HyperNormalTimes

Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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July 16, 2020

Data Delivers Advantage

Why Data Processing Matters 

One of Mikhail Gorbachev’s key economic advisers visited the UK in the mid 1980s. He was on a mission to discover what the UK did well and what could be learnt by Moscow in order to improve its economic efficiency. After a few hours he turned to his host and said that in Moscow they employed some of their best planners on the tricky task of organising bread production, but no matter how many clever people they put into the team there were always long bread queues, “but in London you have none. Can you take me to meet your bread planning department?” This, maybe apocryphal story illustrates the importance of data processing in society.

Of course the UK did not have a bread planning department, and it was this that helped Gorbachev realise the days of the Soviet “hypernormalisation” were up, and they were never going to compete with the efficiency offered by the free market economies of the West. As Hayek pointed out in the 1940s, they could never process the data. A few years later the Berlin Wall collapsed and not long after the Soviet Union itself disappeared.

Data is the New Oil

How would this have played out if the Soviet Union had sufficient data storage and machine learning AI? Would they have been able to match the price mechanism in allocating resources to bread production of the capitalist world? I like to think not. But Jack Ma, the founder of Alibaba, disagrees. He said in 2017, big data will make the market smarter and make it possible to plan and predict market forces so as to allow us to finally achieve a planned economy . This is the reason why today’s geopolitics is being played-out around data and computing, in the same way the geopolitics of the 1970s was played-out around oil.

 

The companies that collect data and process it will have a growing strategic advantage and moat around them in future as the development of neural networks and machine learning AI becomes ubiquitous. Importantly data has much better investment properties than oil. First it is intangible, you can acquire it once and use it many times, and second, its value increases geometrically with scale.

Data Provides Moats

The big tech companies, Google, Facebook and Amazon have a vast data supremacy and have used it to establish wide protective moats around their businesses. They conceivably have more data about their customers than most governments have regarding their own citizens, and its value is increasing as they accumulate more of it and learn how to do more things with it to gain insight into customer preferences, and buying intentions. But in the next stage of their strategic development they will reach out further and understand how we feel, what our healthcare needs are and how we might look to improve ourselves through education and training. Healthcare and education remain the un-disrupted big sectors to go after.

The impact of COVID and consequential lock-down has been not only to enhance our use of data driven devices and internet enabled services, but also to bring the future forward from a financial perspective. Zero interest rates and existential threats to the more economically sensitive sectors of the economy mean that the moats of the established Big Tech companies have been widened and the power of the potential barbarians at their gate has been diminished if, not extinguished. We have entered the phase of data monopoly. The scarcity of its constituents and the strengthening of their moats makes their investment appeal overwhelmingly alluring. This is particularly so if you consider the unappetising appeal of bonds or cash deposits.

Data is Strategically Vital

 

Now consider the geopolitical aspect to the clamour for data supremacy. In other times those of us who are concerned with the economic and financial landscape might concern themselves with what is taking place in OPEC, or the efficiency of respective steel industries or agricultural sectors. These days it is whether TikTok and Huawei are safe to use, or should be banned, or to what extent Google, Facebook or Amazon should be allowed to infiltrate our economies. This is the reality of the main issue that will determined global supremacy over the coming generation: who has the best AI data processing capability and how it can be used to best effect.

I don’t know how this will play out, but I do know that the value of data and the ability to manipulate it effectively is likely to increase. Furthermore in an increasingly oligopolistic and autocratic world the ability of outsiders to gain entry to the Big tech club will become more difficult. Little wonder Tesla is the biggest car company in the World, Netflix is bigger than Disney the FANG stocks dominate the S&P 500. While value might have periods of out performance, the scale and data advantage of Big Tech will remain the dominant investment trend of the foreseeable future.

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