Scott recently published a 2-part series on Thomas Piketty’s Capital in the 21st Century:
BOOK REVIEW: CAPITAL IN THE TWENTY-FIRST CENTURY
(he also wrote two follow-up posts)
When one includes the thee posts but also all the comments on Scott’s blog and on Reddit, that is a considerable amount of reading. By my estimate, over 130,000 words–or about the length of a 300-page book.
Here’s my take on how the US economy has transformed and will continue to evolve, as discussed on the blog many times:
1. Capitalism is becoming smarter and choosier, as in capital chasing a smaller but stronger pool of companies. This means as the economy grows, fewer companies will participate. Unlike in the 80’s and 90’s economic boom that saw capital indiscriminately chase smaller, speculative companies and investments, nowadays capital is almost exclusively flowing into the biggest and strongest of sectors and regions such as large-cap tech stocks (Google, Facebook, Amazon, Microsoft) and Bay Area real estate. Winner-take-all capitalism means one must be the next Uber or the next Facebook in order to reap gains; second place is first loser. This is already happening…Google, Amazon, Microsoft, and Facebook are a much larger percentage of the S&P 500 than they were just 3 years ago.
But also, look what happened to Bitcoin as further evidence of the perfidious nature of capital…In late 2017, Capital decided Bitcoin was no longer an optimal allocation and has been divesting from it ever since. The market has realized that Bitcoin is not revolutionary.
2. Because of #1 (but also other factors), the Silicon Valley tech oligopoly will keep growing. Google Facebook, Amazon, and Microsoft will eventually have a combined market cap of $5-10 trillion within a decade, compared being worth a combined $500 billion as recently as 2009. That far exceeds GDP growth. That’s why this blog keeps recommending those companies as investments and why they keep doing so well.
3. manufacturing and retail, which tend to be more volatile and sensitive to global macroeconomic factors, will play a smaller role in the US economy.
4. Due to the aforementioned factors, but also due to central bank and government policy/intervention, the boom-bust cycle will become a perpetual ‘boom’. This means recessions and bear markets will become a thing of the past and economic textbooks will need to be revised to reflect this reality. The fact the post-2009 bull market and economic expansion, officially the longest ever, keeps defying all economic forecasts of contraction, is evidence of how the rules of economics may be changing. Much like a timepiece, the US economy has become so well calibrated that even in the face of civil unrest and the specter of economic crisis under Trump (both of which are unfounded, but the media keeps pushing the narrative that there is a lot of unrest and that Trump is bad for the economy)–it keeps chugging along. Does such apparent hubris mark the top..maybe, but keep in mind that in 2009 it was inconceivable that Facebook, then valued at only $15-30 billion in private markets, would be a $500-billion dollar company as it is today. When it had its IPO in 2012 and closed at $28, the entire media called it a bubble, and how wrong they were. Facebook’s earnings have grown so much that if the stock were to fall to $38, it would be undervalued by conventional financial metrics, versus being overvalued at its IPO. Or that Google in 2002 would become as big as powerful as it is today.
5. Regarding Thomas Piketty’s thesis, among the criticism, no one mentioned the idea I had brought up months ago that r > g does not hold everywhere, which is related to #1. Many would assume based on Piketty’s thesis that all wealthy people have seen huge gains, but only high-IQ countries and sectors have generated superior returns on capital relative to an appropriate benchmark, such as the compounded returns on risk-free Treasury bonds. Although Silicon Valley home owners, for example, have seen huge r > g gains, home owners in less intelligent regions such as Brazil, Saudi Arabia, and Turkey have not (relative to the returns on a 3-month treasury bond). A wealthy person who bought a home in Brazil or Turkey as far back as 2003, 15 years later, would have made no money when the local currency is converted into US dollars (and would have severely lagged the compounded returns of a 3-month bond), which goes against Piketty’s thesis. When one creates a US-dollar denominated benchmark for returns on capital, many regions and sectors are either in-line or lag it. Information technology and biotech have exceeded it (like Google and Facebook); less intelligent sectors such as energy, apparel, and retail have not.