RIP Corporate Capitalism Update: That Was Quick!

Published on: May 28th, 2020

A few months back, Julian wrote a two-part series published in Macro Insiders called “RIP Corporate Capitalism.” In it, he looked at how some favourable long-term ‘tailwinds’ that had benefited equities since the early 1980s might be starting to reverse. Julian specifically identified Globalisation, Demographics, and Laissez-Faire economic policies as all reaching high-water marks where it was reasonable to expect past tailwinds to turn into future headwinds. Well, rather like what happened when he wrote on the theme of US/China trade relations (“Chimerica: When Love Breaks Down”, September 28, 2018), these issues have come into play much sooner than Julian imagined at the time of writing.

Comments

  • JW
    Jim W.
    31 May 2020 @ 14:47
    Julian (or possibly Harry), reading through this, it sounds like there are a couple of reasonable speculations to make. There will be a "fur us" group in the US sphere, including Japan, UK, Oz, Taiwan and a few nations in Europe that have developed stronger defense ties over the past several years with the US. Those supply chains will deeply integrate, but the demographics are not very good across the group. India could be the wild card, depending on how things develop, as China pokes them over the border. Does NATO continue? With the increased needs of the Germans to depend on the Russians for energy, I wonder... It also sounds like big companies are where the advantages are going to be in the next cycle, as they have the ability to deliver into government contracts and also the ability to deal with an ever increasing set of regulations. Based on some of the commentary, it looks like the tech giants of the net are going to have some real issues, though that doesn't mean a breakup of, say, Amazon, would be bad for shareholders. The question I would ask is "what companies did well in Japan during the zombification period", and start with those sectors. (I did a quick google, but no answers obvious). "Zombie Creation" might be another RV theme like "Recession week" that could be very educational.
    • HM
      Harry M. | Real Vision
      2 June 2020 @ 13:17
      Jim, I am asking a colleague who is an expert on Japan your question. I think your speculations are on the money. I own an Australian rare earth company called Lynas (I have done very badly with it) but I noticed that the company has just won a contract with the US to create a processing center in the US. I think this is precisely the kind of thing you are talking about. Re NATO, I would assume it continues, but the tension it sets up with Germany interest in Russian energy is very much in evidence (NordStream).
    • HM
      Harry M. | Real Vision
      2 June 2020 @ 13:53
      My colleague who is a Japan specialist gave the following answer. "As for sectors that did well: Tech, autos, auto parts, telecoms. The one thing they have in common is that they were not dependent upon bank financing--they had direct access to capital markets--and they generated a lot of cash. " And re: breakup risk, I agree entirely. I have promised myself to buy Amazon on a DoJ breakup. I imagine it will be similar to Standard Oil.
  • J
    Jim .
    1 June 2020 @ 16:08
    Julian, from your writings to God’s ear regarding the end of Crony Capitalism -privatizing the profits while socializing the losses. The question is -Will the Fed get the message? I was astounded (but I guess not surprised) when Powell said on Friday with a straight face that “Fed policies “absolutely” don’t add to inequality”. The Fed expands its balance sheet by $2.7 trillion, buys corporate and junk bonds via ETFs (so far) and US billionaires are $434 billion richer since the shutdown, while small businesses (the job creation engine of the US economy) are closing down, many permanently, and 40 million hard working Americans are forced to file for unemployment insurance due to a government directed shutdown of our economy. I yearn for the days when we become a capitalist economy again and I am referring to the version of capitalism In which “capitalism without failure is like religion without sin”. Call me a skeptic as I am not holding my breath. Anyway, great piece as always and apologies for the rant.
  • JS
    Jim S.
    30 May 2020 @ 03:51
    Great Julian, you never disappoint. So how should we position this? I’m not sure that picking a sector would be prudent here, but picking companies that will be instrumental to shoring “US” supply chains (using US broadly here) could be important. My mind thinks of Intel, Qualcomm, Micron, US based steel... any well capitalized manufactures that already resides in the US may get “first mover” advantage... but never moving? Thoughts? Please feel free to tell me how wrong I am too.
    • HM
      Harry M. | Real Vision
      31 May 2020 @ 14:38
      Pending JB looking at this I will note you seem to be on the right track. JB also mentioned basic materials sectors and the cheaper commodities. Ultimately, producers need to be incentivised to produce. Thats true for farmers, and its true for onshoring chip producers.
    • JS
      Jim S.
      1 June 2020 @ 03:58
      Thanks Harry, yes I put some positions on in HCC and MSB per JBs recommendation on XME when it was really beat up about a month ago... Great call and advice by you all. Also, I just saw this tweet on a WSJ article on Semi Lobbyists looking to shore up US Supply supply chains. Thought you all might like it if you haven’t read it yet. https://twitter.com/papermoneyecon/status/1267254126896873475?s=21
  • MT
    Max T.
    31 May 2020 @ 10:21
    Wonderful piece Julian. We are in the midst of such substantial change and while fascinating it’s also a bit worrying to see how this will play out. As always there will be winners and losers but I don’t see many winners on the whole from what we’re going through. Given recent events, I can’t help but remember your comments from past videos about bullets being the true metal to own at the end. I hope we’re not heading that way. I can’t see who this is good for as a shareholder. As a bond holder it seems you’re destined to be made whole but I don’t see much return.
  • RM
    R M.
    28 May 2020 @ 19:33
    Julian's pieces are always thought provoking. Like many who can afford MI, I received more personal benefits from "unbridled capitalism" than negatives. I watched (from a level below) the C-suite take most of the benefits for themselves. They outsourced relentlessly, off-shored aggressively, and in general took the broader population in the USA for granted. It would be welcome if the pendulum swung back a bit. The issue off AI/Robotics/3D printing looms ahead. On the one hand, it may prove to be the next transformative wave that gets us out of stagflation by greatly enhancing productivity (Lacy Hunt briefly touched on tech transformation in his recent excellent interview). On the other, if Jeff Bezos and his ilk are the primary beneficiaries of the all this new tech, the general population is screwed. I have no idea what the outcome, but it seems to me politics will play a crucial role in the "who benefits from the new tech?" arm wrestling. In the meantime, I am in on the some of the stagflationary trades, Silver was an excellent call.
    • HM
      Harry M. | Real Vision
      29 May 2020 @ 15:59
      Totally agree. The Chinese have a curse "may you live in interesting times". Seems to me that politics is set to be "interesting" for some time.
  • MS
    Michael S.
    28 May 2020 @ 15:36
    What I don't understand. Is why in the world, there is still some debate in the investment community around owning physical gold ? All the things you pointed out, in my mind, will lead for confiscation of paper assets direct or indirectly via the tax code, meaning "If it has a CUSIP, it can (will be) be zapped". Any even physical Gold presents challenges, as you need to buy and sell it via dealers. Strict reporting of buys and sells will be logged by them in-order to remain in business. And yes, the scenarios above, will eventually lead to ownership of lead and brass. My guess, is actually like in other times of desperation, there will be a long and terrible war OR a massive arms race and beefing up of production for a "hot war" that never gets fought with China, but lasts for decades..
    • HM
      Harry M. | Real Vision
      29 May 2020 @ 15:58
      I think a lot of people see a reason to hold some physical. Problem is it can get inconvenient to hold a lot of physical. Insurance, custody etc. That said, I for one remember the 1933 Executive Order 6102, which forbade the "hording of gold", and empowered UST agents to inspect all bank safe deposit boxes.
  • JG
    Johan G.
    28 May 2020 @ 14:23
    Wow Julian, that is what I call disruptive! What you are describing here is no less than turning the world we know upside down! What about stranded assets? For most companies their assets are a complex mix of hard assets such as plant and machinery, and soft assets such as people, business models, brands etc. All will change in this scenario, and the balance sheet losses of corporations will be formidable, and global in scope. It takes time for corporations to adjust, and change is now so rapid that corporations cannot possibly adapt quickly enough in my opinion. Could we see a 'permanent' reduction in the global economy supply capacity? Change is so rapid that supply curve shifts downwards?
    • HM
      Harry M. | Real Vision
      29 May 2020 @ 15:55
      Forgive me for answering for JB, but I know he will eventually adjust my reply if I get something wrong. Yes, massively disruptive, but normally the pace of disruption would be variable. The pressure to shift supply chains is very obvious at this stage. When Julian first wrote about it (2018 I think) it was not so obvious. But I think the cost of shifting supply chains will be very high but partially mitigated by automation when the shift is to the US. Often the shift would be too a US ally state like Mexico. Disruptive and will require substantial new investment. I would argue that we will see disruption, and it will be inflationary at the margin, but its hard to imagine a contraction in global supply. Simply cos where the US experiences direct pain from forcing supply chain shifts they will act to mitigate that pain limit the speed of the transition.
  • WM
    Will M.
    28 May 2020 @ 15:12
    Julian, what do you mean by Margret Thatcher "dropping the flag on unbridled capitalism"? Is that a reference to her ending union domination of UK industry and freeing up the beginning of financial corporate capitalism?
    • WM
      Will M.
      28 May 2020 @ 15:22
      Sorry I hadn't finished reading the letter and it became clear later in the missive. Thanks.
    • HM
      Harry M. | Real Vision
      29 May 2020 @ 15:42
      Julian is a Formula 1 fan.
  • PM
    Philip M.
    28 May 2020 @ 16:04
    I can't wait for Amtrak Airways

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