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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November 1, 2020

East Beats West,The Creator Economy & The End of Google

China Wins

James Forsyth has a salutary article in the Times this week entitled “Covid is killing faith in western democracy” with the strapline, “confidence is ebbing away as the liberal west is outperformed by the statist east”. In many ways Boris Johnson personifies the issue of how defenders of individual freedoms (like his right to wear a bobble hat when skiing or enjoy the delights bent bananas) are not able to effectively deal with a communitarian crisis in public health. By contrast the South Korean use of phone records to prosecute the enforced lockdown of infected individuals and the acceptance of QR codes at every public place in China, are examples of how this pandemic has accelerated geopolitical race to be “top nation”. It is increasingly is looking like China has won.

Lobster Pot Lockdown

In Britain, as the return of lockdown looms, Brenda from Bristol, who so eloquently highlighted the straining disbelieve the average person had in “not another election”, is seemingly now speaking more widely about the whole democratic process and its institutions. As Forsyth points out, China and the east generally, are light years ahead of the UK (and the west) in terms of digital government. Dominic Cummings might be too late in recognising the critical importance of turning our outdated analogue bureaucracy into one able to produce a world beating test and trace system. The lobster pot of lockdown is having a serious effect on faith the British people have in its government. Britain is not alone, the same narrative is playing out elsewhere. This is seriously damaging for our future political and financial stability. Meanwhile we have the IMF urging the UK government to go further on stimulus and further into debt.

Spend, Spend, Spend

The least worst option from here is to keep printing money, hold down interest rates (or take them below zero) and use the tried and tested method of inflation to lower the debt burden. In order to avoid turning the UK into Venezuela or Zimbabwe, the government will require to impose greater control on the money supply, the way it is used and how it is allowed to flow. I am old enough to remember the 1970s with exchange controls which only permitted any one person to take a maximum of £50 worth of foreign currency abroad at any one time. I also remember both Labour and Conservative governments trying to control prices and incomes by legislative means, to contain what was euphemistically called, cost push inflation. These measures had all the success of trying to push on a piece of string.

But this won’t necessarily happen quickly. The degree to which the velocity of money has fallen and the amount of inertia to overcome in order to get people spending again should not be underestimated. (The savings rate is rising sharply despite lower rates). The longer term risk, remains that of inflation.

Who Needs Banks

The emerging mechanisms for control of the monetary system are Modern Monetary Theory (MMT) and Central Bank Digital Currencies (CBDC). These twin pillars represent a way for government to mainline money directly to consumers, bypassing both capital markets and commercial banks. In its purest form everyone will become account holders at the Bank of England. (While this is unlikely to happen over night, the writing is on the wall). The disintermediation of the banks will allow the government to implement negative interest rates and enforce an increase in the velocity of money. Consumers will be basically told to “use it, or lose it” (as rugby referees say). If they over stimulate they can simply take the money back in the form of higher rates or the imposition of taxation at source. Like so many things in the post Covid world, the analogue approach to money will not be able to keep up. Its control has always been dependent upon a well functioning banking system. We unfortunately lost that over a decade ago. If you were the Rishi Sunak would you want to depend on the banks to execute on your strategy, or would you want to go direct?

Technology & Real Assets

I continue to believe that the best investment policy is to selectively own quality (high return) growth equities along with exposure to real assets. These for me include gold, and Bitcoin, but could include Rolex watches, fine wine or art. Businesses with high return on capital and pricing power in structural growth categories have a chance of out-running the impact of currency debasement. The performance of real assets depends on their perceived scarcity value, which in turn depends upon a fixed supply and increased relative demand. Cash will remain the primary means of exchange for the foreseeable future. You need to own some of it, but it is increasingly going to be literally burning a hole in your pocket.

Digitisation Accelerates

My biggest exposure to growth equities this year has been via Alphabet, Facebook, Amazon and Pinterest. Collectively they have performed well. The Q3 results suggest that the trend towards digitisation in advertising and cloud infrastructure are, if anything, accelerating, not slowing from the strong growth reported in Q1 and Q2. Amazon as usual cast doubt on the sustainability of its growth rate into the busy Q4 festive period, but the main issue remains the cost of vaccinating its supply chain not on its ability to deliver on top line growth. Meanwhile AWS continues its long term quarter on quarter c 30% growth rate. Not surprisingly all these  success stories were at pains to project their saintliness ahead of the ongoing antitrust proceedings. The reality is, if most people had a choice they would put more trust in Jeff Bezos delivering them an effective and affordable vaccine than Donald trump, Joe Biden, or Boris Johnson. An irony of the UK’s failure to deliver a “world beating” tracing app was in part due to its centralised approach to data collection, while the alternative developed by Apple and Google was decentralised with fewer data privacy issues.

No Going Back

This current period of exceptional digital growth will of course slow, but the advertising dollars lost by the traditional advertisers in the past two decades are not going to return to them. When Facebook and Google lose their dominant positions in advertising, it will be to Snap, Pinterest and Amazon, not back to the likes of WPP and ITV. Similarly when Amazon loses ecommerce  market share it will not be to the bricks and mortar players, but via Shopify, Etsy and Pinterest to the myriad of online artisan creators that have now been monetised into merchants. Some of which will scale.

The Death of Big Brands

This is an under reported aspect to the digitisation of commerce (advertising and online retail). The demise of the all powerful branded leaders with primacy of shelf space bought by brand advertising muscle has been fragmented by direct to consumer online RoI driven models. It is telling that Facebook can still grow its advertising revenues at double digit percentages despite its existing strong market position and widespread bans from the major advertising spenders. The reality is, Facebook and Google can both grow quite nicely by concentrating on the long tail of small and emerging advertisers and influencers. Nike and Pepsi can do what they want with their ad budgets, it doesn’t really move the needle. Facebook has over 2 million advertisers, Google over 4 million.

Rise of Passionate Creators

The rise of creator sites like Etsy and Pinterest, has only just started to attack this vulnerable spending power once forced down the dumb pipe of traditional big brands via old school advertising spend. As a result I think both businesses should continue to show supernormal growth rates for sometime. Like TikTok, Pinterest does not rely on a social graph but on an interest, or preference graph. TikTok’s algorithms understand which type of short form dance style you prefer, Pinterest gets to know your styling preference for your new living room project and what type of recipes you like. Neither care who your friends and followers are. Pinterest is innovating quickly in ways of allowing its Pinners to monetise this valuable source of consumer behaviour data. It is only just starting its journey at developing the critical KPI of revenue per active user.

The passion led creator economy is the next step along the evolutionary progression from the gig economy. Whereas Uber is a mechanism for arbitraging (exploiting) low wage earners for the benefit of busy middle class customers, the passion led creator economy allows anyone a chance at monetising their “output”. It was reported this week that the rate of new business formation in the UK is running at an all time high. Much of this is a “needs must” response in a period of falling employment. However, it also signals a new source of a rich and varied supply of goods and services that can be directly and efficiently traded on Pinterest and Etsy (other sites are available).

The End of Google

The DoJ, most likely with strengthened political support from a new Democratic executive and legislature by the new year, is onto Google and the plan looks serious, targeted and determined. The ensuing attorney fest will be akin to an ultra-marathon, with Google dug in for the duration. However, I think it remains doubtful that any US government will inflict any serious lasting self harm on its own technology industry. The battle with China for “Top Nation” status has moved from being a peculiar Trump obsession in 2016a, to a bipartisan strategic objective today.

Google search is an insanely popular tool of modern life. The day will come when this is not the case. But for now it will dominate the way we search for information and the resultant advertising revenue it collects will remain an unregulated monopolistic utility due to the fact it is the best available product in its category. The main threat to Google’s position will come as new technologies emerge and change the shape of the future internet and the way we interact with it. Although the route this takes is unknowable, I reckon it will be shorter than the journey time of the legal action of the DoJ, but still sufficiently long for Alphabet to grow its equity value by a factor of another 2 or 3times. I will hold onto my shares.

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