🌌 Reshaped #48
Stock bubbles and cheap money, social media at crossroads, tech unions, European deep tech and much more
Welcome to a new issue of Reshaped, a newsletter on the social and economic factors that are driving the huge transformations of our time. Every Saturday, you will receive my best picks on global markets, Big Tech, finance, startups, government regulation, and economic policy.
This week, I am diving into the stock bubble and its potential bursting (see Finance). I think that there is very little focus on the real factors that are driving the bubble; many love to make historical comparisons despite the evident differences between previous bubbles and the current one. I am curious to receive your opinion on this exciting topic.
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Policy
Platform regulation
The tragic events in the US are a reminder of one of the greatest challenges ever faced by global regulators and social media companies: regulating and managing widespread misinformation and hate speech. This is hard because it requires some compromise on either their production or their acceptance. Mark Zuckerberg made a historical decision to ban indefinitely Donald Trump (Wired has some pretty good analysis on that), which means no more waiving on Facebook’s own rules. He was later followed by Jack Dorsey, who did the same on Twitter (CNN). However reasonable (and well-deserved) it might seem, this generated vast amounts of criticism ranging from “you cannot silence the US President” (typically libertarian) to “look at the other side of the coin: this shows the incredible power of digital platforms”.
The truth, of course, is in the middle. And there in the middle, there is the need to fight both the uncontrolled stream of false information in the Web and the excessive power these platforms have in controlling the public sphere. Here, we should define what is “uncontrolled”, what is “false” and what is “excessive”. And we might end up with totally different opinions: again, this shows the complexity of solving the trade-off even when its components seem to be quite well-depicted in our minds. In doing this, we should not forget that public institutions can be (and actually are, sometimes) among the main producers of this kind of false information. A recent paper by Steven J. Barela and Jerome Duberry explores this more in detail.
First, because disinformation aims to twist the truth in subtle ways when key facts remain secret and unavailable, exposing an operation becomes a tedious and difficult task. Second, the new digital world has opened the door to omnipresent operations that occur below the threshold of armed conflict and are accelerated exponentially by big data warehousing and algorithms that allow individualized targeting during an election cycle. Third, when disinformation operations disrupt the flow of information during a political campaign, the candidates involved and the process itself emerge with a dangerously eroded legitimacy.
➡️ A recent paper by Ashutosh Avinash Bhagwat claims that there is confusion in the criticism towards Facebook and that the best solution to its problems would be to keep on “supporting sensible, narrow reforms, but otherwise muddling along with a light regulatory touch, while encouraging/pressuring companies to adopt voluntary policies”.
➡️ According to Jack Dorsey, crypto regulation could have the controversial effect of limiting transaction transparency even more (The Verge).
➡️ Apple gave Parler, the conservative social media platform, 24 hours to come out with a content moderation policy or it will be banned from the App Store (BuzzFeed).
International relations
While years of unsolved social conflicts were giving rise to the assault on Capitol Hill, the US was still actively trying to limit the expansion of Chinese power. On Tuesday, Donald Trump “signed an executive order banning transactions with eight Chinese software applications, including Ant Group’s Alipay mobile payment app” (Reuters). Meanwhile, on Wednesday, the NYSE removed China Unicom, China Telecom and China Mobile — three of the biggest Chinese telecommunication companies — from the stock exchange (The New York Times). Apparently, this could be expanded to Tencent and Alibaba (the biggest Chinese companies by market capitalization), which would make it impossible for Americans to invest not only in their stock but also “derivatives, bonds and depositary receipts” (The Wall Street Journal). This would be a particular problem for Alibaba, which is planning the sale of bonds worth $8 billion in the US (Bloomberg).
However, for the US, a global consensus on harsh economic policy towards China is all but guaranteed. The EU-China investment deal (see Reshaped #47) could already have damaged international relations within the NATO. The agreement was sponsored by Angela Merkel “partly because of the huge German bet on the Chinese market and partly because she believed strongly that engagement, not confrontation, was the best policy for a declining West in the face of a fast-rising China” (The New York Times). It was nonetheless criticized by many leaders in the EU, including liberals like Guy Verhofstadt who do not trust the Chinese commitments.
➡️ On The New York Times, Li Yuan explains “why China turned against Jack Ma”.
Technology
Tech unionism
Among the disruptions emerged in 2020, tech unionism is rarely mentioned. Yet, it is a phenomenon that is gaining traction and deserves more attention. On Monday, a group of more than 400 Google employees announced the foundation of a new union called Alphabet Workers Union, “primarily an effort to give structure and longevity to activism at Google, rather than to negotiate for a contract” (The New York Times). In their column on The New York Times, the executive chair and vice-chair of the union explain that tech companies are far from immune from abuses.
To those who are skeptical of unions or believe that tech companies are more innovative without unions, we want to point out that these and other larger problems persist. Discrimination and harassment continue. Alphabet continues to crack down on those who dare to speak out, and keep workers from speaking on sensitive and publicly important topics, like antitrust and monopoly power.
Unionism has never found much space in the Valley and, more broadly, among tech workers. Tech corporations have managed to keep them far from their businesses through a mix of incentives and narratives — primarily, that of unions harming the flexibility required to perform at a high level in the tech sector. The first example of a union among major technology companies dates back to last February when employees at Kickstarter founded Kickstarter United (NBC). Since then, the trend was reinforced by similar initiatives and finally reached a Big Tech corporation. We tend to think that the divide among tech workers is between skilled employees and gig workers; however, there is a growing divide even inside the former category, with armies of unskilled workers and contractors in the game.
➡️ In China, young workers started a “silent rebellion against the culture of working overtime for little reward” (South China Morning Post).
➡️ Even Indian tech workers are considering unionism (Mint).
Deep Tech
A new report by Dealroom and Sifted explores the state of deep tech in Europe, with some interesting data like total value (€700 billion) and total VC investments (€10 billion). Deep tech ventures have high technology and market risks (see Reshaped #24 for a primer on this topic), which means that they are more capital-intensive and that the go-to-market is less responsive to any progress in the technological learning curve — the opposite of what happens in biotech, where market risk is strongly mitigated by high levels of awareness in the product development process. This is reflected in the funding path (see chart below), which is much more similar to that of a standard tech startup than that of a biotech one.
The strong presence of deep tech ventures in Europe and their healthy financing (one-quarter of European VC investments), along with the creation of local hubs to concentrate expertise, should make Europeans more optimistic about the potential of their innovation ecosystem. Of course, deep tech is harder to translate into any rapid progress in total factor productivity (TFP). In a recent post, Eli Dourado explains that “scientific breakthroughs alone are not enough to drive an end to the Great Stagnation. TFP only budges when new technologies are adopted at scale, and generally this means products, not just science”. However, Europe has a chance to be better positioned than in most of the previous technological paradigm shifts.
➡️ The Tony Blair Institute for Global Change interviewed 16 technology experts from all around the world to explore the technological opportunities of the future.
➡️ Hyundai is in talks with Apple to develop its own electric car (CNBC).
➡️ As space launches to the Moon are expected to increase soon, more attention should be paid on sustainability to preserve its ice reserves (Nature).
Finance
The debate about the existence of a (tech) stock bubble similar to the dot-com rush of the late 1990s is entering a colourful phase. In the past, I argued that the main point of difference between the two bubbles lies in their foundation. The dot-com bubble saw in tech startups the new asset class for high-risk investors pursuing higher yields. The two main characteristics at that time were the hope in startups as a new organizational and financial model to dominate the global economy and the optimism/exuberance in the performance of markets in the long-term. This time, investors seem to behave as a consequence of reinforcing feedback loops in the global economy, such as low interest rates and low yields in non-equity securities.
Hence, the bubble hypothesis this time is justified by different factors. First, not all forms of stock exuberance are irrational. Of course, there are some evident signs of unbalance in public markets. The three huge IPO waves of 2020, the SPACs boom and the liberalization of direct listing rules are a clear signal of the attractiveness of public markets for investors and companies willing to exploit the positive moment. We could add to the list the incredible rise in valuations and the easy access to public markets that was granted to startups with no revenues (like in the EV sector) — not to mention the crypto bonanza.
However, for a complete picture of the bubble, we should at least try to understand whether investors are acting rationally or not. As a first signal, take the confidence index (see chart below): stock bubbles tend to present high volatility in investors’ confidence and high variance between institutional and individual investors (at least at the beginning). The shapes of the curves are nonetheless very different from those registered during the dot-com bubble.
We could also look at the Price/Earnings ratio (see chart below concerning the US) to see a big difference between now and then. This means that current valuations are more correlated to public companies’ fundamentals than during the dot-com bubble.
The best explanation in months of what is happening was recently given by Martin Wolf on the Financial Times. According to him, the rationality of the current bubble is explained by low interest rates — which naturally tend to drive money in equity markets to pursue higher returns — and declining bond yields (see chart below).
Given the interest rates, then, stock markets are not overvalued. The big questions are whether real interest rates will jump, and how soon. Many believe that ultra-low real rates are the product of loose monetary policies over decades. Yet, if that were right, we would expect to see high inflation by now. A better hypothesis is that there have been big structural shifts in global savings and investment. […] If they were to do so as a product of higher investment and faster growth, strong corporate earnings might offset the impact of the higher real interest rates on stock prices. If, however, savings rates were to fall, perhaps because of ageing, there would be no such offset, and stock prices might become significantly overvalued.
A rational bubble, however, remains a bubble, which carries a natural risk of bursting. Many are worried about the potential impact of various non-financial factors on stocks (antitrust, unemployment or global catastrophes). This year should have taught us that stock markets tend to react and keep themselves far from the negative tendencies of the real economy. Besides, negative events that are likely to spur monetary or fiscal policies could end up favouring strong market performance. Instead, I would concentrate entirely on interest rates to predict the future of the stock bubble. This means answering two fundamental questions:
How much of this exuberance is explained by the belief that Central Banks will maintain low interest rates in the medium term?
Are interest rates kept “artificially” low by monetary policy or are there other factors that contribute to this scenario?
This is consistent with the principle that stock bubbles are primarily kept alive by cheap money. Hence, any prediction regarding the direction of the current bubble could be made more accurate by looking at each possible evolution in interest rates rather than sector analysis. With low bond yields and cheap money, investors will continue to pour money into equities whatever the fundamentals of the target companies.
➡️ Roblox raised a new round worth $520 million at a valuation of $29.5 billion and will go public with a direct listing (VentureBeat).
➡️ Next week, the fintech startup Affirm will go public with a target share price between $33 and $38 (TechCrunch). In 2020, the company generated $4.6 billion in revenues, which shows a sustained growth path (+77% vs. 2019).
➡️ The EV startup Rivian raised $2.5 billion in a new round, while the online lending startup Social Finance (SoFi) will go public by merging with Chamath Palihapitiya’s SPAC (Reuters).
The big picture
There is no space left, so this will probably be a small picture. I am leaving you with some reading recommendations:
A recent paper by Johannes M. Bauer and Tiago S. Prado about the relationship between the emergence of digital platforms and innovation.
An insightful article on Science about the coevolution of policy and science (very recommended).
An article on Rest of World about how African governments are promoting entrepreneurial policies.
A recent essay on Palladium regarding the US-China conflict and how it “is forcing America to wake up from its half-conscious neoliberal stupor”.
Thanks for reading.
As always, I am waiting for your opinion on the topics covered in this issue. If you enjoyed reading it, please leave a like (heart button above) and share Reshaped with potentially interested people.
Have a nice weekend!
Federico