July 29, 2021
Situational awareness: The US economy has now officially recovered all the ground it lost in 2020. The GDP growth rate was 6.5% in Q2, thanks to an 11.8% (annualized) rise in consumer spending.
- In this week's newsletter: Fast-growing giants; the return of the debt ceiling; why Europe leads in sustainable investing; the CFA exam pass rate; plentiful jobs; and much more. All in 1,625 words, a 6-minute read.
1 big thing: Giants leap
Never in the history of capitalism have the world's biggest companies grown as fast as the tech giants in recent years.
Why it matters: A series of stunning earnings reports this week — with another one likely to arrive this afternoon, from Amazon — has underscored the astonishing growth among a group of companies that were already some of the most profitable of all time.
The big picture: The standard view from Wall Street to Silicon Valley has always been that fast growth is found in startups, while mature companies provide a much more reliable income stream. Today's tech giants, however, are growing at a pace that many entrepreneurs would covet.
By the numbers: As recently as 2017, Apple, Microsoft, Alphabet, and Google combined were worth less than $2 trillion. Today, Apple and Microsoft are both worth more than that alone. The five biggest tech giants are now collectively worth $9.3 trillion.
- The four companies reporting this week so far generated an astonishing $250 billion in profit just over the past 12 months. Ten years ago, when they all mostly looked identical to how they look today, their profits were less than $58 billion.
Flashback: After the "Nifty Fifty" large-cap stocks imploded in the mid-1970s, Forbes magazine wrote their post-mortem in 1977.
- Investors had gone temporarily insane, wrote the anonymous author, since "no sizable company could possibly be worth over 50 times normal earnings."
Now consider Microsoft at this point in 2018. It was a very mature and very large company, with trailing earnings of a massive $16.6 billion. At a valuation of almost 50 times earnings, it was worth $809 billion.
- Microsoft easily grew into that valuation over the course of three years during which its core product lineup barely changed.
- Today, its trailing earnings are more than $61 billion, and growing fast. Its market cap is $2.2 trillion, or 35 times its trailing earnings.
The bottom line: The outsized profits at the tech companies look suspiciously like monopoly rents, with no end in sight in terms of how much and how fast they can grow.
- That's one reason the companies are facing so much scrutiny in Washington. Not that it seems to be having any real effect.
Bonus: The giants' metastasis, in two charts
These charts don't include Amazon, which is fast approaching a $2 trillion valuation of its own, although its profits are still relatively low by tech-giant standards.
- Amazon has spent more than a decade with its P/E ratio never dipping below 50; its shareholders don't seem to have been remotely insane.
2. Debt ceiling drama
It was bliss while it lasted — which was exactly two years. Right now, the U.S. has no limit on the amount of debt it can issue. But that ends on Saturday.
Why it matters: Brace yourself for another round of unedifying posturing and brinkmanship, all of which should result — after a period of entirely unnecessary fiscal contortion — in the debt ceiling being raised (not abolished) sometime this fall.
The big picture: The debt ceiling cannot do what it purports to do, which is control the amount that the government borrows. The tax and spending bills passed by Congress are legally binding, and the debt ceiling neither enables nor constrains them.
- When Treasury needs to borrow money in order to follow the law of the land, it has no choice but to raise the debt ceiling. The alternative — default — is unthinkable.
Where it stands: Under the terms of the Bipartisan Budget Act of 2019, the debt ceiling comes back into force on August 1, at exactly the level of the national debt. It has to be raised, but Republican leadership is on the record saying that they will not vote for such a thing.
What they're saying: Treasury Secretary Janet Yellen, in a letter to Congress last week, urged members to "protect the full faith and credit of the United States by acting as soon as possible."
- Don't hold your breath. Congress is focused on the infrastructure bill right now. So far, no one's started seriously grappling with the debt ceiling, partly because Treasury is still sitting on about $450 billion in cash.
- Treasury will use "extraordinary measures in order to prevent the United States from defaulting on its obligations," says Yellen in her letter — but given the uncertainty engendered by the pandemic, no one knows how long those measures might last.
- The best estimate of a "drop dead date," from the Bipartisan Policy Center, is early November, but no one wants this saga to drag on that long.
What's next: Congress is about to enter recess until September, and while it might return in August for the sake of an infrastructure bill, no one's expecting movement on the debt ceiling until October.
- The most likely scenario, per Axios' Alayna Treene, is that Congress then simply kicks the can down the road for a couple of months before doing a bigger debt-ceiling raise around Christmas.
The bottom line: No other country has an entirely artificial debt ceiling causing regular and predictable political agita. While every treasury secretary would dearly love for this archaic annoyance to simply be abolished, Congress invariably insists on keeping it alive, mostly so that its members can continue to score cheap political points off each other.
3. The home of sustainable investment
There are $1.83 trillion of European assets in sustainable investment funds, per Morningstar. In the U.S., by contrast, the number is just $300 billion.
Why it matters: There's no sign of the United States catching up in the foreseeable future. Total inflows into European sustainable funds were $112 billion in Q2, compared to less than $18 billion in America.
How it works: The history of European sustainable fund mandates is decades old, especially in the Nordic countries and the Netherlands. Professionals at large institutional investors like pension plans and insurance companies consider ESG mandates to simply be a necessary part of any responsible long-term investment shop.
- European regulators are also pushing hard for further disclosure and regulatory mandates, both at the EU level and at the country level.
- European banks like UBS have announced that sustainable funds will be the default option for private-wealth clients.
The big picture: Broadly speaking, the slowest part of the investment world to move into sustainable investing has been retail investors. The U.S. investment universe is much more based in retail, which helps (in part) explain why America is so far behind Europe.
- Under new European rules, financial advisers will have to ask clients what their sustainability preferences are. That's likely to drive increased retail participation in both active and passive sustainable funds.
- So far, no such mandates seem likely in America.
The bottom line: The investments are always greener on the other side of the pond.
4. A tough exam gets tougher
It's Robinhood IPO day today. The firm's CEO and co-founder, Vlad Tenev, is in trouble for not having a Finra license, but don't cry for him: His hand-picked board has offered him another 22 million shares, worth as much as $4.5 billion, to keep on doing his job.
- In terms of professional exams, the Finra license that Tenev lacks is the easy one. The CFA is the hard one, and it seems that the pandemic has made things worse: The pass rate for the Level 1 exam fell to just 25% in the latest round of results.
- The CFA Institute says the exam itself didn't get harder, but that the difficulties and stresses of trying to study for it during the pandemic might be to blame.
5. Job optimists
American workers are increasingly optimistic about their options, writes Axios' Sam Ro.
- Even unemployed workers with financial cushions are opting to sit on the sidelines as they await more competitive pay.
- That's derived from 54.9% saying jobs are “plentiful,” less a mere 10.5% that view jobs as “hard to get.”
State of play: All of this is occurring as U.S. employment remains about 6.7 million jobs below pre-pandemic levels.
6. Coming up: Eyes on cybersecurity
Why it matters: The recently-confirmed Department of Homeland Security administrator may shed light on how the government wants to work with the private sector to protect federal networks and "national critical functions."
- Background: The extent of last year’s SolarWinds attack is still unknown. Major ransomware attacks have also targeted Colonial Pipeline and JBS, both key parts of U.S. infrastructure.
Go deeper: The ransomware pandemic
7. Building of the week: The London Zoo penguin pool
Russian architect Berthold Lubetkin designed one of the most daring Modernist structures that Britain had ever seen, in 1934 — for the penguins of London Zoo.
- Engineers Ove Arup and Felix Samuely helped to make possible a pair of intertwining cantilevered concrete spiral ramps, which proved much more delightful to human observers than to penguins whose feet would get infected after walking on them.
- The penguins were eventually moved to a different location in 2004; the architect's daughter says the pool should now be demolished, since it is no longer fit for purpose. Lubetkin's biographer begs to differ.