Late Stage Capitalism, Part 2

Part 1

The 2008 crisis allowed large companies to become leaner and more productive, shedding excess labor and other costs, but many of the jobs lost have not returned despite record high profits, stock prices, and earnings. When the crisis ended, these cost saving measures provided a huge tailwind, and profit margins and growth for S&P 500 corporations have surged since 2008. This is one major example of asset-based capitalism winning. Most of the jobs created since 2008 have been in the low-paying service sectors, but many ‘professional’ jobs lost in 2007-2009, such as in the financial and real estate industry, did not recover.

Pre-2008 capitalism favored entrepreneurship; now investment–whether in stocks, bitcoin, or real estate–is more lucrative. In post-2008 capitalism, wealth is created not through entrepreneurism or labor, but by buy and holding investments such as Bitcoin, the S&P 500, the Nasdaq 100, and high-end real estate.

Micro and macro economic conditions have created a runaway ‘Mathew Effect’, in which the ‘big and successful’ become bigger and more successful, which could explain why major tech stocks like Amazon, Google, Telsa, Facebook, and Apple keep going up to no end while ‘brick and mortar’ retail (and pretty much everything else) stalls. Capitalism has gotten much smarter and choosier, so instead of capital taking risks in small business like it did in a pre-2008 era, capital is chasing a very small pool of already very large and successful companies. But this is not necessarily due to risk aversion, but rather due to large companies growing as fast, but much more consistently, as the small ones. Why invest in a tiny start-up that will grow slower than Facebook, when one can invest in Uber, Tesla, or Facebook, which are much better and already have huge growth and market dominance, instead of wasting money on a start-up that will almost certainly fail.

From HBD-as-Destiny Thesis (part 5 of predicting series)

…VC funds are having trouble making good returns. The market only cares about companies that have the potential to become the next Tesla, Facebook, Amazon, etc., so unless you’re in a this very special and exclusive niche, exiting (which means a large buyout or IPO) is very hard. It’s not like in the 90′s when all tech sectors did well…now it’s just social networking, apps, Tesla, and Uber. A very lopsided, winner-take-all market. In a post-2008 world, only very few companies and sectors do well, and the out-performance of maybe a couple dozen companies is enough to lift the entire stock market and economy higher. Such companies include the ones I have been recommending on this blog for years: Amazon, Facebook, Google, etc. Nearly a decade later, no one has been able create a viable competitor to these companies and likely never will. That’s not to say it’s impossible, but it’s very improbable.

The common argument that start-ups offer a high expected value to compensate investors for the high rate of failures, although sound in aggregate, does not necessarily yield superior total returns to investing in existing large and successful tech companies. Facebook stock is up 300% since 2012–way, way better than the vast majority of venture capital funds. Facebook was already a $100+ billion company when it went IPO, which was already huge, but now it’s $400+billion, and I predict it will be be a trillion-dollar company soon, along with Google and Amazon (each will be worth a trillion).

Late-stage capitalism means people are participants and consumers, and there are fewer creators. And although this new and unshakable regime and status quo may give rise to ennui and an overall dissatisfaction with the state of politics and society (which could explain the rise of Trump), Marx’s prophecy of the collapse of capitalism, and or capitalism being self-limiting, is wrong. The system is sustainable because it’s the one that is the most optimal, given the alternatives. The EMH, which is applicable not just to stocks but society as a whole, stipulates that capital will automatically choose the most optimal allocation. Second, capitalism boosts living standards. Despite social decay and the doom and gloom media, Americans have it ‘good’ compared to the rest of the world. Historically, mass revolts occur during periods of extreme economic distress, usually as a consequence of losing a war, not during peaceful–albeit very unequal–times.