The Break Up of the Tech Platforms is Here

greg beier macroESG.com thursday 29 october 2020 10:42 PM EDT

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Markets, Politics, and Technology for a Sustainable Future

Actionable Ideas

• For long-only investors, exit the platform tech names that now account for about one-fifth of the S&P500’s market cap.

• For long-short investors, time to think about which pairs make sense in the new world that is coming with the Trump loss. I’ll put a few ideas together and roll them out when I’ve conviction in them.

• The next bull market will not be about GOOG, FB, AAPL, AMZN.

Performance of the Google, Facebook, Amazon, and Apple Since President Trump was sworn in.

The Big Break Up is Finally Coming

As Macro ESG has been writing about for some months, the arrival of the Biden administration will lead to Big Tech being tamed. Ultimately, this is good for the sector’s long-term growth, but it won’t be easy in the beginning. At the minimum, European GDPR standards will be implemented in the US. Then, non-core businesses will be spun off. Of particular interest is how the information hegemony that is at the core of these businesses will be altered.

America Loves to Go Big with New Toys

America loves to fall in love with new technology and let it run free. I was once having lunch with a European duke who remarked that he had loved living in New York and experiencing the American can-do spirit. He said that in his capital, people hear about a new idea and someone brings up Aristotle and then they discuss that for two hours. While I love the classical philosophers (and so does he), the point that he was trying to make is that Americans can just get on with it.

But now the tech era, which I have experienced personally since the age of 15 when I started working in a ComputerLand Store, is coming to a close - and that is a good thing.

The Administrative State

When America built the railroads all across the country, it led to the rise of the administrative state which has been a great source of America’s economic growth and strength. For example, if a train ran by a farm and sparks from the locomotive lit a farmer’s crops on fire, the administrative state dealt with ensuring that the farmer was compensated. It allowed the US to use technology on a large scale - fairly.

Now, the big tech firms are going to face the start of a new administrative state - which they have by and large escaped. Moreover, they are going to face a break-up in their economic concentration.

I had a terrific conversation with a retired American diplomat right before he’d passed and who’d help start the OSS during World War Two that he was truly worried about the impact of technology on children. This is going to be one of the key areas of regulation - and for good reason.

Time for Dynamic Law

I was listening to a Harvard policy talk online recently and the speaker, who hailed from Canada, made an interesting point. He said that in Canada laws are updated continuously - I believe that he said every five years. He felt that was a big contributor to America’s regulatory problems, because the laws get stale on the books here while in Canada they stay more dynamic. He said that this was the reason that Canada’s financial system didn’t get harmed by the financial crisis in 2008 - it’s because they’d updated their laws to reflect changes in finance. I thought that was a brilliant point and if adopted here, would do wonders for the US. He said that the US was caught out by the financial crisis as it was running its financial system on laws drafted in the 1930’s.

If we have dynamic markets - why not dynamic laws that are built to be updated, refreshed, and made relevant in five year cycles? I think that it makes perfect sense. Plus, it’ll give all of the lawyers who are about to be made unemployed by the rise of AI and tort reforms something to do.

Trump is Afraid of Apple

Donald Trump who loves to criticize all manner of men and beast - has never been negative about two entities: 1) Vladimir Putin and (often less discussed) 2) Apple. In the case of Apple, the tech giant was granted exemptions from the tariffs that hit so many other businesses.

As the New York Times reported on March 23rd, “While Apple is among the biggest and most prominent importers of goods assembled in China, the company has mostly avoided tariffs on its major products throughout the yearslong trade war. Some of its most lucrative products, including the iPhone, iPad and MacBook, weren’t subject to the tariffs even though large swaths of imported goods from China were. Other products, such as computer components, a wireless mouse and now the Apple Watch, received exemptions. Apple’s requests for exemptions for other devices, including AirPods, the iMac and its HomePod wireless speaker, are still pending.”

Apple is Different

Apple’s motto used to be “Think different.” Now, it really is “Apple is Different.”

Recently, I heard Apple CEO Tim Cook on the Atlantic online conference. He made one point there that I’ve been rather fascinated by and long wondered about. He said that Apple does not build profiles of its customers and that Apple has decided to put its customers first and that means protecting their privacy too. Apparently, Apple is not selling advertising - which is really the root of the privacy problem.

If the tech platforms were forced to sell their services without any advertising - but for a straight cost - I wonder what that would be?

Global Power Dynamics

The implications of breaking up big tech are significant.

For starters, it shows that the Europeans were correct in their implementation of GDPR and that this will likely lead to the US doing the same thing here. If the US does lead to more tech regulation, then it is likely that the US tech firms will be forced to pay more tax abroad. I am not a tax expert, but this seems likely as the users are the product which is what happens when services are free.

Competitors in other areas - particularly China - may use this era of regulation as an opportunity to attempt to beat the US companies in other markets. America will have to be careful in how it prunes its tech giants so as not to impair them in international markets. In that sense, the US will become something of a digital mercantilist in much the same way that China is with Alibaba.

Economic Concentration is Bad for Growth, the Consumer, and Labor

The American economy has become sluggish from low to no real growth since the private equity boom led to the economy being dominated by oligopolies and monopolies. This has been bad for growth, the consumer, and labor too. For example, Americans pay far more for mobile phone services than consumers do in France.

This may lead to a decline in the private equity business overall, or at least it going overseas where the antitrust laws aren’t as severe.

While America has gone to a so-called startup culture, the equity culture in America has actually faded out. The number of companies listing has declined markedly over the past 20 years as well as the number of companies going public too. in fact, i was talking to a CEO who said that he’d rather go sell out to a private equity firm for 20% less and let them deal with the headache and legal hassles of being listed.

Investment Implications

Long-only investors should get out here - plain and simple.

Long-short investors should get their track shoes on and prepare for a compelling time coming up. I’ll put a few ideas together and roll them when I’ve conviction in them.

The entire investing tableau is about to change and while tech will still be strong, the regulatory environment will change so significantly that their profitability and growth profile will shift into an altogether new and, dare I say it, diminished utility’ish role in the economy.