The proposed White House infrastructure program would spend $200 billion in federal money over 10 years — that's $20 billion a year, if Congress approves — to lure private capital toward roads, bridges and airports. Meantime, Apple alone has more than $200 billion in cash on its books right now, which it could bring back to the U.S. tomorrow and spend however it wishes.
Big companies today can borrow more cheaply than at any time in history, and there are at least 30 companies for which credit-default insurance is cheaper than for the United States government.
The value of global equities is now about 95 percent of world GDP, the highest ratio of corporate capitalization to economic output on record, despite stubbornly sluggish growth and widespread dissatisfaction in the developed world with the effectiveness of government leadership.
These are just a few illustrations of how investors trust and value companies more than they do countries right now — because they're seen as more stable, powerful and flexible, in many cases. The ballooning value of a handful of globe-enveloping technology companies is part of this trend, with the markets assessing them as if these networks will prove stable and reliable economic entities for decades.
Companies have even taken to forging their own foreign policies, with dozens of CEOs opposing President Donald Trump's withdrawal from the Paris climate-change pact, and then vowing to continue meeting the Paris environmental goals anyway.
The idea that giant companies are, in a sense, stable transnational institutions largely insulated from public policy perhaps helps explain financial markets' consistent strength despite stalled fiscal-policy efforts. This is not just about the Trump economic agenda, now slowed relative to expectations of a few months ago.
Since 2012 or so, investors have been awaiting a "handoff" from easy monetary policy to fiscal reforms and stimulus in Europe and the U.S., yet gridlock and austerity have persisted. The populist wave sweeping the developed world is rooted to some degree in all of this: hamstrung governments, powerful companies, buoyant markets and widening wealth gaps.
Ben Hunt, chief investment strategist at Salient Partners and author of the Epsilon Theory blog, writes, "If political parties in Western democracies were stocks, we'd be talking today about the structural bear market that has gripped that sector. Show me any country that's had an election in the past 24 months, and I'll show you at least one formerly big-time status quo political party that has been crushed."
Ray Dalio, chairman and chief investment officer at Bridgewater Associates, last week wrote a LinkedIn post on his continuing theme of rising populism and prospect for instability. "In the early stages of a new populist administration, the main thing to look for is whether conflict moves to the point that it is detrimental to the effectiveness of government and the economy."
The way that democracies can stoke self-reinforcing popular conflict, he says, "has to be watched out for because, if it were to occur, it would have profound implications for economies, capital flows, and markets. Right now there is a whiff of it in the air."
In a sort of contorted result of the Great Recession and its aftermath, governments (outside of China, perhaps) have quit trying to foster broad economic growth and instead have capped spending as leaders quarrel over who's to blame for the fix they're in. Companies and owners of capital have been net beneficiaries of this pattern.
A key reason (though not the only one) that instability and impotence on the governing front have not disturbed financial markets is, of course, the exertions of central banks, with their combined $14 trillion in bond purchases and open-ended commitments to support the capital markets.
Yet the way that highly liquid markets have lately rewarded a set of very large companies driving a sort of deflationary global technology boom has been remarkable. While the reflex "Trump trade" after the election benefited Old Economy industrials that would benefit from fiscal stimulus and revived inflation, we've now unwound most of that move.
Five members of President Trump's manufacturing CEO council have since exited their jobs, while Amazon boss Jeff Bezos – owner of The Washington Post initially seen as a possible victim of this administration – has seen his personal net worth rise by $14 billion since Election Day.
The question now — especially after we've seen a little wobble in the stocks of the half-dozen or so anointed Big Tech companies in recent days — is whether investors have gone too far in taking shelter in this quadrant of the market. As these stocks plumbed new highs, we began to hear more and more justifications of their towering market values and the unstoppable enlargement of their domains over time.
That's what Wall Street does — extrapolates the momentum and spins a story around it. And, in large part, it makes sense, given the speed at which a company such as Facebook or Alphabet can become so huge and dominant with comparatively little capital employed — the two companies are lines of code, their R&D and capex consisting of engineers on laptops. And, together the two companies are worth $1.1 trillion.
But it's also telling that the zeal for mega-cap tech stocks took on the character of a "defensive" trade — assets to own when the broader growth picture blurs and Washington goes "tilt." Any defensive trade will only work so long as the thing that's feared remains scary. So, maybe, one risk in these stocks is that policy progress begins to look more likely, and growth might quicken and interest rates come unstuck from such low levels.
Another hazard? That these companies keep getting bigger and more highly valued and themselves become targets of an uneasy populace.
Eric Peters, chief investment officer of One River Asset Management, who circulates a weekly note summarizing conversations with big investors, quotes one unnamed chief investment officer: "People talk of rising populism. Every populist movement turns its ire on someone. … Apple earns 90 percent of the global smartphone market profits but sells 20 percent of the phones. Populists will go after these firms, because that's where the money is."
Key Points
- Investors trust and value companies more than they do countries right now.
- The value of global equities is now about 95 percent of world GDP, the highest ratio of corporate capitalization to economic output on record.
- This may explain why stocks continue to post record highs even as the Trump economic agenda is slowed by scandal.
Apple CEO Tim Cook
Toru Hanai | Reuters