It’s never been a better time to be a contrarian.
QE has created too much money chasing too few good investment ideas, which quickly becomes a crowded trade.
The following article was originally published in “What I Learned This Week” on July 20, 2017. To learn more about 13D’s investment research, please visit our website.
QE has created too much money chasing too few good investment ideas, which quickly becomes a crowded trade, and therefore dangerous, and subject to a violent reversal. With the demise of traditional media and the rise of fake news, it is harder than before to measure extremes in media sentiment. Nevertheless, magazine covers are a measure of peak interest, which is a barometer of extremes. The Economist is still very widely read and its covers have been excellent contrary indicators over the years. As we have written for decades, everyone pays lip service to contrary thinking, but few can execute it because being a contrarian requires an extreme form of independent thinking. The crowd feels comfortable and safe with company.We don’t.
Let’s begin with the classic The Economist cover story from December 3, 2016 entitled “The mighty dollar.”
We have warned about capital concentration in the U.S. since early last year, but The Economist cover from December 3, 2016 nailed the top almost perfectly. With the euro having rallied from 1.0388 on December 20, 2016 to a high of 1.1631 on July 20, 2017, this cover is a perfect example of peak interest and the power of contrary thinking.
Now, how should we interpret the March 25, 2017 The Economist cover story on “Amazon’s empire”?
When added to The Economist cover of May 6, 2017 on “The world’s most valuable resource: Data and the new rules of competition”?
And included with, this photo of Jeff Bezos from the July 2017 Allen Conference in Sun Valley juxtaposed on a 1998 picture. From bookseller to the Terminator.
A new study by Ball State University’s Center for Business and Economic Research found that, in coming years, about half of American jobs are at risk of being replaced by automation. This is an old topic for our publication as we have warned about this for over seven years. At some point, the political pressure caused by job loss and loss of tax revenues by state and local governments (see section 4) will reach such an extreme that a reversal will happen.
When the tech “bubble” bursts, it will have immense consequences. First, another pillar of support for the U.S. dollar and investing in the U.S. will crumble. That means more capital will be withdrawn from the U.S., bringing further weakness in the U.S. dollar — all of which will feed on itself. Second, the bursting of the tech and dollar bubbles will weaken the case for passive investing and bring back to life active money management. As performance shifts from the S&P 500 and its heavy weighting in tech stocks to other parts of the world, capital will go as it always does to where it is treated best. Third, capital may be harder to come by for technology investments, especially as the reign of “free money from the Fed” comes to a close. Fourth, the tech onslaught, which has brought terror to every industry, could be slowed.
The real problem with tech is Silicon Valley’s cognitive bubble. For a number of years, we have warned about the disconnect between the tech innovators and the real world. In early 2014, we shared a telling anecdote from a West coast acquaintance. “He just moved into an ultra-sleek new building in an up-and- coming neighborhood in San Francisco. On his way out to dinner (booked, of course, via an app on his iPhone), he was unable to open the building’s door to get to his waiting Lyft car because of several homeless people sleeping in front of the building.”
Silicon Valley is primarily focused on tackling the challenges of an affluent, tech- savvy class of consumers. But, what about the problems that actually need solving?
As The Financial Times’ Rana Foroohar recently argued, Big Tech has become the new Wall Street — out of touch, disconnected and insensitive to the needs and concerns of the common man. While recent complaints from numerous women about sexual harassment have forced the Valley to take a closer look at its own inner social failings, it has yet to engage in growing public concerns about tech-related job destruction, monopolies and privacy.
As Foroohar writes:
“When I ask most techies about these concerns, reactions tend to range from defensive to naive to clueless: ‘Politicians don’t understand the Valley’, or ‘Universal basic income will make work irrelevant’ [the modern equivalent of Marie-Antoinette’s classic ‘let them eat cake’] or, worst of all, the patronising smile or exasperated look that says: ‘You’re not a tech insider, and thus you just don’t get it.’
Frank Pasquale, a University of Maryland law professor and noted Big Tech critic, cites a telling example of this attitude. ‘I once had a conversation with a Silicon Valley consultant about search neutrality [the idea that search engine titans should not be able to favour their own content]. And he said, ‘We can’t code for that.’ I said this was a legal matter, not a technical one. But he just repeated, with a touch of condescension: ‘Yes, but we can’t code for it, so it can’t be done.’ The debate would be held on the technologist’s terms, or not at all.’
All this reminds me of the cognitive bubble that financiers were in before (and in many cases after) 2008. Like the tech industry today, finance did a good job of using its money and political power to hold the debate over reform hostage to its own interests. Policy conversations were made as complicated as possible to keep ‘insiders’ in control, even though the simple questions — is the financial system helping the real economy and society or not? — were often the best and most important. Cognitive capture of decision makers was rife because financiers and regulators lived and worked in the same echo chamber. Many bankers I knew seemed befuddled about why people were so angry with them. No wonder — they had never met any ordinary people before.
All this is true when it comes to Big Tech today. ‘Silicon Valley talks mainly to itself,’ says Vivek Wadhwa, a software entrepreneur and fellow at Carnegie Mellon University.”
Reportedly, Google has already hired at least five top law firms to fight the $2.7 billion EU anti-trust ruling. While Big Tech’s arsenal is deep, a day of reckoning looks increasingly inevitable. The Valley’s bubble looks to be increasingly vulnerable from multiple fronts. A Credit Suisse report released last week points out, that relative to the broader market, the performance of FAANG stocks (Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet) have moved inversely with interest-rate direction since 2003. The inverse relationship implies “a move higher in interest rates in 2H17 could be a challenge for the group,” the note said.
This article was originally published in “What I Learned This Week” on July 20, 2017. To subscribe to our weekly newsletter, visit 13D.com or find us on Twitter @WhatILearnedTW.
