Editor’s note: Three weeks ago, Bill Bonner Letter coauthor Dan Denning showed you how the past quarter’s volatility could be the start of a bigger crash.
And today, he’s back to show how one of the companies leading the downturn could bring the whole market with it…
Ask five people you see today what “Cambridge Analytica” means to them, and I bet you’ll get four blank stares.
Maybe one paranoid person (who’s ranted to you about the Deep State) will know that it’s a British firm that supposedly exploited data on 87 million Americans to influence the 2016 election.
The other four? Nothing.
But maybe not for long. The issue of data privacy has suddenly become a rallying cry to #deleteFacebook and to break up Big Tech under antitrust rules. This could be exactly the kind of issue that leads not only to a sell-off in richly valued stocks, but also a sell-off in a richly valued stock market.
At writing, Facebook’s shares are down 19% from a 52-week intraday high of $195.32 on February 1. Most of that decline has come since Facebook closed at $185.09 on March 16, the day The New York Times broke the Cambridge Analytica story. Nothing gets the attention of shareholders and the press like losing more than $100 billion in market capitalization.
If the issue of data privacy (and what that even means) was only confined to Facebook, it would be an interesting but unimportant story in the scheme of things. But it’s not just confined to Facebook.
A growing backlash against Silicon Valley is brewing. That backlash – or #techlash, as it’s been referred to on Twitter – threatens to tip the stock market from a correction to a crash.
FTC Comes Knocking, Public Leaves
Could the government conceivably break up Big Tech under antitrust laws?
The established threshold for breaking up a big company is that the company must be engaging in behavior that is harmful to consumers. The classic example is Standard Oil’s monopoly on the oil industry. Its control of the refining industry and the retail industry (gas stations) gave it unique (and potentially harmful) pricing power in the consumer market.
Busted!
Until mid-March, it was hard to make the case that any tech companies should be broken up on antitrust grounds.
Google? Gmail is free and Google’s search engine is the most popular in the world because it helps people find what they’re looking for.
Apple? Show me a Mac user who won’t shut up about how great they are.
And Amazon? What’s so bad about low prices and 24-hour delivery?
Facebook, though, has changed the antitrust case against tech. Instead of talking about the services these companies provide us (many of which appear to be free, not including your time and data), the conversation is now about the vast troves of data these companies are accumulating from us.
It’s just now dawning on people that Facebook is a giant data mining operation. You provide the content. You give the company permission to access your phone calls, your text messages, and reams of other data generated by the apps you’ve installed on your phone. Facebook sells it.
Is that unethical? Is that illegal? Can voters or consumers be manipulated into making decisions that The New York Times does not approve of (voting for Donald Trump, for example) all because of Facebook’s data policies? The public seems to think so.
A poll commissioned by media company Axios shows that Facebook’s favorability fell by 28% from October 2017 to March of this year. It was the largest decline of any of the techs. Barely a third of the American public has a “favorable” view of Facebook. Apple, Amazon, Twitter, Google, and Microsoft also fell, but retained largely favorable ratings.
Facebook has attempted to soothe the public’s ruffled feathers by reminding people that sharing your call history and text messages is something you agree to when you use Facebook’s services.
If you don’t want to share that data – or have it sold – you can opt out… all of which sounds reasonable enough. Consumers do have a choice in what technologies to use and what permissions to grant the services they patronize.
What has changed is our perception of Big Tech. We used to see it as a liberating instrument of communication, information, and individual expression.
Now, we see institutions that have lobbied successfully for a light regulatory and tax treatment in order to build vast databases of information which are either sold to people who want to manipulate us or used directly to manipulate us.
Is this behavior that is harmful to consumers?
Last week, the Federal Trade Commission (FTC) announced an investigation into Facebook’s privacy practices.
Attorneys general from 37 different states have demanded that Facebook explain its privacy practices, according to The Wall Street Journal. This could be the precursor to fines, regulations, or class-action lawsuits… all of which could be damaging to Facebook’s reputation and share price.
Even if Facebook violated its own policies on sharing data, it’s not clear whether it has broken a federal law or engaged in anti-competitive practices. But this could be a sign of things to come.
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Tech’s Threat to the Bull
That’s where the real damage may happen. Breaking up the Big Tech companies or regulating them as if they were public utilities would be disastrous for their bottom lines.
And Big Tech stocks have been some of the best performers of this bull market. The Wall Street Journal reported that, as of March 12, Facebook, Amazon, Apple, Microsoft, and Alphabet (Google) had accounted for 45% of year-to-date gains for the S&P 500.
A momentum market is happy to reward tech companies with rich multiples on earnings and sales, especially when their audience is growing and the press is good. But as thousands, and then millions, abandon the popular tech platforms, the story will change. Buyers will become sellers.
You’d expect to see a change in the leadership of the stock market at the very least. But it’s more likely that the tech stocks will lead the sell-off in the market. The February lows will be retested. We’ll go from correction to crash.
Why?
Passive investing through index-tracking and exchange-traded funds have led to a lot of lazy buying of momentum stocks. Big Tech stocks have gotten bigger on a market-cap basis and have taken the indices with them. As Silicon Valley faces its day of reckoning, the market will pay the price, too.
Swamp Gets Swampier
It doesn’t help that the #techlash is happening at the same time that the U.S. government is auctioning off $294 billion in debt.
That’s the highest amount of bonds and notes for sale since the financial crisis in 2008. And it comes as the Fed is talking about raising interest rates and ending its bond purchase program (quantitative tightening).
What’s more, the feds tacked on $1 trillion in new debt in the last six months alone.
The U.S. government debt-to-GDP ratio is now 105% (the all-time high was 119%, after five years of World War on two fronts). After years of record-low interest rates and a nine-year stock market boom, the nation’s debts are spiraling of control.
Spending is, too. In the 2,300-page omnibus funding bill that a Republican Congress passed and a Republican president signed, there was an increase in defense spending (now over $700 billion per year) and an extra $200 million for the IRS to simplify the tax code!
Can you smell the methane? The swamp just got swampier.
Wealth Strategy
My point is that Facebook’s public relations data debacle may be the prefect catalyst for the stock market crash we’ve seen coming. Tech will lead. Everything else will follow. And the stock market crash will usher in the recession, along with the help of rising rates from the Fed.
What should you do now?
Investors need more than just a stock selection strategy or investment philosophy. You need a total wealth strategy.
This is what Bill and I unveiled last year in our asset allocation strategy. It diversifies your portfolio and manages your risk by recommending that you invest your money in five distinct asset classes: stocks, bonds, real assets, cash, and cryptocurrencies.
If you’re not an investor, you can – and should – still do something. My latest issue of The Bill Bonner Letter is about “Going Dark.” In it, I show you how to delete your Facebook account and definancialize your life (and exactly what that means). Subscribers can read it here.
We believe the best defense against a predatory Deep State or predatory Big Tech companies is to attain (or retain) financial independence. It can’t solve all your problems. But having wealth that’s safe, liquid, and growing gives you choices.
More importantly, it gives you freedom – a quality that’s getting harder to find in American life.
Regards,
Dan Denning
Coauthor, The Bill Bonner Letter
P.S. In The Bill Bonner Letter, we try to connect the dots about where the economy is… where it’s been… and where it’s headed next.
And we recently stumbled onto something disturbing.
Twenty-eight unelected D.C. insiders could be planning to seize control of the country’s most important asset: your money. Your privacy, wealth… even your very way of life… are at risk.
You may be skeptical. I didn’t want to believe it myself when I first uncovered it. But read the whole story and decide for yourself right here.