US stocks recovered their pandemic losses incredibly quickly.
Suspiciously quickly, you might say…
In fact, 2020 saw the shortest bear market in US history, with stocks recovering to all-time highs by August.
But, today, we look into how their past successes of 2020 could spell their own doom in 2021.
The Washington Post kicks us off with an article from August 2020:
‘Five hundred companies make up Wall Street’s most widely used measure of the stock market’s performance: the Standard & Poor’s 500 index. If it were not for just six of them, the benchmark would be down this year.
‘Along with Apple, the overachievers — Facebook, Amazon, Netflix, Microsoft and Google’s parent, Alphabet — are household names that have leveraged digital expertise to prosper amid the new, socially distanced reality.
‘Through Tuesday, these six stocks collectively were up more than 43 percent this year, while the rest of the companies in the index together lost about 4 percent.’
That data is months old now. But the key argument is that a select few stocks boomed in 2020, making the year look good for the overall US stock market. But other stocks suffered badly.
But it was the article’s subheading which should catch your attention: ‘Tech titans are flying high, but the companies face mounting pushback from lawmakers, regulators.’
In other words, the US government — and others by the way — look set to spend time and effort targeting some of these outperforming companies in 2021. That could have a huge impact on their stock performance in coming years.
The plan is to pursue them under anti-trust legislation. More on what that is in a second.
The resolution of such action can be breaking up companies into several smaller and independent pieces. The idea is to bring competition between them into the consumer marketplace.
But if this were to happen, the effect on share prices could be bad. Some of the divisions of the large companies are far more promising, profitable and better performing than others.
Competition between them could also hammer all three of those variables, making the newly-formed companies poorly performing investments after being split up into pieces.
Given these companies have floated the US stock markets boat so much, targeting them could drag down the US stock markets overall performance by undermining its star performers. And that could happen with the mere threat of a policy onslaught.
But what policy onslaught?
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Phase 4 of the US’ war on corporate obesity
As ever, examining the history of all this helps enlighten what’s about to happen. And the US government has a history of taking on companies that it deems to be too powerful.
In fact, the so-called anti-trust law has gone through three phases over the past 120 years. My colleague at Strategic Intelligence Australia, Jim Rickards, recently discussed them in detail. Let me sum up how he capably set the scene in a weekly update which inspired today’s Daily Reckoning Australia.
Under the first phase — 1890 to 1940 — companies were targeted simply for being too large. This theoretically gave them too much power over consumers and competitors. And so they were broken up into smaller pieces. Rockefeller’s Standard Oil is the textbook example.
The second phase lasted to the 80s. It applied a more scientific approach to identifying ‘trusts’ that were abusing their power. For example, large companies were acceptable if there was still plenty of competition.
From 1980, the US took a different approach again. It focused on whether consumers were benefitting from the corporate behemoths. Companies effectively had to actually do something wrong to be targeted under anti-trust laws.
I’m simplifying a great deal, based on Jim’s explanation, but you get the idea. Companies that are too dominant can be broken up under US law.
But social media doesn’t fit the bill
Social media and some other tech giants have abused the third phase of anti-trust law by falling through its loopholes. They offer many services for free — something which obviously benefits the consumer at first glance. You don’t pay for Google or Facebook, so what could possibly be wrong with it?
But their practices do threaten to breach the spirit of anti-trust law. They acquire potential competitors before they can compete, sell consumers’ data without compensating consumers for it, and have accumulated dangerous levels of influence and power over society by becoming so ubiquitous.
The US election, the pandemic and other examples of social media’s influences on our lives have demonstrated this rather well recently…
So, what if anti-trust laws were to be rejigged to target these companies? What if the laws were changed by the new political winds in the US?
That now seems likely.
Last week, the US Federal Trading Commission filed a lawsuit against Facebook. It is accused of acquiring potential competitors like Instagram and WhatsApp to try to form a sort of monopoly.
And then Texas led a group of 10 states in filing an anti-lawsuit against Google and Facebook for collusion.
I think this is just the beginning of an assault on these companies. And investors need to beware. Especially if you hold US stocks.
If anti-trust is successful in breaking up the likes of Facebook and Google, that could undermine the entire US market’s performance. Remember, just a few companies are behind much of the rally in US stocks…
But there’s another angle…
Regulatory capture is coming
In 2016, I took part in the ‘Free Market Road Show’. For three months we travelled around Europe advocating for free-market thinking at universities and think tanks.
In Bulgaria, I found myself on a panel discussing the regulatory crackdown on free market-style innovation companies like Uber and Airbnb. They’d disrupted the government-licenced taxi and hotel markets. Governments were struggling with how to fight back.
I predicted that Uber and Airbnb wouldn’t keep their free-market innovative culture for long. Soon they’d become partners of the government, trying to fight off rival companies by embracing and influencing government barriers to doing business. They’d become the very thing they were founded to fight and upend.
And that’s what happened. The companies went from openly flouting regulations to giving in to local regulations in most places and lobbying to rewrite them in others. Airbnb even shared data with the Chinese Communist Party, which made one executive resign in disgust.
Well, I’m making the same prediction here again.
The so-called anti-trust campaign against Facebook and others is an attempt by the government to control these powerful organisations, not to disempower them. It will end in a partnership between government and large tech corporations which harms consumers.
Especially us — those willing to speak out against both big government and big business.
The phenomenon is known as ‘regulatory capture’. Because corporations have so much at stake in regulations, whereas consumers are only lightly affected by each marginal change in those rules, it is the companies which end up spending the time and money to lobby government. Eventually, the industry captures the regulators. They have the bigger incentive to do so.
You see symptoms of this in many ways. Such as the infamous revolving door in jobs between industries and their regulators.
Well, I expect the same sorts of outcomes as the fourth anti-trust campaign kicks off in the US.
Investors and consumers will end up paying the price. Politicians and corporate powerbrokers will win. The pandemic and US election crackdown on dissenting views is just the beginning of a clampdown.
It’s all a bit like in politics. It’s when the two sides agree about something that you need to be really worried…
Until next time,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend
PS: Australia’s Great COVID Recession — Learn which investments to accumulate and which ones to avoid in order to give you the best chance of preserving your wealth during the recession. Click here to learn more.
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