Trading on Wall Street began yesterday with a thud. Earnings were reported. And the Street was not happy.

The Dow sold off by 500 points, recovering some of the loss during the course of the day.

 


More to lose

What we have here, the old-timers would say, is a bubble looking for its pin. It could be earnings. It could be trade. It could be the next rate hike. We don’t know what the pointy object will be.

But Donald J Trump is hoping the two never meet. No one has more to lose…and no one will fight harder to keep the two apart.

This morning, The Wall Street Journal reported:

‘President Trump escalated his attacks on Federal Reserve Chairman Jerome Powell, saying the head of the nation’s central bank threatened US economic growth and appeared to enjoy raising interest rates.

‘In an interview Tuesday with The Wall Street Journal, Mr Trump acknowledged the independence the Fed has long enjoyed in setting economic policy, while also making clear he was intentionally sending a direct message to Mr Powell that he wanted lower interest rates.’

Even now, two years after the beginning of a ‘normalisation’ cycle, the Fed is still lending at rates near or below the level of consumer price inflation.

Most economists would say it’s time to take away the punchbowl. But there’s our president with a bottle of gin to spike it up a bit. Mr Trump is either an economic genius…or a complete imbecile.

But every party comes to an end. And every bubble and its pin eventually find each other.

 

Failed revolution

Meanwhile, we are exploring the phenomenon of the Information Revolution, in general, and Google and Facebook, in particular.

In short: There’s a lot of wind in these two companies; it is bound to get out somehow. Here, we explore why and how.

The Information Revolution — beginning in the ’90s with the advent of personal computers and the internet — delivered more information…But who has time for it?

Who thinks we need more information? Who goes to his wife and says, ‘Honey, we’re out of information!’? And how many people go to see psychiatrists and report that they didn’t get enough information as a child?

When the Information Revolution of the ’90s began, it was believed that growth rates would speed up because people would have access — almost unlimited access — to information.

Well, that was the thinking 20 years ago. And what happened? Have growth rates gone up since then?

When the new century began, the economy had been running at about 4% GDP growth for the previous 18 quarters — that is, for more than four years.

Now, it’s chugging along at about 2%. And even that is very questionable, because they changed the way they calculate inflation, so the real rate of growth might be lower…or even negative.

The economy didn’t speed up. It stalled.

Growth rates began falling in the ’70s. The Information Revolution didn’t reverse the trend.

And now, GDP growth is at half the level of the ’60s and ’70s, despite the biggest breakthroughs in communication technology in history.

 

Another failure

The other thing that didn’t happen was that capital didn’t become more productive. Remember, the idea was that information and computer technology would reduce the need for capital.

Capital — savings — would be much more efficient. Instead of needing $100 million to launch a new business, you might only need $50 million. So you could launch twice as many new businesses with the same amount of money.

That’s twice as many new products…twice as much output…and twice as much progress.

Did that happen? Nope. Not at all.

The number of new businesses should have doubled. Instead, it fell. New business start-ups, from the ’90s to today, got cut in half (approximately).

And capital didn’t become more efficient, either. The Fed has added $3.8 trillion in ersatz capital to the economy since 2009, and it produced the weakest recovery in history.

What conclusion can we draw from this?

Well, flooding the market with information did no more good than flooding it with money. Just as money is only good when it is real — and earned — information is only useful when it is real…and learned. Otherwise, every bit of it must be examined, sorted, and disposed of.

It distracts. It confuses. It takes up vital time and attention. Like manure, information can be useful, but pile too much up in one place, and it stinks.

 

Information peddlers

But information is what Google and Facebook peddle. They are advertising-supported media. Advertising budgets depend on sales. And sales depend on consumers. And consumers depend on wages. And wages depend on time.

There are only so many hours available. And real wages have been essentially flat for the last 40 years. So don’t expect ad budgets to rise much.

Google and Facebook make their marks on the world not by adding to the world’s wealth (they didn’t add to productivity or wage growth)…but simply by taking market share away from newspapers, magazines, and TV.

Still, investors give the two tech giants the price-to-earnings (P/E) ratios of growth companies. Facebook trades at a P/E ratio near 25. And Google trades at almost 50 times earnings.

And they have a combined market cap (total value) of more than $1.2 trillion, roughly the GDP of Mexico.

But guess what? Google and Facebook aren’t growing much anymore. Now, there are newer tech companies taking market share from them.

Teeka Tiwari told us in Bermuda that real techies don’t use Google or Facebook anymore.

They’ve moved on to blockchain-based technology. These new companies don’t collect and sell data the way Google and Facebook do. Instead, they let users control their own data…(How do they make money? To be explored!)

The departure of young users comes at the worst possible time…just before a broad market sell-off. It leaves the ‘old’ tech giants in a tight spot — with declining market share in a low-growth industry (advertising-based media) in a falling stock market.

Yes, that is what happens when the pin and the bubble finally meet up. P/E ratios deflate.

Instead of 25 or 50 times earnings, Google and Facebook may soon sell for only 10 times earnings, while ad budgets and market share contract. Instead of being worth more than a combined $1 trillion, they will be lucky to be worth half that much five years from now.

More to come…including the Dark Side of Big Data…how Facebook and Google could help turn the US into a Police State…and other paranoid realities…

Regards,
Bill Bonner