SOCIAL MEDIA IS A SOLID SHORT
Gregory C. Beier
Macro ESG Strategist
Sustainability Arbitrage LLC
Tuesday, January 12, 2021 09:01 PM EST
Macro ESG = Markets, Politics, and Technology for a Sustainable Future
Summary
The time has come to short social media which means Facebook and Twitter as they’ve been the engines of the political controversy.
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After last week’s attack on Capitol Hill, Congress has impeached the President for a record second time and will certainly reign in his tool of power - social media.
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The Russell 2000 Small Cap index is up ~20% since the election of Joe Biden on November 10th, indicating a change in stock market leadership.
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As Facebook has been riding a wave of goodwill for a long time that has allowed the company to remain exceptionally profitable – that goodwill free ride is totally over, and the pendulum will swing the other way. Facebook may be broken up on anti-trust grounds and long investigations and hearings will be burdensome to the company.
MACRO
Markets
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The US stock market appears to be changing leadership. Facebook has been one of the strongest performers since it came public in 2012. Equity markets around the world are showing surprising strength and the star performer in US equities is the Russell 2000 Small Cap index since the Joe Biden election win in early November.
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None of the other social media names are tied to the political controversy like Twitter and Facebook, as their actions to restrict the President have clearly signaled their responsibility.
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In 2020, the biggest divergence ever between sectors in the S&P 500 was between information technology and energy – nearly an 80-point spread – a record (an excellent observation by Jeff Gundlach of Double Line today). It would not be surprising to see a reversion to the mean; hence, pulling the high flying social media companies down.
Politics
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After the storming of the US Capitol by Donald Trump’s hard-core supporters, the US government – particularly the US Congress – is incensed that the Capitol building should be breached by an angry mob and sacked has motivated the entire body to move forcefully on who and what made that possible.
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To that end, President Trump is being impeached for a historic second time, permanently destroying his legacy, and the US government will come down hard on everyone and every tool that made it possible so that it doesn’t happen again. Facebook and Twittter tried to get ahead of the problem by banning Mr. Trump from their platforms, but once the hearings and investigations get underway, it seems likely that both companies are in for a lot of regulation and fines. Their golden era is over.
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As Senator Warren published a plan to break-up Facebook when she ran for President, it seems likely that this plan may even be dusted off and brought out again to see if the Biden Administration is keen to apply anti-trust to Facebook.
Technology
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Breaking-up Facebook may be the appropriate rebuke for a company whose algorithm, many experts claim, makes money by serving up highly emotional, viral content that may have led people to becoming radicalized. If true, then the entire revenue model and viral engagement strategy of social media may be called into question – threatening its very reason for being.
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Once the hearings get underway, there may be additional calls to scrutinize Facebook’s privacy policies – the Achilles heel of modern technology. This may further drive a push to break Facebook apart to avoid the over-concentration of personal information in one company.
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Facebook and Twitter may even be forced to disgorge their profits from promoting nefarious content if its algorithms are found to be at fault. Nobody has suggested this, as far as I know, but it just seems logical that hearings would end with that being ordered which would really change the way algorithms are used and possibly impact the way intellectual property is valued.
ESG (Environmental Social Governance)
For a Sustainable Future
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Environmental: Clearly Negative
This is clearly negative for the environment, as the government is bogged down in an unnecessary emergency that is driving the American public apart. As written about yesterday in “The Greatest Global Risk,” if the United States government cannot effectively function because of money influencing policy creating polarized politics – and social media has a significant role in this outcome – then social media is threatening the capacity of the United States to be able to agree upon basic facts and govern rationally, which would greatly thwart its capacity to deal with climate change and serve as a global benchmark for good governance.
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Social: Online Radicalization Finally Comes Home
The negative externality of online radicalization is a huge, possibly even catastrophic, cost to society at the national level and across the world. As we have seen with ISIS / Daesh and Al Qaeda, it is extremely important to prevent people from getting disconnected from reality and caught up in fringe groups that are expert at grooming and cultivating vulnerable potential recruits. It is essential that social media keep people from going rogue. The risk is so great that it may eventually lead to social media platforms having liability if their users become radicalized and commit heinous acts on their technology. It’s a colossal problem, but as written about in “Worse than Watergate: The US is a Long-Term Buy,” that the people who stormed Capitol Hill may not have done so:
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“If modest steps had been taken to share the gains of globalization, there would not have been a Trump presidency;” and
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“America’s great policy mistake during the Reagan Era, and really since 1970 when the middle class began its secular decline, was to pursue economic policies that produced wins without managing the costs – in other words – without sharing the gains.”
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Governance: Twitter is Special
Twitter has a silver lining in that it miraculously has become the unofficial bulletin board for world leaders to make verified, real-time statements. This is a remarkably precious development and is uniquely American as it depends on every other nation’s faith in the United States to not interfere in a private enterprise as well as in America’s commitment to free speech.
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For example, just today, Secretary of State Pompeo put out a tweet at 10:00 AM EST critical of Iran and the Foreign Minister of Iran retorted at 1:47 PM EST followed by Secretary Pompeo at 3:30 PM EST.
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It’s purely astonishing that the President of the United States had his most important communications tool taken away from him by a private company, following a widely recognized travesty, and there is nothing that he can do about it.
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That speaks volumes about the integrity of the American system. In almost any other country, the CEO and his senior team would have been forced to make a change.
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