You know Stanley Drunkenmiller did a interview in 2019 with the Economic Club of New York 2019.. In that he talked about wonky data or not believable data as tech on the margins was leading to greater GDP or industrial activity than was being measured in the normal fashion... great stuff Russell!
I agree that GDP may be under-counted: there is likely a plethora of economic (financial) transactions that happen which are not tracked/taxed by any government authority. It's also possible that "net worth" maybe be greatly exaggerated. You can create simple models where two people with $1 in fiat each can create a 1bln market cap in a particular security/token etc.
So mkt cap/GDP is a fairly useless metric. But this analysis doesn't make it any easier to overlook high P/E earnings ratios. Earnings and FCF are self-reported by public companies. So unless they are lying about earnings, this metric still stands. However, you can make the case that tech earnings will grow MUCH faster than reported GDP if that ecosystem is growing faster. And you are kinda seeing that in specific Mag7 stocks, but not all. Which points to some other reason for this massive increase in P/E.
One big change is that big tech continue to return capital even as they grow. This helps push valuations much higher than in the past when companies use to issue stock and options.
Nick Colas from the Datatrek newsletter (used to work for Steve Cohen) has argued that American companies deserve the higher multiples because they are structurally better companies than they used to be. The business models aren't the same and you can see it in many metrics (Ireland is just one factor among many).
He compares the top 10 S&P 500 companies now and from 30 years ago. Companies like GE, Coke, ExxonMobil to Nvidia, Apple, Microsoft. The Net Margins of current companies are >3x what they used to be and return on equity is > 2x. Nvidia was getting 95% margins on their H100's. I'm sure if you broke it down further, Coca Cola does not have the same kind of top line growth that the biggest companies today have. The way that Nvidia and now Broadcom have expanded their revenues while at the size they already are at has never happened before.
Tech has far better pricing power than I had assumed. You look at the price inflation in an iPhone, or the pricing on online advertising has been much better than expected.
This has also been at odds with what we have seen in China, where deflation in tech is still the norm.
I would have always been fine with US stocks if the fiscal deficit was not so large, or the Chinese example was so different - but they both seem to be red herrings.
The pricing power is part of it, but the business models in the digital world are just superior. The combination of large fixed costs and close to zero marginal costs with the global aspect of the modern world. The closest analogs we had in the past were those who covered TMT. The telco and broadcast television models were good, but at the end of the day, they were geographically limited.
I was listening to a podcast where an economist was describing how in some extremely rural part of Mexico; they have the same exact parenting problems as Park Slope, New York. Mothers are concerned that their 13 year olds just spend all day in their rooms looking at their phones. The penetration of mobile can be close to 100%, whereas barely anyone had a PC back in the 90s.
This is from Lucas Shaw at Bloomberg, "Three companies — Alphabet, Meta and Amazon — now account for 41% of global ad sales. More than $400 billion in sales"
You know Stanley Drunkenmiller did a interview in 2019 with the Economic Club of New York 2019.. In that he talked about wonky data or not believable data as tech on the margins was leading to greater GDP or industrial activity than was being measured in the normal fashion... great stuff Russell!
https://youtu.be/r7kMSqgruOY?feature=shared
Hi Russell,
I agree that GDP may be under-counted: there is likely a plethora of economic (financial) transactions that happen which are not tracked/taxed by any government authority. It's also possible that "net worth" maybe be greatly exaggerated. You can create simple models where two people with $1 in fiat each can create a 1bln market cap in a particular security/token etc.
So mkt cap/GDP is a fairly useless metric. But this analysis doesn't make it any easier to overlook high P/E earnings ratios. Earnings and FCF are self-reported by public companies. So unless they are lying about earnings, this metric still stands. However, you can make the case that tech earnings will grow MUCH faster than reported GDP if that ecosystem is growing faster. And you are kinda seeing that in specific Mag7 stocks, but not all. Which points to some other reason for this massive increase in P/E.
One big change is that big tech continue to return capital even as they grow. This helps push valuations much higher than in the past when companies use to issue stock and options.
Is the price-revenue ratio of Us equities ex financials also distorted by this tax avoidance scheme?
Put the money where your mouth is: overweight Us and Tech! I appreciate your reasoning, but I still think it's a very dangerous proposition...
That would be the next logical step - but I will see if there is anything that looks interesting from that thought process
Nick Colas from the Datatrek newsletter (used to work for Steve Cohen) has argued that American companies deserve the higher multiples because they are structurally better companies than they used to be. The business models aren't the same and you can see it in many metrics (Ireland is just one factor among many).
He compares the top 10 S&P 500 companies now and from 30 years ago. Companies like GE, Coke, ExxonMobil to Nvidia, Apple, Microsoft. The Net Margins of current companies are >3x what they used to be and return on equity is > 2x. Nvidia was getting 95% margins on their H100's. I'm sure if you broke it down further, Coca Cola does not have the same kind of top line growth that the biggest companies today have. The way that Nvidia and now Broadcom have expanded their revenues while at the size they already are at has never happened before.
Tech has far better pricing power than I had assumed. You look at the price inflation in an iPhone, or the pricing on online advertising has been much better than expected.
This has also been at odds with what we have seen in China, where deflation in tech is still the norm.
I would have always been fine with US stocks if the fiscal deficit was not so large, or the Chinese example was so different - but they both seem to be red herrings.
The pricing power is part of it, but the business models in the digital world are just superior. The combination of large fixed costs and close to zero marginal costs with the global aspect of the modern world. The closest analogs we had in the past were those who covered TMT. The telco and broadcast television models were good, but at the end of the day, they were geographically limited.
I was listening to a podcast where an economist was describing how in some extremely rural part of Mexico; they have the same exact parenting problems as Park Slope, New York. Mothers are concerned that their 13 year olds just spend all day in their rooms looking at their phones. The penetration of mobile can be close to 100%, whereas barely anyone had a PC back in the 90s.
This is from Lucas Shaw at Bloomberg, "Three companies — Alphabet, Meta and Amazon — now account for 41% of global ad sales. More than $400 billion in sales"
This was not possible back then