Written by Lance Roberts, Clarity Financial
Doug Kass had an interesting point on Apple’s surge to $1 Trillion in market cap.
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A consensus has formed among economists that the trend toward corporate concentration – in terms of the size of companies and their grasp on profits – is real and may be long-lasting.
“The number of papers that are being written on this from week to week is remarkable,” said David Autor, a Massachusetts Institute of Technology economics professor who has studied the phenomenon…”Apple and Google combined now provide the software for 99 percent of all smartphones. Facebook and Google take 59 cents of every dollar spent on online advertising in the United States. Amazon exerts utter dominance over online shopping and is getting bigger, fast, in areas like streaming of music and videos.” – New York Times, Apple’s $1 Trillion Milestone Reflects Rise of Powerful Megacompanies
With much justification, a small group of stocks, referred to as FAANG, has dominated the U.S. stock market and U.S. economy.
Nearly half of this year’s gains in the S&P 500 Index have come from the five component stocks of FAANG (Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet – aka Google (GOOGL) ).
Lance here:
A couple of week’s ago I addressed this market capitalization issue, to wit:
“The current environment has the look and feel of a late-stage market cycle. This is particularly the case when you have 20-stocks making up more of the overall S&P 500 index than the bottom 400 combined.”
“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.” – Bob Farrell’s Rule #7:
Back to Doug:
Indeed, FAANG stocks have fueled much of the near-decade-long bull market since March 2009.
The rise of FAANG has contributed and influenced our domestic economy, in a not-so-good way. Facebook, Amazon, Apple, Netflix and Google’s unfettered growth has manifested in declining levels of unionization and contributed to the disruption of numerous industries, thus influencing the general trend of weak wage growth and impacting the rise in income inequality.
As the technology of FAANG has rapidly eclipsed the influence of regulatory supervision and an antiquated antitrust legislation, their sales growth and market dominance have gone nearly untouched by the hand of government.
The business media has rejoiced in Apple reaching a $1-trillion market cap and, not surprisingly, has embarked on a trivial, simplistic and superficial discourse, questioning how much further Apple can rise, which will be the next $1-trillion company, and so forth.
Rather, one should consider the consequences of the concentrative issues relating to FAANG and consider what happened to the U.S. and global economies when our banking industry grew exponentially by leveraging itself into oblivion, proving that it was not too big to fail in 2008-2009.
“A year ago, the big tech companies were basically untouchable; today, they seem not to be.”
– Luigi Zingales, University of Chicago
To me, the existential risk to FAANG is that their growth is dulled by the above realities and the U.S. government takes a more aggressive position toward FAANG’s domination. After all, in an age of populism seen both on the political left and the right, assaults by legislators and government regulatory bodies seem likely to intensify.
As well, should the current phase of protectionism continue and the possibility of trade wars intensify even further, it could result in the disruptors being disrupted.
After all, nearly 19% of Apple’s sales are derived from China.
By contrast, the existential risk to our economy is that their growth is allowed to continue at a helter-skelter pace, with some of the downside factors mentioned in this morning’s missive multiplying should the growth snowball be permitted to roll further down the economic hill.
Doug’s point is interesting as it dovetails into an article that David Robertson, CFA wrote for RIA this past week wherein he noted:
“Such competition moves the tradeoffs of centralization vs. decentralization to the geopolitical stage: ‘The AI competition may be better viewed as part of a broader struggle between a decentralised democratic model and a digital authoritarian system.’
So are technology companies breaking bad? That would probably be an overstatement, but it is very fair to say that many of the elements crucial to harness the full potential technological innovation are underrepresented in today’s environment. Knowledge of technologies is insufficient, governance is slow and weak, and public engagement is low. This creates a weak position from which to wrest power from companies with strong economic incentives. This is important for investors. Unless things change, there is a good chance that not only will the great potential of technological innovation fail to be realized, but also that such innovations will continue to be exploited right up until things break.”
The risk of concentration into the few stocks poses an enormous risk to investors when, not if, something inevitably goes wrong.
As we saw just recently with plunges in $FB and $NFLX, given the massive levels of leverage currently built into the system a concentrated sell-off in the FAANG stocks could lead to a rather disastrous unwinding for investors.
While such an event is widely dismissed as impossible, it is important to remember it was deemed to be that way previously. This tweet from David Rosenberg sums it up succinctly.
As I noted last week, the underlying economic environment, and the associated structural deformations pose a substantial risk to investors longer-term.
“While fighting trade wars, pushing tax cuts and increasing government spending may provide short-term boosts to the economy by pulling forward future consumption – they do not address the issues which are detracting from longer-term growth.’
- Debt
- Spending Hikes
- Demographics
- Surging health care costs
- Structural employment shifts
- Technological innovations
- Globalization
- Financialization
While Doug’s, David’s and Rosie’s points are valid, these are issues that will take time to develop. As such, the ongoing performance of FAANG stocks will continue to lure unwitting investors into the trap which will eventually lead to their demise.
But such is the nature of markets historically.
Just be careful you don’t get F.U.B.A.R.ed. (FAANG’ed Up Beyond All Recognition)
