April 21, 2023: Global News Roundup
Not too big to fail—Big Tech, Big Finance, the S&P 500, and a bunch of empty skyscrapers
According to the Financial Times, the US’s benchmark equity index—the S&P 500, which lost about 20% of its value last year as the US economy struggled—has regained US$2.36 trillion in value so far in 2023 (through April 8), getting a boost last month from the Silicon Valley Bank collapse and resulting panic as investors sought out the “safety and comfort” of investing in the US’s largest and most popular companies. A full 90% of the index’s gains were driven by price increases in just 20 stocks, including semiconductor manufacturer Nvidia (up 83%), Meta/Facebook (up 76%), Salesforce (up 42%), and Apple (up 30%). The article noted with concern the “heavy concentration in the world’s most influential stock market”. Indeed.
The chart below from a report released last month by the Transnational Institute, a nonprofit research organization, shows the global dominance of US-based Big Tech firms. Measured by total sales, Amazon and Apple are the 2nd and 3rd largest companies in the world, respectively, with US-based Walmart taking 1st place and China’s major state-owned oil companies in 4th and 5th place. Measured by profit, Apple and Microsoft take the 1st and 2nd place slots, with Google’s parent company Alphabet in 7th place and Facebook in 10th. Measured by market value, Apple and Microsoft again take the top spots, with Amazon, Alphabet, and Facebook coming in 4th, 5th, and 6th place, respectively.
(Source: Interview with Cory Doctorow, “Seizing the means of computation”, State of Power, 2023: Digital Power, Transnational Institute, p. 2, here).
In an article published at the beginning of the pandemic, the FT noted just how reliant the US economy become on Big Tech in the years following the Great Recession: “The so-called Fang stocks — originally Facebook, Amazon, Netflix and Google, but with Microsoft and Apple also often thrown in to the mix — became emblematic of the US technology-driven rally after the global financial crisis of 2008. They helped drag the S&P 500 up by nearly 400 per cent from its 2009 low to the beginning of 2020, leaving many other equity markets in Europe and Asia in the shade. The more tech-oriented Nasdaq 100 index climbed more than 700 per cent over the same period” (emphasis added). By 2020, Microsoft, Apple, Amazon, Alphabet, and Facebook accounted for 20% of the S&P 500’s capitalization: “That is a modern-day record in terms of concentration, Goldman Sachs notes, and comes with potential risk for investors.”
Not only has the S&P 500 become more concentrated in terms of the share of market capitalization accounted for by Big Tech, but ownership/management of Big Tech shares have also grown more concentrated among a small group of extremely large financial firms. The chart below shows the major holders of Big Tech stock, with large asset management firms dominating the market. The Vanguard Group led the pack, owning/managing about 12% of all shares in the GAFAM group of companies, followed by BlackRock (10%) and State Street (6%).
(Source: Peters, Nils, “Holding the strings: The role of finance in shaping big tech”, State of Power, 2023: Digital Power, Transnational Institute, p. 25, here).
Researcher Nils Peters explains how, following the start of quantitative easing (QE) during the Great Recession, investors had a hard time generating returns on government bonds as interest rates fell, prompting them to seek out higher returns in the stock market (uncoincidentally, the problem of low yielding government debt also underpinned SVB’s collapse last month):
In other words, buying the debts of governments and corporations (bonds), a proven but increasingly insufficient strategy for institutional investors, was supplemented by purchasing corporations’ shares and stocks (equity). This resulted in a decade-long bull market in publicly listed Big Tech stocks, and privately held shares of tech startups, where asset prices continuously rose…As was the case with excess savings, this shows that macroeconomic trends, finance and the fate of Big Tech are closely intertwined. (Peters 2023, p. 26)
It's hard to overstate the size of these corporate giants. The graphic below from Visual Capitalist in 2021 compares Apple’s market cap of US$2.1 trillion to the GDP of various national economies. The Apple economy is larger than that of Italy, Brazil, Canada, or Russia. (Based on my own calculations, Apple’s economy equates to about 8% of US GDP). Apple may be huge by global standards, but BlackRock is even larger, with over US$9 trillion in assets under management reported this week, more than 4 times the size of Italy’s economy, the equivalent of about half of China’s GDP and 36% of US GDP in 2022. Vanguard has about US$7 trillion under management, which was more than double India’s 2022 GDP.
(Source: Visual Capitalist, “The World’s Tech Giants Compared to the Size of Economies”, 2021, here).
As it happens, the risks of investing so much in such a small handful of giant corporations started to become more apparent this week. The wave of layoffs in the global tech sector is continuing: “[O]ver 150,000 people have been affected by tech layoffs in 2022 alone, whereas, 68,500 new cuts were seen in January 2023 alone,” reported the India-based Business Standard, with “a drop in stock price, economic fears, and declining sales were cited as the reason for downsizing by software firms.” The replacement of workers with artificial intelligences (AI) was also cited as a possible factor. The layoffs in tech do not only impact workers in the US, but also abroad, for example in India. News this week also demonstrated how Europe is capitalizing on the wave of tech layoffs, with Politico Europe reporting that EU officials are working to recruit laid-off workers to help implement the new Digital Services Act, which established new censorship rules for online content in the EU market: “Workers with insider knowledge about how social media giants operate would make valuable additions.”
For its part, this week the S&P, which remains overvalued relative to its historical average, seems “stuck” within a narrow range, “with those people who think that there is going to be a recession coming and those people who think there is going to be a soft landing," said Rick Meckler, partner at Cherry Lane Investments, in comments to Reuters on Wednesday. Other observers also noticed “hesitation” in the S&P this week, with the Australian Financial Review commenting that the market was just waiting for a downside “catalyst”: “The market is clearly in waiting mode, with the shorts ready to move instantaneously with an abundance of liquidity…”. An analyst from Hong Kong whose commentary I track put it as follows on Wednesday: “Feels like one of Einstein’s mental experiments, stocks are in an elevator that is free falling but they don’t know it. They will only realise when it hits the ground and that’s too late.”
If shares in Big Tech collapse like they did last year, the impact will be substantial owing to already-existing financial fragility and also to the fact that tech stocks are widely held by ESG funds, pension funds, insurance companies, and other institutional investors. For example, last October, when tech stocks were collapsing—Meta/Facebook share prices had fallen about 70% by last fall, but rebounded later in 2022 and into 2023—reports were that pension funds, especially 401Ks, were struggling badly owing to how tech-heavy their portfolios were (see here, not an international source, sorry). In fact, there’s some limited evidence that major institutional investors like pension funds are pulling back from stocks and moving back into bonds, a movement that, in itself, could put downward pressure on Big Tech shares (here, also not an international source). And, there is substantial exposure to the S&P globally, including Canada, China, Japan, and the UK, suggesting the potential for knock-on effects should share prices tank again.
In related news, earlier this week, BlackRock—the world’s largest asset management firm, which recently saw protestors storm its Paris offices—released an advisory note for clients that strongly reflected both the terrible year the firm had in 2022 as well as expectations of a rough road ahead. Referring to the new financial “regime” emerging, BlackRock’s comments read as follows:
We don’t see the return of a joint stock-bond bull market like we saw in the Great Moderation. That was a decades-long period of largely stable activity and inflation when most assets rallied and bonds provided diversification when stocks slumped. We think strategic allocations of five years and beyond built on these old assumptions do not reflect the new regime we’re in – one where major central banks are hiking interest rates into recession to try to bring inflation down…We think being more nimble is key because coasting with strategic allocations can prove costly. It’s even more important against a backdrop of structural forces like geopolitical tensions, the energy transition and shifts driven by banking sector turmoil.
In other words, the days of macro stability and easy money are over, and we’ve entered a new stagflation-depression era in which policymakers behave differently than they used to and geopolitical and financial risks proliferate.
Meanwhile, pain is up in other corners of the US financial system. The chart below shows office vacancy rates by world region. (Office workers were the most likely to shift to home-based work during the pandemic, and many have not returned since.) Even in Europe, where vacancy rates are well below the global average, trouble is brewing. “Offices are the largest component of a commercial property market which lenders and investors have backed with €1.5tn of debt in Europe alone. About €310bn of new or replacement borrowing is issued to keep the market moving in a typical year…,” reported the Financial Times last week. Citibank analysts estimate that European real estate values could fall as much as 40% by the end of 2024, and the specter of default looms large.
(Source: Oliver, Joshua, “European commercial real estate: the cracks are starting to show”, Financial Times, 4/9/2023, here).
Notice also how high office vacancy rates are in the US relative to other regions. In Denver, Colorado where I live, at least 5 Class A office buildings downtown have already fallen into receivership, with lenders taking over the buildings after owners walked away from underwater mortgages. My conversations with local real estate professionals indicate that, at present, the number of office properties in receivership may actually be more than twice as high. Back in 2006-8, it was individual homeowners who were backwards on their real estate debts. Fast forward 15 years and now owners of some of the largest and most expensive buildings in my city face the same predicament. On April 6, Fitch Ratings released its monthly report on US commercial mortgage-backed securities (CMBSs—complex financial products created out of a pool of underlying mortgage debt; similar to the residential mortgage backed securities that aggravated the Great Recssion in 2008, just with commercial real estate debt in the pool instead of home mortgage debt). Fitch notes that “a large office maturity default drove the office delinquency rate slightly higher”, and that “office and self-storage reported higher rates” relative to industrial, retail, multifamily, and mixed-use space.
In a report published in 2021 during the pandemic, the IMF warned of exactly what’s happening now in US commercial real estate (CRE) markets: “While the adverse shock to the CRE sector could be considered as temporary, at least partly reversing as the pandemic is brought under control and the economy recovers, the preexisting structural trends towards increased digitalization, e-commerce, and working-from-home—which have further accelerated during the pandemic crisis—create considerable uncertainly around the outlook for the sector and suggest that further price declines may be possible, at least in some CRE segments. Given the heavy reliance of the sector on bank financing in the United States, a significant downward pressure on CRE valuations as a result of a persistent drop in demand could be a potential source of stress for banks, especially for those with large CRE exposures, and pose financial stability risks.” London-based Deloitte estimated in 2022 that about 18% of the more than US$800 billion in foreign investment in US CRE was in office space in central business districts (CBD), indicating potentially broad global exposure to a US CRE crisis (though foreign investors did back off CBD office space some after 2021).
In other news, Microsoft is working to adapt its Teams app for the Chinese market, while Russia is considering blocking local access to Wikipedia and regulations in India are undermining attempts to make the country a Google data transit hub. A court in Kenya ruled this week that it has jurisdiction to hear a case brought by 183 people who say they were unlawfully laid off by a subcontractor for Meta’s Facebook: “Meta's lawyers say the company — which also owns Instagram and WhatsApp — cannot be sued, arguing the Employment and Labour Relations Court has no jurisdiction to rule against an entity that isn't based in Kenya…But Judge Mathews Nduma Nderi from the labour relations court disagreed.”
Things I’m keeping an eye on:
1. Conflict in Sudan: Civil conflict broke out in Sudan shortly after I posted last week. A tentative ceasefire agreed earlier this week did not hold and fighting has resumed. Al Jazeera has been running constant coverage, here. Prior to the conflict, the people of Sudan were already struggling with a dire food crisis. The UN reported last summer that about 1/3 of the Sudanese population was acutely food insecure, with hunger rising owing to Ukraine war- and sanctions-induced food price increases.
2. Anti-finance protests: No people on Earth protests quite like the French do. Massive protests against President Macron’s pension reforms, ongoing for close to 2 months now, are increasingly focused on the outsized power of major financial corporations, including US-based BlackRock. On Thursday, protestors stormed the Paris offices of Euronext, a pan-European stock exchange.
3. Next financial dominoes to fall in US: I don’t know what breaks next, whether it will be stock or bond markets or CRE or more banks or something else entirely. Whatever the catalyst is, the dollar appears to be in very serious trouble. FT reported on Wednesday about the extent of the global dollar sell-off, with global USD reserves falling sharply since last year (down 8%), and resting now at 47% of total global reserves. (In 2001, the dollar represented 73% of the world’s foreign exchange reserves.) De-dollarization is not a linear or orderly process, because investors tend to exhibit herd behaviors, meaning they all move together quickly, especially when panicked. Once some kind of critical threshold has been reached—and I believe we’ve already reached it, though we will only know for sure in hindsight—the process picks up speed as the risk of holding dollars rises, confidence plummets, and investors flee to safety, no matter how hard central bankers try to stop it. This is how other countries have historically fared in similar contexts, and it seems the US is about to see first-hand what a currency crisis is like. Further, from a strategic perspective, if I were the BRICS, I’d be considering rolling out some new currency instrument really soon, maybe a gold-backed scheme of some kind, to help capture impending capital flight from the US. I’ll keep you updated.
4. BRICS and the Ukraine war: Brazilian President Lula came out with a strong anti-war stance this week, criticizing the US, Ukraine, and Russia alike for undermining world peace. Needless to say, his criticism was poorly received by many US and European officials. Lula also met with Russian foreign minister Sergei Lavrov this week in Brazil. Further, the fate of US dollar has been and still is tied directly to the ongoing Ukraine war and to any future conflict over Taiwan (for example, see my post from 2 weeks ago discussing the effects of Western sanctions on dollar demand).
5. Taiwan: According to the Taipei Times, “US Indo-Pacific Commander Admiral John Aquilino on Tuesday said Washington must be ready to “fight and win” if it fails to deter China from taking military action against Taiwan.” It was also announced this past weekend that the US will be sending four sets of Norwegian Advanced Surface-to-Air Missile Systems (NASAMS) to Taiwan, a system compatible with the equipment Taiwan already has. As I’m writing these lines, I’m getting déjà vu remembering writing last year about shipments of HIMARS missile systems to Ukraine. On this note, the chart below, drawn from a recent report from SIPRI, shows the overwhelming dominance of the US in global arms markets, with 40% of the total. The next largest weapons dealer is Russia, with 16% of the global total.
(Source: Stockholm International Peace Research Institute (SIPRI), “Trends in International Arms Transfers, 2022”, March 2023, p. 3, here).