economy Markets stocks

Redundancies

In “Gods“, I described an inegalitarian market that not only reflects, but also feeds, an inegalitarian society.

The most critical takeaway was that in many (if not all) respects, we are in uncharted territory, efforts to compare the present with historical instances of wealth accumulation and concentration notwithstanding.

It’s long been the case that due to disproportionate ownership of corporate equities, gains in US stocks exacerbated inequality. Simply put: the benefits from rising stock prices do not accrue in linear fashion. They accrue exponentially because the majority of shares are controlled by a minority of the population.

But in the current conjuncture, in which a literal handful of stocks (i.e., five of them) make up nearly a quarter of the S&P 500 and nearly 40% of some growth benchmarks (figure below), the people behind those companies are witnessing a parabolic rise in their personal wealth, which is, in turn, creating a society where having, say, $250 million makes you a relative pauper.

Consider, for example, that through the end of last month, the average gain in net worth for the 500 richest people on the planet in 2020 was about $700 million — with an “m”. That’s an astounding figure on its own. The 500 wealthiest humans made an average of nearly three quarters of a billion dollars during the first seven months of a year defined by a global pandemic and the worst economic downturn in a century.

But what’s really astounding is the disparity between that figure and what the people at the top of that list made over the same period — or, more poignantly, what they make (or lose) on any given day.

Imagine you’re on Bloomberg’s list of the top 500 richest people on the planet. Your net worth increased, on average, $100 million every month this year. Mark Zuckerberg’s net worth increased by nearly $5 billion over 72 hours on Wednesday, Thursday, and Friday of last week.

In the interest of comic relief, allow me to lapse into a somewhat colloquial cadence.

Let’s say you’re worth $4 billion. You’re buying yachts, art, Bentleys, and sports teams. Elon Musk, by contrast, is going to Mars and implanting AI chips in pigs’ brains. That’s the difference.

Retaining the colloquial tone, but getting a bit more serious in terms of thinking about what this entails from a socioeconomic perspective, consider that you (the guy/gal worth $4 billion) no longer count. You might as well be worth $4 million. Or be the breadwinner in a household that brings in $400,000. Because the difference between you and the 10 people who “count” in this world is essentially the same in all three scenarios.

If you’re worth $4 million, you might not have a proper “yacht” or a Basquiat or a Flying Spur, but you’ll have a boat and a 750i in the garage. If you’re the household making $400,000/year, you might not own a boat or a 750i, but unless you live in one of the most expensive locales in the nation, you’ll have more than enough disposable income for a lightly-used Porsche Cayenne which you can drive when you take the family on a vacation to some place where you can rent someone else’s boat.

The point is, in all three scenarios (the $4 billion scenario, the $4 million scenario, and the $400,000/year scenario) you’re not going to Mars on a rocket you built, and you’re not closing in on a breakthrough with artificially intelligent pigs. In fact, you’re not doing much of anything really, and certainly not by comparison to the dozen people who, at any given time, can change the course of human history simply by deciding (unilaterally, by the way) to get into a new business or launch some fresh initiative.

What does this mean for everyone else? What place is there for anyone below the top 5%? Relatedly, what possible role could there be in all of this for small businesses?

In short, it means that everyone else has become almost equally redundant. This isn’t to suggest that from an experiential perspective, an upper-middle class family in an advanced economy doesn’t enjoy a quality of life that is (figuratively and literally) a world apart from a family living in abject poverty in a frontier economy. But it is to say that in the grand scheme of things, both of those families now matter equally in that neither of them matter at all.

There was a time when the middle class (and especially the upper-middle class) had the power not just to make a difference, but to define the very political order of a nation. A parallel can be found in small businesses, which used to be the engine of economic prosperity in the US.

With that in mind, think of the chart (below) as a kind of “you are here” marker on a larger map showing the evolution of society as outlined above.

Importantly, that is the Russell 2000 which is on the verge of being eclipsed by the market value of Apple — if publicly-traded small-cap companies in the US are now collectively worth less than one tech titan, the read-through for actual “small” businesses is existential indeed.

The latest installment of the Census Bureau’s “Small Business Pulse Survey” shows that on a nationwide basis (the data is pretty granular and you can slice it any number of ways), nearly half of small firms expect it will be at least another six months before business is back to normal. Nearly 8% still say business will never return to the pre-pandemic norm.

“About a third of the companies said they’ve experienced a large negative effect from the pandemic [and] roughly one in 20 expect to permanently shut down in the next six months”, Bloomberg wrote over the weekend, in their own summary of the survey data.

The same article notes that the number of permanent closures looks set to be “substantially lower than worst-case scenarios outlined when COVID-19 first hit America”, which Bloomberg describes as a “testimony to the resilience and adaptability of small firms and the help they’ve gotten from government initiatives”.

But what I think should be obvious by now is that the pandemic exposed how unprepared virtually all businesses were to an existential crisis. To be sure, the term “existential crisis” implies unpreparedness. There’s a sense in which one cannot be prepared for an existential crisis, otherwise it wouldn’t be existential.

And yet, a few firms were prepared. The tech titans have proven that, in a pinch, they can supply goods, services, and entertainment, can replicate work arrangements and can replace human contact with reasonably robust virtual interactions.

Indeed, one thing that’s lost in the characterization of small businesses as “resilient” and “adaptable” is that much of that resilience and adaptability was made possible by the same damn tech firms. Local restaurants, for example, used Google to advertise their carryout and curbside services. Delivery apps and other facilitators are downloadable in app stores controlled by Apple and Google. The devices that run those apps are manufactured by Apple, and many of those apps undoubtedly run on AWS. And so on.

The figure (below) shows the price-to-sales ratio for the Nasdaq 100 versus the Russell 2000.

While some would characterize the recent surge (red dot) as a “bubble”, it’s almost impossible to argue that the index couldn’t trade on an even more expensive multiple when you consider we’re nowhere near dot-com peaks and the conditions which persisted two decades ago are not at all comparable to those which persist today.

The spread between the Nasdaq’s sales multiple and that for the Russell is below.

Again, the market has not bid this back to dot-com peaks, despite a socioeconomic backdrop which makes it possible to argue that every business — from giant consumer brands like Nike to the tiniest local eateries which relied on delivery apps to facilitate business during the pandemic — will become increasingly, if not entirely, dependent on the tech titans in the years ahead.

Going forward, we are all redundant and superfluous to a greater or lesser degree. Ironically, just about the only businesses one can imagine escaping this vortex are the smallest of the small — a dive bar in a frontier town in Alaska — a barbershop in some modern day Mayberry — a burger stand in some totally nondescript Midwest township — the diner from Monster’s Ball. In short: businesses with no connection to modernity and no aspirations to serve anyone other than the same two-dozen people (and their descendants) they’ve been serving for decades.

And maybe that’s the ultimate irony — the only way to avoid not mattering is to never have mattered in the first place.


 

12 comments on “Redundancies

  1. runamok says:

    Great post.

    This is exactly why what the elites do, say, their morales, their ethics, what they want to have happen in society, what they tell their minions to do, is so damn important. It would be nice if a few more of them took a more constructive role in making the world a better place for everyone.

    Say what one will about Musk, he is at least creating possibly three or more future industries. This means jobs, economic growth, tax revenue, and opportunities. More than can be said about others in that elite category.

    I just don’t see yet what the path forward is, how this is going to unfold over the upcoming half dozen or so years. We’ll have to wait and see. Hopefully, a few elites will realize the calamity that is ensuing and decide that if not now never.

  2. Anaximander says:

    It’s starting to feel like just another form of totalitarianism. “Market” fundamentalism has ironically led to state capture and an economy centrally planned by five unelected officials. It may be the logical end of the Enlightenment, a romantic notion of progress in the rich world that was underwritten by the tailwinds of colonialism and the rape of the earth. Those tailwinds are gone now. Perhaps we’re reverting back to the mean as it were. Hobbes and Machiavelli understood human nature as it existed in and coming out of the dark ages, and they weren’t exactly “romantic” types.

  3. mfn says:

    Great post; great last line.

  4. Bob says:

    This situation with big tech is not unprecedented. It sounds strikingly similar to the situation with the industrial robber barons of the late 19th / early 20th century, such as Rockefeller, Carnegie, Mellon, JP Morgan, etc. Their business empires seemed untouchable and destined to dominate indefinitely. But various influences come into play – founders leave / die, politicians (for reasons noble or malevolent) legislate, governments intervene/interfere, markets and innovation move on. I doubt anyone can say with any certainty how this will come about, but it seems inevitable in time.

  5. But are the tech titans not also dependent on the small businesses? Elon Musk, Bill Gates, Mark Zuckerberg all get up in the morning out of a bed from a small business in a building built by many small businesses, dress in clothes from some small businesses, eat food from a number of small businesses, drive or ride in a vehicle produced by a number of small businesses and spend the day interacting with people operating other small businesses. What kind of world would the tech titans try to live in if all the businesses that don’t matter closed and the people that don’t matter walked away?

  6. joesailboat says:

    The tech titans have relied on trickle-up economics. If our Government operated and taxed accordingly it may not matter as much. They pay attention to an 8 year olds needs. They know whats needed. They know that the person with 400 million is less important than 400 million people with one dollar.

  7. Profound post, weekend’s best

  8. John says:

    I’ve been living inside the theme of this post for awhile (joking at work that I’m valuable enough that at least I’ll get to pick which MegaBillionaire I’m enslaved too), indeed it feels like Capitalism echoing Feudalism (for sure those nation state boundaries seem to matter less to the tech titans).
    Similar to my ironic question of whether Chinese consumers might be the new surge of growth to lead the world out of the pandemic induced depression, I wonder whether China will halt these Digital Robber Barons? (the founding fathers apparently believed checks and balances always helped)…
    Sadly it’s been long apparent to me that the leaders of the tech titans care not a whit for (their practical progenitor) American Democracy, and instead prefer their own empires endless aggrandizement (see Musk vs Bezos in their own Space Race).

  9. John3D says:

    Is it right to say that history is a succession of creating a middle class after its destruction by one form or another of governing elites. It seems that we are now at the end of one of those cycles. BUT, is it really possible to build up a middle class again in this country? I’d love to know how if someone has an idea. I can’t figure it out. Even if big tech is broken up, where are middle class jobs being created. People are redundant except as consumers.

    • Joey says:

      There’s no shortage of labor-intensive work to be done: infrastructure, child care, elder care, transitioning of the economy from resource consumption to resource-sparing, etc. As H has been suggesting, these things can be funded directly by carefully considered fiscal policy. The middle class is dying because the last 50 years have seen a systematic shift from policies that foster a middle class to policies that lead to a concentration of wealth. The way to reverse this is to reverse those policies, and specifically regarding the tech companies, to start implementing effective anti-trust and privacy measures. These are utilities in wolf’s clothing. If they were regulated like utilities, they wouldn’t be all-powerful.

  10. John says:

    There are lots of jobs in technology: I think you’d be hard pressed to predict an end to Entertainment (Movies, Music, Literature, etc) and now you can add Gaming. (Hardware, Marketing, Accessories, Commentators, etc = new jobs that didn’t exist before).
    Similarly advances in Energy (solar anyone? how about better batteries?) and Communications (Satellite Software Engineer? Social Network Moderator or Auditor?) are increasing… especially consider the Baby Boomer needs for Medical Care (and overall shift to Robotic/Automated Manufacturing).
    There are plenty of new jobs for whatever group of people can organize to get them.
    These Tech Robber Barons though are already in decadence of defending their moats at all costs (Lobbying and Regulatory Capture, Financial and Legal Gymnastics, Acquisition and Shutdown, etc) so I wouldn’t look to them to create jobs, it’s all the “little billion to 10B” companies that would make the difference.

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