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How Populism Killed The Bull Market

February 17, 2018 April 30th, 2019

Those still wondering how Donald Trump got elected or how Brexit passed need to take a more holistic view of what’s going on around them. Populism is not just a political force. It is a financial force. It is a social force. It is a technological force. Today, it permeates every aspect of our societies and our lives.

At it’s heart populism, at least in its current form, is simply the product of the people trying to regain powers that have been taken away from them. It’s not just wealth inequality inspiring the shift, it’s power inequality that is driving the populist forces at work. And the point at which populist trends become as obvious as they are today is the point where their anger has boiled over, they are ready to demand a change and won’t be dissuaded. The political realm is just where it is most apparent.

In the case of the financial system it is still very apparent but less obviously so. People are tired of financial institutions, including central banks, exploiting them for their own purposes and profits. They are tired of having their purchasing power persistently devalued and they are tired of the moral hazard created by central bankers backstopping extreme risk taking with depositors’ capital which yields them zero return or less.

In the case of Big Tech, it’s becoming more obvious with every passing day. People are rapidly growing disenchanted with companies that have very effectively manipulated them in pursuit of profits and, more importantly, to their mental and emotional detriment and to the detriment of society as a whole.

The point is these trends are not unrelated. They are, in fact, very closely intertwined and, in some respects, just different manifestations of a populist backlash against centralized authority and elitism in all of its various forms.

As mentioned earlier, the populist political movement can be seen in the popularity of extremist candidates like Donald Trump and Bernie Sanders. People are tired of politicians abandoning the platforms that got them elected in favor of their corporate supporters. They are desperate for change regardless of what that change really stands for. Brexit was a similar political movement but the real beginnings of it can be seen in the Arab Spring. People around the world are fed up with the status quo and are demanding significant change in their politics.

The rise of Bitcoin and Blockchain technology is a direct result of the backlash against too-big-to-fail banks and their greatest enabler, the Federal Reserve. Listen to any Bitcoin evangelist and it’s clear that, as the Miles Johnson wrote for the Financial Times recently, it is a, “faith-based financial asset for a populist era”:

Speculative manias have occurred throughout history. The study of bubbles has greater value in informing us about the state of the societies in which they occurred than any lasting financial lesson. The Tulip bubble in the Netherlands occurred during the Dutch Golden Age, when the country was the world’s leading economic and social power, and the ability of an investment to defy gravity was easy to believe. Bitcoin’s price is not being driven by anything resembling conventional financial logic, but in part by the same forces that have delivered the political shocks of the past two years. Like populist politics, belief in cryptocurrencies and “trustless networks” have chimed with a collapse in confidence in traditional forms of authority and a disdain for experts.

Cryptocurrencies like Bitcoin may never live up to the promise of replacing dollars or becoming a true store of value but the distributed ledger protocols (DLP) they are based upon certainly present a risk to the banking system as we know it. As the Harvard Business Review reported a year ago:

The existing financial system is very complex at the moment, and that complexity creates risk. A new decentralized financial system made possible with cryptocurrencies could be much simpler by removing layers of intermediation. It could help insure against risk, and by moving money in different ways could open up the possibility for different types of financial products. Cryptocurrencies could open up the financial system to people who are currently excluded, lower barriers to entry, and enable greater competition. Regulators could remake the financial system by rethinking the best way to achieve policy goals, without diluting standards. We could also have an opportunity to reduce systemic risk: Like users, regulators suffer from opacity. Research shows that making the system more transparent reduces intermediation chains and costs to users of the financial system.

In other words, the banking system could be much more effective and much safer for the global economy without banks as we know them to exist today and it may not even require cryptocurrencies. Even if Bitcoin and it’s many pretenders to the cryptocurrency throne all go bust, just as many dotcom stocks did during the aftermath of the internet bubble, the underlying technology will survive and eventually, due to its obvious merits, thrive.

An open global financial network that allows savers, investors, lenders and borrowers to interact without intermediaries and in a more secure environment is a very real prospect created by DLP technology. This is why so many bankers, both in private banking and at central banks around the world, have denounced it so forcefully.

But the growing forces of anti-elitism and decentralization are not just at work in the world of politics and finance. In fact, the most powerful representation of these trends is now at work in Silicon Valley. The backlash against Big Tech is just another tentacle of this giant squid attacking the foundations of society.

Facebook is the poster child but they are not alone. Google, Apple and Amazon represent to many the forces underlying the massive wealth inequality around the world. By skirting antitrust regulations designed for a corporate era that is now a distant memory these companies have generated sustained sales growth and profitability like we have never seen before. At the same time, labor share of corporate income has plunged. In the past, this has always reverted towards a mean usually as the direct result of populist forces like we are now seeing today. The FANG stocks, as the apotheosis of the “winner take all economy”, now have a bullseye painted around them in this regard.

Wittingly or unwittingly, the attack on these companies today focuses squarely on what has made them so successful and, again, it’s a populist sentiment driving it. The question of data ownership was not much of a question until very recently. Facebook, Google, Apple and Amazon have zealously tracked and collected data about their users and customers for years and it’s is really the key to their kingdoms. Furthermore, users have willingly provided the companies with free content and much more.

Until now, it was taken for granted that, simply due to their efforts in providing the platform, they owned whatever they data they collected or content they hosted. This is now being questioned at all levels. In the Financial Times last week, John Thornhill wrote:

Users of Facebook, Instagram, Twitter and YouTube may believe they are simply sharing their special moments, witty insights and hilarious escapades with friends and families. All this activity is enriching our lives, deepening our social connections, and providing fun and free leisure time. Looked at another way, though, all we are doing by pecking away at our mobile phones like so many digital battery hens is generating massive data sets for machine-learning programs to work out how to sell advertising against us. The genius of Facebook is that all its users are — unwittingly — working for the company for free, creating its most valuable product. That enables Facebook to pay out the equivalent of just 1 per cent of the company’s market value to its own employees, compared with 40 per cent at Walmart…. We consumers should wise up to our role as digital workers and — in Marxist terminology — develop “class consciousness”. Data labour unions need to emerge to fight for our collective rights. The historic approach of labour to overmighty capital has been to strike. We may know the DaL movement is serious when we start digitally picketing social media groups under the slogan: “No posts without pay!”

It may be somewhat tongue in cheek but there is a very real revolutionary tone here and Mr. Thornhill is far from alone in his sentiments. The German government has already taken up this fight with Big Tech and, though most didn’t recognize it for what it was, launched a missile at the heart of these companies profits. Last week, a German court ruled that both Facebook’s data collection and usage was illegal.

If Facebook doesn’t have the ability to collect data about its users and then use that data to create highly targeted advertising what is it exactly they have to offer advertisers?

The more interesting question that arises out of this is: if Facebook doesn’t own all of the data they have collected who does? Or perhaps, more poignantly, who SHOULD own your data? I think if you asked most people they would say they believe they should own it themselves. I should own my own search history, my “like” history, my tweets and posts and anything else I do online just as I should own my own medical records and financial identity and you should own your own. This is where DLP technology comes back into the mix and it’s probably one of the most exciting potential applications for it. The New York Times recently reported:

The true test of the blockchain will revolve — like so many of the online crises of the past few years — around the problem of identity. Today your digital identity is scattered across dozens, or even hundreds, of different sites: Amazon has your credit-card information and your purchase history; Facebook knows your friends and family; Equifax maintains your credit history. When you use any of those services, you are effectively asking for permission to borrow some of that information about yourself in order perform a task: ordering a Christmas present for your uncle, checking Instagram to see pictures from the office party last night. But all these different fragments of your identity don’t belong to you; they belong to Facebook and Amazon and Google, who are free to sell bits of that information about you to advertisers without consulting you. You, of course, are free to delete those accounts if you choose, and if you stop checking Facebook, Zuckerberg and the Facebook shareholders will stop making money by renting out your attention to their true customers. But your Facebook or Google identity isn’t portable. If you want to join another promising social network that is maybe a little less infected with Russian bots, you can’t extract your social network from Twitter and deposit it in the new service. You have to build the network again from scratch (and persuade all your friends to do the same). The blockchain evangelists think this entire approach is backward. You should own your digital identity — which could include everything from your date of birth to your friend networks to your purchasing history — and you should be free to lend parts of that identity out to services as you see fit. Given that identity was not baked into the original internet protocols, and given the difficulty of managing a distributed database in the days before Bitcoin, this form of “self-sovereign” identity — as the parlance has it — was a practical impossibility. Now it is an attainable goal.

The recent action by the German government and the sentiments expressed by major media outlets here in the U.S. suggest to me that we are quickly moving in the direction of having a debate about data ownership and portability. This debate gets to the heart of the wealth and power inequality created by a “winner take all economy” which is the direct result of a failed antitrust regulatory framework.

Just think of what mobile phone number portability did to empower consumers and create competition in an industry that had become far too centralized. Personal data portability could do wonders for individuals and for the economy by empowering individuals and reigniting competition in social media, online commerce, smart devices and cloud computing. And DLP can make it happen.

These are the implications of populist forces continuing in their current direction and at their same velocity. The train has left the station. In its tracks are any “too-big-to-fail” institutions, not just banks and Big Tech but anyone or anything that stands for centralization and elitism. Even Warren Buffett and his masterpiece, Berkshire Hathaway, are not immune. In a long form piece for The Nation, David Dayen wrote, “Warren Buffett should not be celebrated as an avatar of American capitalism; he should be decried as a prime example of its failure, a false prophet leading the nation toward more monopoly and inequality.”

When it comes to greater regulation of market power, data ownership and the risks of social media, Europe may be leading the charge but it looks like American politicians will soon be following their lead. Democrat Dianne Feinstein, in regards to the Russian interference in the presidential election, told representatives from the major social media platforms, “You’ve created these platforms and now they are being misused and you have to be the ones to do something about it or we will.” That certainly sounds like a barely-veiled threat.

Last week, in a hearing held by the Senate Commerce Committee, Republican Ted Cruz, referenced a recent article by Scott Galloway calling for the breakup of Big Tech in saying, “A number of members of this committee are concerned with the scope and control of Big Tech that the size and power of it is unprecedented.” Less of a threat than Feinstein’s comment but it certainly sounds like there is bipartisan agreement that Big Tech has overstepped and that Congress is seriously considering how to rectify the situation.

Even without increased U.S. regulation, George Soros believes Big Tech’s days are numbered due to the regulatory climate in Europe. In an op-ed for Project Syndicate he wrote, “It is only a matter of time before the global dominance of the US Internet companies is broken. Regulation and taxation, spearheaded by [EU Commissioner for Competition Margrethe] Vestager, will be their undoing.” If the U.S. regulatory authorities are now following suit then we are very likely staring at the beginning of the end for Big Tech as we know it.

What should be most worrisome, however, to investors in the these companies is that, “Facebook was built on the power of network effects: You joined because everyone else was joining. But network effects can be just as powerful in driving people off a platform,” to quote another long form piece that appeared in Wired last week. Sure, the regulatory risk are now massive even if they are only capable of slowing the growth of these companies but most people forget how quickly the tech landscape changes.

We live in an age of record low attention spans and viral fads. It’s one thing for the major media outlets to bash Big Tech for not acting like major media outlets. It’s something else for pop culture outlets like Wired, Vox, Mashable, USA Today along with celebrities like Jim Carrey to pronounce that Facebook is not cool anymore let alone, “one of the most evil companies on the planet.” This suggests the reverse network effects mentioned in the Wired piece are already at work and the data supports this view. The company recently reported that its growth in younger users and engagement among all users is now in decline.

These network effects are at work, not just in social media, but in the markets, as well. As I mentioned earlier, Facebook is the poster child and, for this reason, it is also the canary in the coal mine for the backlash against Big Tech. These rapidly rising risks are not yet reflected in the stock price but investors in the financial markets understand the power of network effect even better than the techies who have only recently embraced the concept.

A revolt against Facebook on the part of its users will inevitably show up in the share price inspiring the network effect which has powered its gains to over a half-trillion dollars in market cap to also switch into reverse. And if this broad, populist backlash spreads from the F to the AANG it would almost certainly represent a sword to the heart of one of the most epic bull markets in history. In fact, looking at how far all of the populist trends have already run, as represented by political upheaval, the rise of blockchain and the backlash against Big Tech, there’s a very good possibility the bull is already dead. He just doesn’t know it yet.

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