The world, technology, and U.S. economy are rapidly approaching a paradigm shift and investors will need to keep their finger on the pulse to adjust and adapt to the new normal.
This tech letter is about a recent note from Deutsche Bank that landed in my inbox and the contents are so pertinent that I must address it and what it means for the U.S. tech sector.
The note essentially said that the “era of globalization” is over and hunker down for the “age of disorder” where millennials are disenfranchised, poor, and largely disconnected from the financial benefits mostly harvested by the boomer generation.
The coronavirus has woken up the sleeping giant of Americas’ youth - they have come to grips that even though they use the flashy apps of Facebook (FB), Google (GOOGL), Amazon (AMZN) on their shiny Apple (AAPL) iPhone, they don’t exactly build wealth from these companies.
In fact, it’s the other way around.
According to Deutsche Bank, the next step in the development of the U.S. tech sphere is taking “revenge and redistributing wealth” from the old to the young.
The bottoming of tech stocks in March and the explosive price action have mainly benefited the shareholders who are from an older cohort and then the hardest hit was the youngest.
As Millennials start to grow in to positions of power, inheriting Apple or Amazon stock will most likely become costlier because the inheritance tax could balloon.
Boomers who mostly hold Congress seats have also stonewalled regulation on tech.
Tech, in fact, has the least amount of regulation out of any industry in the U.S. and nothing has been done to stop them from building up ironclad monopolies.
This could culminate in not only a tech tax on realized gains, but REAL regulation that won’t happen until political power is shifted over to the Millennials.
Climate change has been wreaking havoc in the Western region of the United States, but Deutsche Bank says that an even greater risk is the “intergenerational conflicts” that are about to explode.
The truth is that many young people feel alienated and stifled by the status quo as if the “establishment” is the only group in the U.S. that has benefited.
According to Deutsche Bank, Millennials also feel that the government is only working for corporations and the “elite.”
This data also doesn’t necessarily pinpoint one racial or ethnic group in the Millennial category but is a broad analysis that cuts across all shades of the spectrum.
As of July 2020, 52% of millennials were living in their parents’ home, up from 47% in February, according to the Pew analysis of Census Bureau data.
Young people simply cannot afford to live independently now.
If this power pivot does take place, corporate taxes will meaningfully go up, irrespective of what Biden does if he gets elected, and that is terrible news for the likes of Facebook, Google, Amazon, Apple, Microsoft, and so on.
These “redistributive policies” will be seen as a desperate act of saving Millennial’s financial lives as the increasing debt load will exacerbate inflation, meaning it will be more expensive each day to be an American wielding a weakening dollar.
The group of 7 big cap tech stocks will have to adjust to these new conditions, and clearly the riskiest company is Facebook who has been overstepping data privacy laws and destroying democracy for years.
These issues will finally be addressed when Millennials age into power.
Millennials are sure to take a hatchet to Boomers' pension benefits as the debt built up will need to be repaid and cuts along the financial chain must be accepted to the detriment of Boomers' inheritance plans.
It appears as if making money hand over fist, that mostly the Boomers enjoyed, will certainly be tested moving forward.
As the world quickly deglobalizes, tech companies won’t be able to outsource semi chips to Taiwan and assemble devices in China on the cheap.
These strategies must move inward and locally to support American jobs.
The inquest is out, and unfettered globalization and capitalism have been handed a guilty verdict by the Millennial generation.
The deeper ramification is that unfettered asset appreciation will likely be a relic of the past.
If you look at these tech charts, they basically appreciate in a straight line. Get ready for more zig-zags, and if regulation hits hard, we could also be facing zeroes in certain strategic tech firms.
Honestly, a company like Facebook doesn’t produce anything and is overvalued for it.
Then there is the issue of whether Millennials are content on the ever-growing problem of financing zombie companies that now comprise 37% of the S&P because of artificially low-interest rates.
Fed Governors like Jerome Powell will soon become obsolete and blamed in the history books for recklessness.
I define zombie companies as companies that cannot even pay back interest on debt let alone principal payments.
These companies are a serious drag on innovation because they perpetually fund companies that should not exist adding to the debt load.
The artificially low rates have boosted tech shares and broader markets for years along with the Trump corporate tax cut.
Buybacks will eventually become illegal because of the conflict of interests.
Just take a look at the big airlines whose management milked the cash cow and left the rainy-day fund barren to only get bailed out billions of dollars.
That won’t happen again.
Corporate funding will get significantly harder in the next year of corporate America. Investors should take note that management is rushing to capital markets to get every last penny of funding before the election because terms of financing could sour quickly in November.
US and China geopolitical relations will worsen and we are already seeing it play out as China has notified the U.S. that they would prefer TikTok to be deleted instead of generating a sale.
All Chinese tech apps will be removed, and Chinese tech companies won’t be allowed to list on U.S. public exchanges.
Don’t expect anymore “Chinese investment” into Silicon Valley for the foreseeable future, and that goes for education where the Chinese Communist Party has bought off Harvard University for a $1 billion.
U.S. Millennials now must compete with the Chinese government who are glad to fund their zombie companies in a race to the bottom.
This doesn’t exactly scream a higher-quality life for future Millennials exacerbating the problem.
Climate change is on the verge of compounding from bad to worse as California is grappling with not only apocalyptic air quality but a pandemic.
Who knows the next time anyone will be able to go outside in California?
Do you think rolling blackouts will encourage tech start-ups to continue operations in California?
Computers and internet don’t function without electricity – someone should tell California Governor Gavin Newsom.
Tech startups will never happen in California again, likely catalyzing a renaissance in zero state income states with cheap property markets.
Ultimately, we are currently in the midst of a technology revolution with astonishing equity valuations reflecting expectations for serious disruption to the status quo.
Call it a bubble or whatever you want, but the fragility of this bubble is real and we only need one external event for a major correction.
Then there is the thorny issue of whether markets will flip out over negative interest rates if that actually happens.
The report goes on to say that there is a “bipolar standoff as both the US and China seek to prevent encirclement by the other. Companies that have embraced globalization will be stuck in the middle if relations sour as we fear.”
It’s clear to the naked eye that the prior strategy of “scaling” a tech company like Facebook and Apple just won’t work anymore because so many territories will be off-limits.
Creating the next unicorn will be that much harder as many of the tailwinds boosting tech the last 25 years are on the verge of winding down.
As we enter this transition stage, I expect one of the big tech companies to falter through regulation or some other black swan event.
These developments favor active tech stock managers who must recalibrate daily according to wild swings that we will experience.
Buckle up because this will be a wild ride.
