perhaps even investors don’t realize is that the Big Tech companies in the future will be competing against themselves. Right now this competition is already very visible with regards to the cloud, personal assistants, artificial intelligence (AI), virtual and augmented realities and even Big Data. Starting off from their own individual market niches which they created and dominate, the Big Tech companies are all moving in the same direction.
First, my list of the principal players that makes up Big Tech. They would be Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL), Facebook (FB), Microsoft (MSFT), Alibaba (BABA), Baidu (BIDU) and Tencent (700:HK). I would classify IBM (IBM) as a Big Tech wannabee. These companies have been made possible by the incredible progress in semiconductor chips sometimes labelled (incorrectly) by the short-hand “Moore’s Law”. The Big Tech firms have generally been users though not inventors of this accelerating semiconductor technology.
The American companies in the above Big Tech list have suffered pushback from two sources, i.e. unfavorable rulings from European tax and regulatory authorities and one snarky article after the other in publications like the Financial Times and the New York Times.
The European Regulatory Authorities Don’t Like American Big Tech
Recently there have been several major negative European decisions in the tax and regulatory area affecting the (American) Big Tech companies. The most egregious action has been the recent decision by European regulators under European Commissioner for Competition Margrethe Vestager to fine Alphabet $2.71 billion for Google’s favoring its shopping ads over rivals. As the Wall Street Journal put it in a June 29 article by Jack Nicas, Google has thrived by launching new services out of its search engine. This narrow, backward looking ruling strikes at the heart of Google’s strategy. The Europeans don’t care if Google benefits the consumer or that Google is now competing with the other Big Tech companies in areas described above.
Why have the Europeans taken this decision? The answer on the surface lies in a hostility among continental European elites towards accelerating technology and free markets, which not coincidentally are identified with the United States. There are after all no European equivalents to the American Big Tech firms. The Germans for all their technological proficiency have not come up with one. But I believe there are deeper, psychological reasons that may account for the continental European elites’ distrust of technology and anti-Americanism. In 1914 the Europeans (including the British), with their empires and with their universally admired cultures, ruled the world. By 1945, their cities lay in ruins and millions of their citizens were dead thanks in part to new technologies that had never been employed in wars before. These technologies had brought them death and destruction and a loss of European world domination. Worse, Europe had to be rescued by the upstart Americans.
The widespread European belief in the so-called precautionary principal and the strong opposition in Europe to genetically modified foods are two more indicators of European hostility to technology. But these are subjects for another essay.
The Journalists Have Turned on Big Tech
Coincidentally with the actions of Commissioner Vestager, what seems like a campaign against Big Tech is being carried out in the Financial Times and the New York Times. One might cynically ask is this campaign underway because the internet has made the newspaper business less profitable?
Below is a passage from FT economics writer Martin Sandbu, dated July 4:
“the internet platform businesses (Big Tech) exert systematic influence on our access to information and therefore shape how we act on it. The noxious effects of this range from built-in discrimination in the platforms’ algorithms to the advancement of bigoted world views through search engines and of course the below-the-radar targeting of impressionable voters, possibly with manufactured fake information.
The fact that the principal business on top of this earn ill-gotten gains thanks to their market power is bad enough on its own, but in the context of their socio-political systemic importance merely adds insult to injury. On both counts, however, the case for better public regulation is clear.”
The above quote in my opinion reflects a lack of appreciation of the competition that exists among the Big Tech firms and that is likely to intensify in coming years. Plus it ignores the incredible efficiencies that have been brought to the global economy by these companies.
The fake news argument is a trickier issue. Because of terrorist and criminal use of social media, the journalist critics and politicians want to turn the Big Tech companies like Facebook and Alphabet into censors. This after some resistance they are doing just that. This makes me uncomfortable.
Similar anti- Big Tech arguments are recited in a recent New York Times article by Jonathan Taplin entitled “Is It Time to Break Up Google”. Taplin really wants Amazon and Facebook as well to be broken up like Google, or—better yet—be regulated as utilities. In my opinion, this would hardly be in the interest of shareholders or society. Innovation would die at these companies and future competition among them would be limited. The companies would be penalized for being efficient and offering lower prices. Insane.
In a lighter vein, NY Times columnist Farhad Manjoo has argued that the Big Tech firms – his name is the Frightful 5 – are controlling our lives. Manjoo confessed he couldn’t give up their services – the “convenience trap” as he called them– but views the Five in a dystopian light. My own view – why would anyone choose inconvenience over convenience? When I read the article I thought Manjoo was inadvertently putting forth a Buy recommendation for the stocks of the Frightful 5 (Amazon, Apple, Facebook, Google and Microsoft).
On the Subject of Jeff Bezos and the Washington Post
It is not in the interest of tech investors that Jeff Bezos, Amazon’s founder and CEO, personally owns the Washington Post. Of course, as an American and under the First Amendment, he has a perfect right to this ownership. But the Washington Post has been extremely harsh—many would argue unfair — in its criticism of President Trump. Trump with his xenophobic immigration policies, his pressure on tech companies to manufacture in the US and his fondness for mercantilist industrial policies, has shown little knowledge of or sympathy for the tech industry. He has already conflated Bezos’ ownership of the Washington Post and Amazon itself. He may view Bezos’ ownership of the Washington Post as tech kicking sand in his face. Tech investors might prefer Bezos had bought say National Geographic.
China’s Internet Is Its Own World
The American Big Techs by and large are kept out of China. Access to the global internet is restricted. All this is the result of the Communist/Confucian-father’s need to control ideas and the East Asian Chinese economic model which is highly protectionist. So the Chinese internet giants only have themselves to compete with. This is suboptimal but mitigating this is the fact that China with its 1.3 billion increasing prosperous people is a huge market.
But internet companies in China have their own set of problems in a country where there is no First Amendment freedom of speech. Investors got a taste of this a week ago when the authorities suddenly charged Tencent’s on-line game Honor of Kings with poisoning the minds of Chinese youths and turning them into addicts. Tencent immediately instituted restrictions on juvenile access to the game. Investors must hope that Tencent has satisfied its Communist/Confucian-father masters. With 200 million users, Honor of Kings is the world’s most popular on-line game and a significant contributor to Tencent’s earnings. It reportedly is coming to the US.
China is a land of contradictions. Unlike Europe with its intellectuals’ anti-Americanism, anyone who has spent time in China will testify that Chinese people are very fond of America. So many Chinese executives, scientists and professors were educated in the US, like the United States and speak good English. (One hopes that Trump in his xenophobia will not try to limit Chinese students coming to the US.) China desperately wants to modernize further and is in love with technology. But its protectionist policies, information control and top down industrial policy work against it. China it would seem in tech has one foot on the gas and one foot on the brake.
The Big Tech American social media firms are not welcome in China. Apple is an exception but in my opinion is living on borrowed time. Only Apple hardware is welcome. When and if the Chinese can make a smartphone equal to or better than Apple’s, then it’s zaijian (goodbye) Apple.
Investing in Chinese stocks will always have some special risks. But Alibaba and Tencent (and Tencent’s affiliate JD.com) have made many unique innovations in such areas as payments, online to offline, and logistics. Some of their innovations are being imitated by the American Big Techs. The Central Government may give them a Confucian spanking from time to time when they step over some secret line but their stocks in my opinion offer significant long run opportunities.
An Example of a Good Deed Getting Punished — American Railroads
I had assumed that the extraordinary good brought to the world by Big Tech will bring some type of gratitude on the part of the public and policy makers. Until recently that has been the case. But we are in a new age of populism.
In the nineteenth century the American Midwest was opened up to settlement and agriculture by the arrival of the railroads. If you thought the farmers in the Midwest would have loved the railroads which made their economic existence possible, you would be dead wrong. The farmers hated the railroads. A major populist movement called the Grange and then the Populist Party lobbied against “railroad monopolies”. Eventually the Interstate Commerce Commission was created in 1887. The ICC and its fare regulation effectively drove the railroads – once a major interest of investors – into penury.