Market Comment November 2020 -Trouble in Paradise?
This newsletter is normally about the long-term view. Tune out the noise, look to the long term, and things will be alright. The problem with this philosophy, usually a wise one, is that you must survive the short term to get to the long term. Entering 2020, most market commentators had pointed at a difficult investment environment, subject to radical uncertainty and a range of secular disruptors such as China’s rise and the resulting geopolitical tensions, populism, deflationary demographic trends, financial vulnerabilities related to valuations and pockets of excess leverage, and technology and sustainability issues that create winners and losers. Sadly, major disruptions and radical uncertainty indeed unfolded this year, albeit from an unexpected source: the Covid-19 pandemic that has already cost more than one million lives worldwide, caused the deepest economic recession since the Great Depression, and sparked staggering fiscal and monetary policy responses. For the long term, the most consequential development coming from Washington last month, however, may have nothing to do with Covid-19: it is the landmark and little-noticed, 449-page report from the House antitrust subcommittee into Amazon, Apple, Google and Facebook. All four, the report alleges, wield monopoly or substantial power, and have abused it. Since each serves as a gatekeeper over a particular distribution channel, they can “pick winners and losers” throughout the economy. They can charge excessive fees, impose onerous contract terms, and hoard data. The big four have gone from “scrappy, underdog start-ups”, to the “kinds of monopolies we last saw in the era of oil barons and railroad tycoons”. For America’s big technology companies, the coronavirus pandemic has played to their strengths, as millions have relied on them for online shopping, entertainment, business and social contact. Their ability to prosper through lockdown has propelled their market values to new highs. Yet momentum towards US (and EU) legislative action to curb their power may have become unstoppable. The report provides a detailed road map and trove of evidence that the next presidency might seize on, and which could potentially be used by Congress to support legislative moves. They could also bolster existing regulatory actions. The justice department is filing a new lawsuit focusing on Google’s dominance in search the biggest since the Microsoft case in the late 1990s. Amazon, Apple and Facebook are already the subject of antitrust probes by federal regulators and state attorneys general. Lawmakers and regulators must tread a fine line. While this has come at a price, the report notes the big four have “delivered clear benefits to society”. Consumers fret about data privacy and, about whether the tech giants are too powerful but enjoy the innovations, free-to-use services and often lower prices they provide. The US antitrust model still based on the concept of consumer harm, or whether prices are being driven up would need to be broadened to the impact of corporate power on market structure, competition, innovation, and quality. It is questionable whether the regulator has adequate and enough resources. Deeper scrutiny of tech acquisitions may also be required, to ensure they are not aimed at neutralizing or killing off competitive threats. Since 1998, the report notes, the four groups have purchased more than five hundred companies between them. Antitrust agencies did not block one. Reviewing whether some of those acquisitions should be unwound may have merit, notably Facebook’s 2012 purchase of Instagram. It is less clear, however, whether outright break-ups or the “structural separations” the report suggests between companies’ dominant platforms and other business lines are, for now, the right path. Another risk would be closer co-ordination between regulators, namely the US and EU. Brussels has blazed a trail in tech regulation and is now preparing in its Digital Services Act to force Big Tech companies to share their vast data reservoirs with smaller rivals. Depending on what happens in the elections, Washington may yet start closing the gap much more quickly. Legislative processes will take years to come to fruition, but it is becoming clear that the momentum against the Big Four is gathering pace on both sides of the Atlantic. Still, Amazon just released its quarterly numbers and it smashed every record in sight, propelled by consumers' embrace of online shopping and services during the COVID-19 pandemic. This makes the Amazon stock a screaming buy. We will watch these developments very closely. All is fine in paradise – for now – but some clouds are gathering on the horizon. Switzerland, November 1st, 2020