Have you ever heard the term, “this time it’s different?” I know, of course you have. And if you’ve ever been one of the unfortunate (or fortunate depending on your idea of integrity) and dared question the regurgitated metrics as to value anything in regards to tech, social, or dare I say it, unicorns. Not only did you hear this term, but it was used in much the same vapid manner as a teenager used their version of the same. e.g., “Because, just because!”
For those who think this is not a fair comparison (i.e. Silicon Valley aficionados, next-in-rotation fund managers et al.) I’ll add just one more example that usually followed, like day followed night, if you dared push for more answers of clarity:
Silicon Valley: “You just don’t get tech!”
Teenager: “You just don’t get it!!”
Then the subsequent storming off to express their outrage via a screamfest into their screen of choice. Sound that dissimilar now?
This has been the world of both business and investing going on now for nearly a decade. So with that said, invoking a grown-up induced tone of delivery, I dare say, “It’s different this time” to all those that once stood behind this gleamed, seemingly beyond reproach of an excuse. The reasoning I’ll explain as we go along is quite simple. To borrow from one of my favorite movies, “Constantine” (2005, Warner Bros.) when the Devil confronts the angel Gabriel: “Looks like somebody doesn’t have your back anymore.”
That “somebody” would be The Federal Reserve.
So now some of you might be asking: “What does the above have to do with the title I began with?”
It’s important for context, as it is at the heart of the arguments or clarion calls emanating from an ever-growing chorus of angry, or cautionary voices that at one time were arch defenders of Silicon Valley and all its ancillary brethren of tech everywhere. The only problem is – they seem to never quite say it. They use arguments and examples that from my perspective address symptoms – not the cause. And Mr. Galloway’s argument demonstrates exactly that.
Before I move on, let me make one thing clear at the outset: This is not a “hit piece” on Mr. Galloway. Far from it.
I have nothing but respect for him, along with his opinions. He’s one of the few academics in education that actually understands, while simultaneously defends capitalism. I believe he’s showing great fortitude in making the case that he is, making it publicly, and sometimes, directly in front of those that actually might be paying for his appearance. One should have admiration for that. He’s putting his opinions where his money, and quite possibly, livelihood is. And that takes guts, real guts. I only take issue in how we arrived, and what is to be done going forward. So for the record: I’m more apt to agree with Mr. Galloway’s opinions than disagree. Just so happens this time, I see things a little differently. Nothing more.
Last week Scott (I use the familiar only for ease) had an article published in Esquire™ with the ominous title, “SILICON VALLEY’S TAX-AVOIDING, JOB-KILLING, SOUL-SUCKING MACHINE” The premise: “Four companies dominate our daily lives unlike any other in human history: Amazon, Apple, Facebook, and Google. We love our nifty phones and just-a-click-away services, but these behemoths enjoy unfettered economic domination and hoard riches on a scale not seen since the monopolies of the gilded age. The only logical conclusion? We must bust up big tech.”
As I implied prior: He’s not mincing words. And in some ways I agree with his call. It’s in the how, and why that I differ with. I’ll take a few of his points on directly. However, I believe one should read the aforementioned article in its entirety and come to one’s own conclusions. Whether one agrees or not, it’s worth the time. For those who would rather watch it in video form, you can view it here where he delivered pretty much the entirety verbatim in premise, which is where I first heard it. He also delivered much the same at a more recent DLD™ conference just a few weeks ago. So, it’s not like it was a one-off, or intentional one-and-done. He appears quite resolved.
Now with the above for context let me address, in no particular order, a few of his arguments.
First: Amazon™, and Apple™. To wit:
“The benefits of big tech have accrued for me on another level as well. In my investment portfolio, the appreciation of Amazon and Apple stock restored economic security to my household after being run over in the Great Recession.”
This one statement tells you more about what has taken place over the last decade than nearly anything else. Not just for Scott per se, but for the entire world connected to the capital markets. The reason why these companies have grown to such behemoths is for one reason, and one reason only: Central Bank largesse. Period, full stop.
When it comes to Apple I have made it known that I am a product user and fan-boy. However, with that said, I also have some very firm disagreements with what I see flowing out of, (or not flowing out, depending) of Apple and have been openly critical, much in the same way a family member will openly criticize another when it appears they’re making obvious blunders.
But Apple does one thing that nearly all the others can not equal: They make a product that people will pay-up for, that generates obscene net profits relative to all comers. All in a market where there is literally a myriad of alternatives to choose from. e.g., In 2015 they earned 92% of all the profits of the smartphone market on a 20% market share. It’s come down since then where it’s now in the 80% range. Yet, if you average it out with 2016’s 103.6% share? Let’s just call it what it is shall we? Incredible, and well deserved. Remember – You have to buy, pay-up, and they are only 20% of the global market. Like it or not, Apple can arguably be what it is today without central bank largess. Although its current market cap may be far lower.
Amazon can not.
As much as everyone loves Amazon (which I too use, and a fan) Amazon as a business, without central bank largesse known in the U.S. as QE (quantitative easing) and in Europe as “whatever it takes” or in Switzerland as “One of the The Swiss National Bank’s premier investments) Amazon goes from a market capitalized juggernaut; defying any and all constraints of business fundamentals; with the ability of not only crushing competition, but suddenly constrain (by putting the fear of God) their investors into selling shares with just a simple press release – to possibly, and also quite arguably – to be nothing more than an entry in the annuls of business as one of the tried and failed retail experiments of the internet. (I can hear the gasps through my monitors.)
Again, without central bank front-running by most, if not all, the major investing firms – there was no “buyer” per se for more Amazon risk shares. What Jeff Bezos did that needs to be commended is this – he understood that in order to survive he needed to do two things well. First: If they were going to keep buying shares – he would keep reinvesting as much and as fast as possible, till it stopped. Second: After the financial crisis is was all about narrative. Business metrics, fundamentals, ________(fill in the blank) were no longer relevant. All that was relevant was – the story to sold. e.g., The growth narrative. And sell it he did.
As far as a business? If not for AWS™ (Amazon’s cloud business) which turned out to be the exact right story, at the exact right time, who knows where Amazon would be today. This one story not only allowed for, but added exponential weight to any investment house narrative to sell the same “narrative” to others. All propelled by QE from here and abroad to be front-run.
To reiterate: Had it not been for AWS – there would be no Amazon as it is now known. And had it not been for central bank largesse – it is arguable there would be no AWS, for Amazon might not have had the investor backing (or should I say near religious backing) that it has today. All conjecture of course, but I stand behind it, vehemently.
Which brings me to Scott’s call of, “Break them up.” Although I agree with his points, I see it coming from a different place entirely.
I am of the opinion Amazon may be broken up in the very near future, but now how Scott does. I believe Amazon and all its subsidiary components will befall the same fate that always happens to behemoths in a market down turn. e.g., Calls for unlocking share holder value – from share holders. And make no mistake, yes, I believe that “market downturn” is upon us.
The funny thing here is, it’s going to come via the behest of a quasi-government directive, not the actual. e.g., The Federal Reserve’s normalization process (aka QT, quantitative tightening) along with further interest rate hikes. We got a glimpse of what that’s going to look like over the past week – and I do not, for one moment, believe that we are through. Let’s just say I’m in the camp of: we just witnessed Round #1. How many further before the K.O. is now in the hands of the betting parlors known as “Wall Street.”
Which brings me to the other two of Scott’s clarion call: Facebook™ (FB), and Google™ (aka Alphabet™)
When it comes to FB there has been more calls about “Fake” this and “Fake” that than nearly anything else. What I never hear in conjunction with all this fake is just how fake the metrics for all these colossal “ads for eyeball” purveyors has been. Is it me, or has anyone else noticed that suddenly, out of nowhere the “growth story” for these two not only stopped but reversed in conjunction with “fake?” Don’t take my word for it, look up their latest earnings report. It’s all there and more if one cares to look. And it would seem, quite a few did just that.
Scott goes on in his article about what the economic impact of FB has been on the advertising business, and in particular, the personnel that was once used or employed.
The issue I have here is only in the once held with religious zeal mantra of “you need to be in social” that was being told and sold throughout advertising by, of course – those that sold social media.
The “ads for eyeballs” narrative was such an easy sell. i.e., “This is where your customers are so you need to be there!” All sounds fine and dandy till many began realizing those “customers” were either, A) Bots that do nothing but click and suck the life’s blood of one’s advertising budget. Or, B) Children, teenagers, Millennial’s and more that are offended if you dare ask them for money, or put an ad in their viewing space when they’re busy consuming a Kardashian escapade. Or said differently: Ad dollars paid has not been a reciprocating process for those picking up the tab. (Hint: See P&G™ as just one example.)
Advertisers have been both lazy, as well as unsure when it has come to advertising on social. But now more and more are questioning their budgets, because (wait for it…) it would seem far more have not panned out as they were originally sold. i.e., Most never paid for themselves. And the once adamant “ad agency pros” are having to answer for those poor results. And it’s getting more difficult by the day.
When the client says “put me in social, regardless” you put them in. When they start asking “What am I getting for all this social?” The campaigns begin changing. And that has been ongoing for a bit, and I look for it to be accelerating. FB and Google, I have contended, has seen “growth” in its advertising business only for being the last juggernauts standing. If the latest earnings are to be looked over with an inquiring eye of what the future may portend. Growth may be a harder term to apply in future reports.
FB is currently (and yes still) priced for perfection as far as its share values are concerned. However, so too was AOL™ back in its heyday. And as soon as the “ad story” of metrics changed? So too did the future of AOL.
I have always asserted, as well as argued, I believe FB to be nothing more than this periods AOL, meeting a similar fate. Heresy, I know, but that’s where I stand. And if I’m correct? Breaking it up won’t be hard to do – just like AOL. Remember the unlocking shareholder value example I used with Amazon? Need I say Instagram™, Oculus™, ___________(fill in the blank)?
And what about Google? Here I’m not exactly sure, but I did notice something quite interesting the other day that deserves attention and fits in with all of the above. Did anyone else notice the timing when suddenly ad clicks that are up near 50%, dropped in value by 14%? One would think if these “clicks” were delivering bona fide sales numbers to the advertisers bottom line their value would hold much firmer. That is, unless these “clicks” are just being made up via making the “click farms” work overtime to keep their bottom line in line. Think about it.
Then there was this: Suddenly in the middle of this “less money for clicks” the company folds back in Nest®. This was supposed to be the exemplar on how its “other bets” would be rolled out into stand alone entities. Suddenly, there seemed an urgency to “roll-it back in.” Coincidence? Possibly. But back to Scott’s point on needing to “break them up.”
If we are in what may be a nasty down draft that causes significant angst on the “markets” and the share value of Alphabet and the others begin tanking in earnest? Hint: Remember the phrase “Unlock share holder value by breaking them up” coming from shareholders, no government intervention required. Or said differently: Look for Nest and more to be pushed back out via calls made on Android® phones. (pun intended)
I’ll leave this conversation on one last point. Yet, it also illustrates just how far we’ve traveled down this road where reality has been altered in such manners and forms, arguments are being made in regards to symptoms rather than the underlying that’s directly in full view. Yet – it appears everyone has either turned a blind eye, or is just too close and can’t as the old adage goes “See the forest through the trees.” And to demonstrate the point, I’ll finish with another example Scott used in his thesis, and that, is Uber™.
Uber, and the entire stable commonly known as Unicorns, would not, could not, have ever existed without the hot money supplied via central banks along with its empowering disregard of any and all business fundamental, regulations, or ethics. Again, period, full stop.
In a world where money was not created ex nihilo and funneled directly into Wall Street, or the global markets for that matter, these companies would have either, A) Been limited in scope and scale to be nothing more than a pimple on the arse of the business world. Or, B) Bankrupt and out of money long ago based on what is fundamentally known as running a for profit business that can pay its bills using 1+1=2 math.
Uber, and most, if not all of its stable mates are in the “cash burn” business. This model suits only one dynamic: Making a very few, very rich.
In a sane world Uber, at best is an app business. And how viable at that is only proportionate to already established laws for taxis globally. Had Uber not had the availability of “hot money” flows via central bank largesse, then use math in an equivalent that would make Merlin blush for its alchemic features. It would have never had the strength of balance sheet to hire, let alone attract the high-flying political entourage (think David Plough for one) the payouts, (and/or purported pay-offs) of industry officials, insiders, _________(fill in the blank) and more, with a complete and total abandonment for recourse.
A touted $70BILLION dollar valuation would have never been seen as possible, never mind probable just 10 years ago. But today, it’s made one of the most derided CEO’s of Silicon Valley a billionaire.
Yet, just like I started this all with. If my “central bank” theme was wrong? Then I would not have accurately called for the decimation of IPO’s back when everyone in “The Valley” scorned that it was me that was the one who “Just did not get it.” And yet? How’s that whole IPO thing still working out?
But here’s the real “money quote” if you will that sums this all up as to whether I may, or may not, be correct about what I’m arguing. And it is this…
The few of us that have been banging the desk along with keyboards, stages, and airwaves saying that this entire market was built as either a Potemkin Village or House of Cards, have been maligned with calls of “Chicken Little,” Cassandra,” or my personal favorite “People that have missed this rally and are only pissed off for it,” and that’s just the mainstream business/financial media.
Yet, what I’ve long argued over these years is this: “We’ve been wrong – for the right reasons.” And the way one would know, or at least possibly construe which side had the more valid argument in the end would be addressed if, and when, the central banks actually began the unwinding of QE in earnest.
Hint: Last week was that moment. Now it’s all about follow through. Both via the central bankers, as well as the “market” in a now evolving game of “Chicken.” If I’m correct in my readings of what is taking place currently? Scott is going to get his wish…
Just not in the way he thinks, because this time – it’s different.
© 2018 Mark St.Cyr