The U.S. economy, and the world, have passed the tipping point and there is no going back.
The coronavirus has pushed the world into the technology future and this is what the leaders of business and industry must realize and commit to. Investors must accept this fact and make this fact a major part of their investment strategy. And those involved cannot be timid about it.
I have spent a lot of time writing in the past several years about the difference between the “new” Modern Corporation that dominates the current world and the “legacy” businesses that are trying to catch up, but just haven’t put it altogether yet.
The “legacy” businesses tend to be, in the words of Cathie Wood, founder and chief executive of Ark Investment Management, focused on “research efforts that are short term, siloed, and highly specialized.”
So many of these organizations seem to be focused on physical assets and can’t focus on anything else. And this includes banks and other financial institutions, as well as manufacturing firms and other industrial giants.
As a consequence, these companies just cannot find their way out of the past.
Focus Now On Intellectual Capital
The “new” Modern Corporation primarily focuses upon intellectual capital. These organizations focus upon building platforms and networks that can reach enormous scale at zero- or near-zero marginal cost. Furthermore, most of these organizations can work at substantial gross margins, which allows them to accumulate large amounts of cash.
These firms also operate in a different fashion. As Jeff Bezos tells his company, “Act like a startup.” By this he means that innovation and change needs to be almost continuous as Amazon is constantly seeking out ways to do things better than other companies can or to find “missing markets” – markets that aren’t being serve at the present time for whatever reason – so that they can be a “first mover.”
The “new” Modern Corporations seemed to be more concerned about the “time pacing” of introducing new products and services rather than waiting for a new entry to be completely “finished.”
Ms. Wood carries this argument over to some of the new companies, like Tesla, where she argues that one can see
“Tesla as a robotics company (because automatic vehicles are robots) and an energy storage company (because autonomous vehicles will be electric) and an artificial company (because AI will power autonomous vehicles. “
Ms. Wood closes her argument by saying that, in her mind, “Traditional auto analysts don’t know that to do with that.”
And this seems to be the case for many other “legacy” companies that are trying to become “modern.”
The Travails Of The Banking Industry
One of the real laggards in this race is the banking industry. Although changes are being made these days, many bankers, and regulators, think too much about banking being connected with a physical presence. Headquarters and branches are still the silos that many bankers work from.
And one might have thought that bankers would have moved faster than they have because money, and finance, is nothing more than information – zeros and ones. One might think that with a foundation like that, bankers would have moved faster into the new world.
But things are changing, even in banking. I call attention to all the changes that are taking place within the payments system. The banking world is now changing and this is only going to accelerate. Financial organizations are going to be looked on more as social platforms with application programming interfaces (APIs) and, possibly, the use of blockchain technology.
This dilemma just points, however, to the emerging issues connected with the definition of what these companies are. Are they tech companies or are they financial institutions?
This problem is a very important one as is evidenced by the recent actions of the Chinese bank regulators and their actions against Ant Group and Alibaba. Ant Group had been allowed to grow its payments system and banking application until it reached enormous size (remember the scalability of intellectual capital) and was engaging in a $34 billion IPO, the largest ever. But Ant Group had been treated as a technology company. Banking regulators said “no” we have got to stop this and ended the public offering.
This is what is happening in the transformation now underway. Is General Electric a manufacturing company, or should it become a technology company copying the model of Tesla. And speaking of Tesla, what about the effort of General Motors to get into the EV market. And , then there are the efforts being made by AT&T to become a “new” Modern Corporation.
The list could go on and on. Can these companies become “tech” companies?
This Is Where Things Are Going
This seems to be the future and it is this kind of world that investors need to focus upon. That will be more of my effort in the future.
We are in a world of radical uncertainty. We don’t really know where this is leading us, but we still must make investments, we still must make decisions, and we must work to encourage managements and policymakers to move into this evolving world.
But this will mean that some of the old tools of investing may be less helpful. The danger with such a changing world is that data from the past are not very helpful if the future is different. It would seem that in the current environment we are working more off of narratives and, consequently, must accept the risk of such a change.
Ms. Wood argues that the sectors of the stock market that are faced with this “legacy” problem account for more than one-half of the S&P 500 stock index. She believes that the following industries are particularly exposed to being “out-of-step” with the future: energy, industrials, consumer discretionary, communications services, healthcare, and financial services.”
Furthermore, there are also economic consequences of this transformation. If these changes do take place, the economic statistics, as they are now measured, will underestimate the performance of the whole economy. The digital world is poorly measured and our measuring tools need to be revised.
This will, I believe, result in a split between what might happen in the stock market and what is going on in the real economy. Again, we are in a world of radical uncertainty and we just don’t know all the dislocations that might exist due to all the changes that are taking place.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.