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A Market Analyst Explains Why You Should Take Inflation Seriously

Bernard Fickser looks at the tech companies that are worth astonishing amounts, unrelated to their current product lines

Readers may remember Bernard Fickser from his series on non-fungible tokens (NFTs) and how they can be made to work better. Now he looks at a more serious problem, the current (quiet) capitalization crisis: the growth in the perceived market value (market caps) of tech companies, far beyond the market value of any assets they have.

He recalls the famous (and costly) Dot.com Bubble (1995–2000), when “tech and internet companies that had no actual products or prototypes or detailed plans for products were receiving enormous valuations simply on a promise and a prayer.” Many prayers went unheard and small investors suffered huge losses.

Business prof Gary Smith highlights Bill’s Barber Shop in 2000, where locals had reckoned on secure prosperity due to the bubble:

After the dot-com bubble popped, the Wall Street Journal made another visit to Bill’s Barber Shop. Bill was now 63 years old and his retirement portfolio had been decimated. His $834,000 was down to $103,000, which was $50,000 less than he had invested to begin with: “It means that I’m looking at another 10 years of work, instead of being retired.” Bill had given up playing the stock market. Now, he was playing blackjack and poker at a Connecticut casino: “I do better there than I do in the market.” Which isn’t saying much. Sort of like being the world’s tallest midget.

Gary Smith, “Double double toil and trouble: Here we go again” at Mind Matters News (February 1, 2021)

Are we headed there again? Fickser asks us to think about it:

Fast forward to the present, and we see incredible market caps again, even more extreme than in times past. Take Apple. In August 2018, Apple was the first company to hit a market cap of $1 trillion. Two years later, August 2020, it was the first company to hit a market cap of $2 trillion. Today, on October 15, 2021, its market cap is the highest of any company and sits at $2.377 trillion. That’s a 137 percent increase since August 2018. Microsoft is at the moment just behind Apple with a market cap of $2.265 trillion. Back in August of 2018, its market cap was $861 billion, so its percentage increase since then has been even greater than Apple’s: 163 percent.

Bernard Fickser, “America’s Capitalization Crisis: A Harbinger of “Low-Class” Inflation?” at Expensivity (October 15, 20201)

Eight of the Top Ten companies, in terms of market caps are Big Tech, including the ones we hear a lot about: Apple, Microsoft, and, in decreasing order of market cap, Google, Amazon, Facebook, and Tesla — Tesla sits at a mere $833 billion.

Tesla is a useful illustration of the market cap stakes. Overpromising new self-driving car and other robotics technologies is simply a hallmark of the way it does business and for a long time few seemed to mind. However, Tech analyst Jonathan Bartlett thinks that’s not working as well as it used to. Even usually gullible media noticed when founder Elon Musk introduced his new robotics line with a human dressed up as a robot.

In the development of the Model 3, Musk said that the key to profitability was to build the machine that makes the machine, and that he expected the factory to look like an “alien dreadnaught” when it was fully automated and running. However, it turned out this level of automation was outside of the company’s abilities, and the workflow switched to a largely manual, human-focused flow. It is unclear how Musk, who was unable to get robotic automation to work in his own factory doing highly-specific tasks, expects to build a “general-purpose” robot for general tasks.

Unlike previous years, where Musk has had a press willing to go along with whatever he happened to say, this time the press decided to take Musk to task for empty promises. The IEEE said, “Elon Musk Has No Idea What He’s Doing With Tesla Bot.” At TheDrive, the headline is “Human in Robot Costume Actually Good Metaphor for How Close Tesla Is to A.I.” ArsTechnica, noting the similarity of the “sometime next year” timeline with other Musk claims about AI, says, “Tesla Bot is the company’s troubled Autopilot system in humanoid form.”

Jonathan Bartlett, “Nobody is taking Tesla AI seriously anymore” at Mind Matters News (August 23, 2021)

This looks like a bubble maxing out. But Fickser, perhaps surprisingly, doesn’t see that as the main problem. For one thing, investors hang on to Big Tech because of the TINA (There Is No Alternative) problem and the fact that currently the companies are very profitable, even if they are not very innovative. Rather, he says, the main problem is the inflation that is produced by too much money chasing too few opportunities:

Even in the Clinton years, deficits in the hundreds of billions seemed like a lot. Billions of dollars have given way to trillions of dollars, much as gigabytes (billions of bytes) have given way to terabytes (trillions of bytes). In the new economy, trillion is the number to beat.

Bernard Fickser, “America’s Capitalization Crisis: A Harbinger of “Low-Class” Inflation?” at Expensivity (October 15, 20201)

To give some idea of the overvaluation, he suggests looking at the difference between the combined market cap of GM and Chrysler ($84 billion + $31 billion) and Square ($114 billion). Square is Twitter’s Jack Dorsey’s latest project, a system for paying bills by cell phone. Is paying bills by cell phone more important to most Americans than wheels? Something isn’t right here. Tesla, Fickser notes, has ten times the market cap of GM but employs only a small fraction of the number of people and produces a laughably small fraction of the number of vehicles worldwide, in relation to its perceived significance.

Perhaps if we think of GM and Tesla as ideas, rather than companies, we might better grasp the social consensus that drives these disparities. GM is everyday so-what reliable; Tesla is Cool and Future Perfect. Or is it? Fickser offers some thought-provoking reflections on the harsh realities behind the claims that electric vehicles are better for the environment and that Tesla’s prospects are therefore bright.

Germany, 1923: During hyperinflation, banknotes had lost so much value that they were used as wallpaper, being much cheaper than actual wallpaper/Bundesarchiv Bild 102-00104

Cryptocurrencies are also experiencing “gargantuan” market caps and Fickser notes that, if we see cryptos as authentic currencies, then they add to the inflation pressure many Americans are experiencing. When inflation really gets out of control, things don’t end well for the middle class:

I’m a baby boomer, and I still remember talking to friends and relatives who lived through the German hyperinflation of 1921-23. I’ve even held in my hands billion mark notes that were not worth the paper they were printed on. An interesting thing about the German hyperinflation is that the middle classes, who with German frugality had saved their money and deposited it at the bank, got hit hardest, losing everything.

Bernard Fickser, “America’s Capitalization Crisis: A Harbinger of “Low-Class” Inflation?” at Expensivity (October 15, 20201)

Here’s the nub of the problem. Current inflation benefits the social elite who are heavily invested in technology at the expense of those whose income derives from working for a living:

… our “upper classes” might do quite well with a brisk rate of inflation that’s even in the double digits (we are currently half-way there). This would be an inflation that keeps their digital assets (as represented in tech stocks and cryptocurrencies) well ahead of inflation but leaves the vast majority of Americans with less and less purchasing power. (Note that the reference here to “upper” and “lower” classes is not intended pejoratively, but rather to highlight and push back against the recent tweet by economist Jason Furman that inflation is a “high class problem.”)

Bernard Fickser, “America’s Capitalization Crisis: A Harbinger of “Low-Class” Inflation?” at Expensivity (October 15, 20201)

The poor, a large proportion of whom depend on social benefits, would be less seriously affected, especially during a slow transition to a guaranteed annual income, provided it is kept just high enough, by political pressure, to forestall mass misery.

Fickser sums up:

What’s behind all this? I’m not a conspiracy theorist, but it seems that market and political forces can collaborate to produce what looks like a conspiracy. It’s clearly in the interest of Big Tech to see their stocks rise to ever increasing unprecedented heights. And Big Tech’s lobbying of politicians in Washington ensures that nothing will stand in the way of their wealth continuing to surge.

Bernard Fickser, “America’s Capitalization Crisis: A Harbinger of “Low-Class” Inflation?” at Expensivity (October 15, 20201)

Of course, when intelligent people react prudently to a confluence of interests and events, the outcome can, as Fickser notes, look like a conspiracy to some. The challenge then is to look deeper, so as to see the true drivers of events. For the middle class, that means taking inflation seriously and probing its true causes before rushing to adopt proposed solutions.


You may also wish to read: How can non-fungible tokens (NFTs) be made to work better? Bernard Fickser offers twelve steps to handling NFTs in a way that dispenses with cryptocurrency-based blockchains and works in ordinary online marketplaces like eBay. In Fickser’s view, NFTs can work if they avoid self-serving cryptocurrency blockchains like Ethereum and enable real-world legal transfers of ownership.

and

Double double toil and trouble: Here we go again. Trouble brews when inexperienced traders try their hand at the stock market. The unwary repeatedly fall for money-for-nothing illusions, most recently illustrated by the buying up of GameStop and AMC shares by Reddit users. (Gary Smith)


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A Market Analyst Explains Why You Should Take Inflation Seriously