Putting COVID-19 aside, I’d say the biggest story of the past decade was the meteoric rise of the tech industry, a story that begins during the Great Recession. About twelve years ago we witnessed a bloated derivatives market threaten to tank global capitalism as we knew it when everyone suddenly learned what a CDO1 was. The smart people had outsmarted themselves and created a perpetual money machine that they couldn’t control, so the markets freaked and everyone took a hit. Americans voted for change and brushed up on Keynes, and other smart people were tasked with creating a regulatory structure to try and prevent it from ever happening again. We assumed that we’d learned our lesson and were better for it.
Yet during the last decade of rapid growth, most Americans haven’t become better for it. The average citizen has gained no additional purchasing power2, no accumulation of wealth, and enormous uncertainty in the future. The only way to get on the path of upward mobility was to fully embrace tech. Smart people did because that’s where the growth was, so the rest of us would be stupid not to join them.
No matter where you line up on the case for supply-side economics, we can all generally agree that growth is good. After all, growth in tech over the last decade was the engine that rescued the jobs market, the housing market, the consumer market, and investment markets. Over that span, we also changed how we define employment in response to a boom in contract labor, and we decided that corporations were people. It was a weird decade for sure, but unemployment figures crept lower, equity markets shot higher, and we finally put the Great Recession deep in the past.
Meanwhile, continually depressed interest rates juiced the market as low yields in bonds pushed many investors to accept greater risks to chase returns, and speculation went wild. An onslaught of tech IPOs injected something new and enticing in stocks, and a rush on zero-commission brokerage firms opened the doors to greater participation among retail investors, who quickly got drunk on growth. Eventually, tech stocks were in such demand that the only way to justify the spike in price was to ignore old-timey metrics like P/E ratios in favor of figures like user base.
Forget About Profit
Many of these firms are not yet profitable and everyone insists that’s fine. But the problem here is, many never will be. Take Uber for example, who went public in 2019 and, at the time, admitted to the possibility that it may never turn a profit. Investors didn’t seem bothered, though, because Uber was positioned at the top of their market. They would have the access to capital and the organizational mobility to react well to market shifts, and, if they ever needed to, they could probably just acquire someone profitable along the way and figure it out. Or whatever.
What may get lost in the story of Uber’s growth, however, is that it’ll be at the expense of dozens of rival firms that were undercut by Uber’s loss-leader status. Some might think that’s basic capitalism in action: assuming that the service is of comparable quality, the cheaper rate should attract the most consumers. But what if that cheaper rate produces a net loss for a firm? Shouldn’t they eventually be run out of business? Aren’t companies in the business of making money and not losing it? Considering Uber’s stock is currently trading at an all-time high3, the investors that would be most hurt by a possible collapse don’t seem worried at all.
Now, Uber has certainly diversified their offerings to increase revenue since their IPO, and they do now claim that they’ll be profitable by next year. And maybe they’re right. Then again, maybe one of the new SPACs4 that formed this year will instantly legitimize some upstart with a multi-billion-dollar valuation that threatens to cut into Uber’s market-share, at which point Uber would have to push their timetable for profitability back a few more years as they funnel additional money into growth, even though that return on their dollar continues to dwindle.
Look Towards the Future
But I’m just using Uber as an example, and I won’t even get into their plan to partially compensate contract workers with stock.5 I could just as easily sub in Pinterest or Snapchat, or rail about how Tesla is overpriced6, or maybe take some cheap shots at also-rans like Theranos or WeWork. But that all distracts from what I’m really getting at here: we’ve let tech ruin America.7
What we need is a strong foundation for economic stability, but what we’re faced with is a collection of poorly run firms that are burning through cheap money to create a mirage of growth. The only way to maintain that illusion is to keep interest rates depressed indefinitely so speculators remain interested. Then, in that instance that a firm should find itself struggling to remain solvent, they can simply afford to borrow more. This allows bad companies to continue anti-competitive practices in a desperate play to remain relevant, and it can prevent superior firms from growing simply because they lack the access to capital. That’s good for investors until it isn’t. Eventually, someone pays the price.
Right now, cities and states are trying to lure tech companies with lucrative tax incentives as bait, most notably when Amazon sought bids for their HQ28. When a deal is struck and a firm opens a new campus somewhere, they come to employ hundreds or thousands, instantly reshaping the culture around it. Goods and services then shift to accommodate the new spending power9 and communities are forever changed.10 But should we be ceding that much influence to such a volatile industry?
A Positive Feedback Loop
Speculation is a necessary element of capitalism,11 but should be engaged in moderation. When the CFPB12 was established in 2011, its role was to regulate financial institutions to prevent the proliferation of speculative instruments that could wreak havoc on the economy at large. So, speculators just moved from risky derivatives into growth equities and smart people found new ways to rebuild their perpetual money machine.13 This is how Tesla, who plans to deliver approximately 500,000 vehicles this year14, is worth more than 68,000 Cheesecake Factories.15
On December 3rd, 25-year-old Austin Russell became a self-made billionaire when a SPAC acquired his company, Orlando-based16 Luminar, and it closed its first day of trading at a market value of $7.8 billion. Now, maybe Luminar becomes a huge success that revolutionizes autonomous driving in such a way that it reshapes our entire species and Austin Russell goes on to become the most-beloved philanthropist of his generation17, or maybe it’s a total bust.18 Either way, its current valuation after a single day on the market is greater than 11,000 Dunkin’ Donuts.19
This year, millions of millennials began trading financial instruments for the first time. This is a generation that grew up on video games, entered adulthood just as we began to track followers and likes, and saw legal sports betting casually come into existence20. As we go hurtling towards this brave new world, I think we owe it to future generations that we take pause to review the economic systems that they’ll inherit from us. We should freely scrutinize the things that we’ve placed value in and not be scared to ask questions like:
- What’s the intrinsic value of Bitcoin?21
- Why is so much of our economy built around advertising revenue when consumer options often feel so limited?
- Who is John Galt?22
At some point, someone will have to pick up the tab on this messy business cycle, and it’ll likely be U.S. taxpayers. If the Great Recession has shown us anything, it’s that should a firm need to fail, then it should aspire to be so massive that it necessitates a government bailout for the good of the broader economy. In recent years, private funding has juiced firms to spend frivolously so they might position themselves atop their respective markets ahead of their IPOs23, because it’s only when you’re at the top that you can make the case that you’re too big to fail. There’s value in tech for sure, but to think that the U.S. tech industry is somehow more valuable than the entire European stock market is an enormous stretch.24
Note: The author is a high school dropout who wrote this while stoned. It does not attempt to be a scholarly work or a screed against excess, it’s simply a brief essay for the author to reflect on years later and despair at how he should have bought some Bitcoin before it went on to trade at $200,000, or invested in Amazon before they assumed rule over the western hemisphere.
- Collateralized Debt Obligations, a clever product that allows an issuer to subsidize risky bets by bundling them with safer ones
- Recent wage growth had been outpaced by CPI pre-COVID and could only have gotten worse since
- $54.86 a share at close on 4-Dec-2020, up from a $13.71 low earlier in the year
- Special Purpose Acquisition Company, a clever backdoor for firms to be taken public without the full scrutiny of the IPO process
- That would devolve into a rant
- It is
- Hyperbole is the language of winners
- It was as if LeBron’s ‘The Decision’ lasted nearly a year and ended with the announcement that he would split time between Cleveland and Miami, only then Cleveland said it wasn’t worth the hassle for him to suit up every other game and LeBron ends up just taking half the season off.
- Eventually 20% of the workforce will split time between dog-walking and food delivery
- So it goes: the sandwich guy learns how to make sushi, the dingy punk bar becomes an e-sports arena, etc.
- Which, despite its flaws, is the greatest economic system that we’ve come up with
- The Consumer Financial Protection Bureau, a frequent target of the Trump administration for obvious reasons
- www.coinbase.com
- For some sense of scale, more than 17 million vehicles were sold in just the US last year.
- Using closing figures from 4-Dec-2020, that’s the $567.8B market cap for TSLA divided by the $1.75B market cap for CAKE, then multiplied by the 211 locations of the Cheesecake Factory. Obviously, this is just for fun and I’m not actually suggesting that each of the 211 locations of the Cheesecake Factory represent a proportional cut of the company’s total market valuation, and that the company could then conceivable scale to more than 68,000 locations.
- Eww
- Maybe Orlando will name a convention center after him
- The company focuses on lidar technology, which Tesla seems to think is shit and, seeing as how they are the leader in autonomous driving, they might be right. I don’t pretend to have an opinion on it either way.
- LAZR $7.8B cap/DNKN $8.76B cap*12,871 locations (in 2019). Please let me keep my system of using sugar-focused eateries as a measurement of tech company valuations without reducing it to the indignities of proper mathematical scrutiny.
- Which, to me, seems so dangerous that I don’t even want to research it because I’m afraid that I might accidentally place a bet somewhere along the way… and win. Then what would I do? Place another bet? I mean, at that point it would be like playing with house money, so what’s the harm? Etc.
- Zero, obviously, but some sort of new shittier zero that consumes stupid amounts of energy
- This should only be asked whenever an Objectivist shouts “John Galt!” at their moment of sexual climax. Their partner, confused, may then ask, “Who is John Galt?” and the Objectivist will then launch into a long-winded plot synopsis of the novel Atlas Shrugged, mostly for their own enjoyment since their partner will have already nodded off long before the Objectivist has even begun to summarize John Galt’s riveting 60-page speech. All the same, the Objectivist will feel uniquely accomplished in their post-coital discourse and deserving of some accolade.
- Or acquisition by a SPAC, because there’s more than one way to bring a fat hog to market
- A milestone that the U.S. tech industry passed back in August. Now, think of Facebook’s $800B market cap, Google’s $1.2T cap, and consider just how much of their revenue comes from advertising. Now, think of the entire European stock market