Blain: "We Are Beginning To See Cracks Across The Tech Model"

Submitted by Bill Blain of Mint Partners

Irish border? Tech/Disruptive valuations - are they unsustainable? Wake up and put on the coffee.

“The man gave me the news. He said, you must be joking son, where did you get these shoes?”

Extraordinary weather here in London. This is the first time I’ve worn a Panama hat in April since 1976. Just last week I was still wearing my winter Fedora! One ponders just what the cooling Gulf Stream and the renegade Jet Stream are doing to us? Photo of view from office window attached. (Barclays office facilities – please take note.. this morning the world is looking thru your dirty windows..!)

The paucity of real market moving news is demonstrated by the headlines given over to the latest Brexit Spat – the Irish border. There are simple solutions – but no one seems particularly interested when it’s a chance for Brussels to punish Britain, Remoaners to bleat about how it’s never too late to repent, while Exiteers fulminate on the need to discipline Europe. Get real. Call it a free-trade zone or whatever. Does anyone really believe the UK and Yoorp will so diverge that Irish Milk will be different from Northern Irish Milk? Aside from arbing petrol prices either side of the border, (which is only 195-215 miles long, depending which map you use), isn’t it best to be practical? Get on with it. 

Back on planet Rest of the World, a very real issue is tech stocks. Their market caps are enormous. 7/10 of the largest companies on the planet fall into the bracket. They dominate global indices, and account for much of ebb and flow of market value activity.

The raises some very big issues, not the least of which is valuations – where me-too investors and investment tourists have piled in. Do the current prices make sense? The conventional wisdom/excuse is you can’t value disruption/paradigm shifts from a conventional perspective. It requires an acknowledgement that extraordinary breakthroughs need to analysed and priced differently. They glitter, they shine, they sound good… so folk buy em – none of which are valid investment reasons!

Amazon has become the proverbial shoe in the retail high street machine (incidentaly the origin of the word “saboteur”). The rise of Amazon conveniently explains the death of the high street and shopping mall, triggers a devaluation of these sectors and expectations the Amazon monopoly can only expand for ever on the basis populations will always consume. Of course its not limitless.

We are beginning to see cracks across the Tech model. Facebook is just one. The implied IP potential of big data collectors was assumed likely to provide annuity-like earnings and rising revenue into perpetuity.. Right up to the moment when it became clear the question of ownership of personal data had never been tested, and now a regulatory threat hangs over the whole sector. Valuations based on free big data no longer apply. Reprice accordingly?  Folk are still thinking of buying opportunities based on what looks a discredited series of expectations.

Or how about the fact i-Phones seem not to obey Boyles law? Although the Iphone “improves” every year, prices are still going up and up and up. Boyles law states “capacity/speed doubles and prices half” every few years. Hmm.. The utility of the iPhone has hardly changed since it became the dominant smart phone. The memory is about the same, but Prices keep rising! Despite the marginally better camera, and slightly shinier shiny white thing, the sum of human happiness has hardly risen as result… and now everyone has one..

The IMF recognises this. In its latest “World Economic Outlook, April 2018, Cyclical Upswing, Structural Change” report, Page 34 states the tech cycle in smartphones has overturned everything we learnt from personal computers. Every two years (or so) we get a spike in i-Phone parts orders followed by a spike in sales as a new shinier glossy version of the bright-shiny new new thang hits the street. The effect is incredible – a massive boost to the manufacturing countries in terms of parts, while in Ireland (where its all booked, but hardly taxed) iPhone payments account for a massive portion of GDP!

The pre-release cycle as production ramps up, and then the post-release cycle as the initial surge in “must have new phone” demand wanes, are worthy of an economic study in their own right. But, the IMF note we actually saw a decline in global shipments for the first time ever late last year. Does that mean the economic driver effects of Smartphone cycles could be in question? Does the price always rises equation break down?

And then there is Tesla. Sure, it’s the Electric Vehicle everyone wants and the market leading EV. We’re told its battery technology prices will obey Boyle’s law, making the car increasingly affordable, while the current production problems are just speedbumps as it approaches the unconstrained motorway. But, by the time it gets there the rest of the Auto-verse will be producing equally good EVs. Will Tesla retain its multiples then? Sure it may remain a leading EV producer, but is that valuation and multiples sustainable??

What would the saturation of the smart-phone market, or a wake up moment in Electric cars, mean across Tech sector valuations – not just in terms of Apple and Tesla, but in terms of all the other smart Disruptive Tech wonders we’ve bought into? For instance, Amazon works: yesterday I took delivery of new window boxes for the London Flat, but I also declined to buy some art materials I need - I’d rather go to a specialist art shop to choose and pick the materials I need. While I might buy a t-shirt off the net, I’ll be choosing my next tweed suit from a tailor.

Tech promises much... but does disruption deliver limitless returns? Nope... nothing moves as much as you think it might. It all convinces me to look at investment returns in a conventional way: real assets, real returns… buy stuff rather than concepts.  

Comments

nmewn Fri, 04/20/2018 - 06:26 Permalink

Sometime in the not to distant future... 

"Son, we had it rough I tellya!!! I remember camping outside BestBuy, on the sidewalk, in the cold, in the rain, to be one of the first to get the latest i-shit. If these thumbs could talk!" ;-)

HenryHall Last of the Mi… Fri, 04/20/2018 - 07:37 Permalink

>> Global Cooling is happening.  We'll be skating on the Thames soon.

Global cooling due to another Maunder Minimum and Global warming due to permafrost methane release. Add European cooling due to Gulf Stream weakening and with a hefty dose of good luck the climate of Europe, especially Britain, will be surprisingly little affected. The various effects tending to cancel out each other.

Meanwhile worldwide sea level rises, the Arctic becomes ice-free (can Britain freeze if the Arctic doesn't?), the Prairies move North into Canada, and weather everywhere becomes increasingly violent. Florida would be devastated by frequent hurricanes except there isn't any Florida any more (above sea level that is to say).

All in a matter of decades, not centuries. It's a good job worldwide financial collapse and reset will come first so climate will seem less important.

In reply to by Last of the Mi…

nmewn 1 Alabama Fri, 04/20/2018 - 07:02 Permalink

I understand San Jose State University is shutting down for a day so its faculty can go through mandatory sensitivity training after one of their professors went on a profanity laden rant about Barbara Bush. 

There's growing speculation in the TwitterVerse that they are going to have to construct a new building and just give it to the Bush family.

Strange days indeed ;-)

In reply to by 1 Alabama

Endgame Napoleon nmewn Fri, 04/20/2018 - 07:50 Permalink

How about just teaching basic politeness? Whatever we think of her husband and her son’s policies, Barbara Bush did teach her kids to be polite, not so much with many of today’s parents.

As for the global spinoff in prosperity from the iPhone, the country where the tech was invented has not seen any growth in general prosperity due to the invention. All the during the rise of smartphones, the middle class has been in decline here, with all of the associated misery.

 

In reply to by nmewn

Endgame Napoleon PT Fri, 04/20/2018 - 07:56 Permalink

It is probably more relevant to Moore’s law. Since they cannot squeeze on many more transistors, the iPhone is not going to feature as many innovation jumps. It will need to be sold on the basis of its value-added shininess, or better yet, by expanding the style options. They are trying to sell it with political themes. That limits their customer base, rather than expanding it with more visual alternatives.

https://en.m.wikipedia.org/wiki/Moore%27s_law

 

 

 

In reply to by PT

PT LA_Goldbug Fri, 04/20/2018 - 07:01 Permalink

Who buys tech stocks?  I suspect the answer lies in compulsory superannuation.
25 years ago (in my country), superannuation became compulsory.

Without even consulting a pocket calculator - neglect compound interest, don't even think about dividends or dividend re-investment, assume 5% compulsory superannuation contributions over 20 years - that means that right now, for every dollar someone earns, there is AT LEAST one dollar trying to figure out how to get invested for their retirement.  Those dollars can not just sit there doing nothing.  They have to go somewhere and all the time pretend to promise a return.  In another 20 years there will be two dollars trying to find a return for every dollar anyone earns.  How did we every survive back in the day when the only people who invested money were people that had a few dollars left over and felt like investing them?

The Baby Boomers have past their peak earning years and, since 2012, have started to retire.  Errr, the ones who paid off their homes and did not go guarantor on their kids and grand kids homes, that is.  Okay, maybe there are not too many BBs retiring and taking their hard-earnt loot out of the system yet.  Gotta keep working and paying them taxes so govt can afford to keep their unemployed kids / grand kids unskilled and on the dole.  But I digress.

Am I wrong in assuming that a mountain of money is coming in all the time and has to go somewhere

"Here!  We need you to borrow all this money and assure us you can pay it back with interest."
"But, but - b- b- b ...- "
"Listen here, we've got too many slaves trying to earn an honest living already.  Absolutely no room for 'em, couldn't possibly fit another one in.  Go start a business or something.  Or at least buy a house and a car and a phone and get a student loan!  We need you to borrow some money, dammit!"
 

In reply to by LA_Goldbug

Stef1304 Fri, 04/20/2018 - 06:43 Permalink

The sum of human happiness has hardly risen as a result and now everyone has one
Sure, I fully agree.
Myself, I had the very "old" iPhone 5, and I just got the "new" 5S... LOL
For 50 bucks...
Got me access to 4G, 16 Go more (32 instead of 16) and latest OS update... 

And you know what ? I am more than happy with it.

Ps - By the way, check the rare metals that are in your iPhone.
http://www.mining.com/web/infographic-the-extraordinary-metals-in-an-ip…
And where it is coming from.
https://www.cnet.com/news/digging-for-rare-earths-the-mines-where-iphon…
Just saying... 

  

philosobilly Stef1304 Fri, 04/20/2018 - 15:10 Permalink

there are only two reasons why anyone would need a phone past an s5, your supercompter in your hollowed out volcano got reposesed because you are a crappy super villian or pre installed bloatware. i cant believe i just said that in all seriousness, yet i satnd by it. my s5 ran like crap, rooted it, dumped 90% of preinstalled software, now it runs faster then new and sprint cant sneak phone killing updates on my phone when im not looking.

In reply to by Stef1304

Last of the Mi… Fri, 04/20/2018 - 06:47 Permalink

What you're seeing and what the article explicitly tries to explain is the dominance rather than the dissemination of data and information that computer processing has brought to us.

There is no competitive price discovery much like there is no equal data distribution, if fact the data you peruse on google is in fact nothing more than more propaganda and the same with fb

We're not moving into some new world where technology assists us at every turn, but rather some bizarre Orwellian nightmare where tech titans manipulate with an evil that is really hard to comprehend.

Anyone who has EVER uttered the phrase "corporations over countries" has no business residing in or having citizenship within the US. Period.

Obey the constitution and the laws, especially the ones about free speech or get the hell out.

Endgame Napoleon Last of the Mi… Fri, 04/20/2018 - 08:05 Permalink

You mean the SCOTUS, a group of men and women in black robes who said that corporations are people? 

The tech leaders are not evil. For a bunch of businesspeople, they seem to have strong ideological positions, though, and the tools they created could easily be used for evil by government.

Some say government ultimately created a lot of the tech—government and the early labs at Xerox and IBM.

 

 

In reply to by Last of the Mi…

DingleBarryObummer Fri, 04/20/2018 - 07:03 Permalink

when you increase the money supply by over 5x in less than 2 decades, you confuse and thus paralyze everyone, and it becomes deflationary.  That is the conclusion of this keynesian-on-crack monetary experiment.  Same thing happened in Japan, they have 100 year low birth rates. 

Now the overfed guinea pigs vomit, fall over, and die.

Endgame Napoleon DingleBarryObummer Fri, 04/20/2018 - 08:25 Permalink

Economics is really just the study of sex and reproduction rates. Here is the magic elixir for a sound economy: birthing.

Pay citizens to birth and work part time, staying below the earned-income limits for pay-per-birth monthly welfare programs that cover the cost of rent and groceries and the cut offs for refundable child tax credits up to $6,431.

This theory that big birth rates = prosperity has to be true since people like getting paid for sex and reproduction, especially when they can still get paid for it in single-earner households with US-born kids, even after illegal border crossings.

Following this plan for 40 years, the USA’s middle class is in sharp decline, leaving us with a top 20%, split between the 1% of extreme wealth that is taking less risk and generating fewer businesses (in the USA, anyway) and the frequently babyvacationing, dual-high-earner parent class that concentrates salaried wealth in fewer households, halving the size of college-educated middle class. 

Then we have the poverty-industry class, which is swelling like a pregnant belly in its last weeks before delivery.

In reply to by DingleBarryObummer

MARDUKTA Fri, 04/20/2018 - 07:09 Permalink

Once the brainiacs brains start to deteriorate, Musk, Zuckerberg, Cook, then the tech will follow.  Greed, corruption, and power has no limits and there is no anti-virus that will halt it.

Only outside influences are brought to bare, then the end game is in sight.

Endgame Napoleon MARDUKTA Fri, 04/20/2018 - 08:36 Permalink

It sounds like Moore’s law is the thing that is roping everything in—everything but the possibility of making money off of targeted advertising, which is probably going to be regulated if they cannot convince the public that it’s not as invasive as they now think it is.

After the congressional hearings, FB only lost like 10% of its accounts, though, so who knows? Most people are just posting their baby, wedding, party*party and cat pics on there, so they probably do not see it as a huge threat.

Companies that used the non-targeted ad approach did not seem to last, including those at the top of the search engines. Even nationally known publications are going back to subscription models, I notice. Even if something is at the top of search in a particular category, it does not mean that enough people click on it to generate a volume of sales for the advertiser’s clients. 

In reply to by MARDUKTA

Let it Go Fri, 04/20/2018 - 07:24 Permalink

The so-called FANG stocks have accounted for much of the stock market rally we are witnessing, however, it might be wise to step back and question the fundamentals behind the upward movement of this group. Stocks that trade at crazy multiples such as Amazon at around 350 times earnings ignore and defy reality.

Amazon bought Whole Foods paying top dollar to go against Kroger with a PE of 17 times earnings. This move was heralded as brilliant rather than a reality check. How can the earnings of a food chain leap in value from a multiple in the teens to a multiple of several hundred? More on the potential of these stocks to bite investors when they fall in the article below.

 http://Fang Stocks Have The Potential To Bite Investors html

hooligan2009 Fri, 04/20/2018 - 07:31 Permalink

the current tech model is what emerged after the dot.com bubble burst in 2001.

the model is based on harvesting data on spending habits, location and personal profiles and selling that data to advertizers to "invade your space" with offers from advertizers that spend the most ad dollars on web-hosting platforms.

imagine you are directed to a street that you may or may not need or want to go down (web-hosting platform) full of pan-handlers (advertizers) screaming at you to buy their knock off perfume bottles and tourist bus tickets and you get the idea.

i prefer to go down the streets less travelled (by web hosting sites that are after my money for their benefit, rather than mine).

wmbz Fri, 04/20/2018 - 07:38 Permalink

"And then there is Tesla. Sure, it’s the Electric Vehicle everyone wants and the market leading EV"

~ Thank heavens I am not "everyone" because I sure as hell don't want a Tesla!

Ban KKiller Fri, 04/20/2018 - 09:33 Permalink

Why, exactly, buy a new phone? What new feature can't we do without? Oh right. Nexus 5, bought new when 18 months released....still does plenty, even makes calls, pictures and videos. Me and Ed having lunch in Granada. 

I see dweebs with the latest...they eat ramen 24/7.

DipshitMiddleC… Fri, 04/20/2018 - 10:51 Permalink

the FANGs keep going up because the deep state needs them to harvest data.

 

(((they))) tell the plunge protection team to buy the dip on all FANG stocks in addition to SP500 futures