Dana Blankenhorn

Defending Facebook

Let’s start with something that should seem obvious.

Facebook is no longer a social network. It’s the global telecommunications company.

It became this by offering free services on a global scale. This came about thanks to its investment in cloud, beginning early in the last decade. While AT&T sat on its assets, along with all the companies once known as PTTs (Postal, Telegraph and Telephone services), Facebook put $1 billion/quarter and up into a network of cloud data centers.

Facebook did it the same way Amazon did, with cash flow. It made its services free, like Google.

The Cloud Crash of 2020

This fall represents the end of a full decade since I lost my last “tech reporting” gig at ZDNet and started focusing on finance.

I’ve made a lot of money. The value of my stock portfolio has tripled. I’ve found a good niche with InvestorPlace that has eased me toward retirement. I only work because I want to. Social Security would pay me more right now. But writing isn’t a job. It’s living, it’s breathing. If you can get paid for it, that means people are reading you and benefitting from it.

I’m very, very fortunate.

Most of my last decade has been spent following the clouds. Cloud computing, which combines distributed processing, virtualization, open source, and scale, has proven itself as the 21^st century’s first great technology revolution.

The Class War

The stock market is evidence of a sick economy. (Picture from Hedgeye via Twitter.) 

The fact that it’s up shouldn’t surprise anyone who has watched the Fed rain cash on the Hamptons like there’s no tomorrow.

Money with nowhere good to go will flood the richest cropland. The Cloud Czars – Apple, Microsoft, Amazon.Com, Alphabet and Facebook– didn’t need all this financial rain. Their growth rates and profit increases are good, but they don’t justify price to earnings ratios of 33, 35, 151, 30 and 32. When markets do that, it’s called a bubble. The Cloud Czars are tulips.

Meanwhile 12% of Americans are unemployed. This underestimates the pain, which is grossly uneven.

Moore’s Third Law of Management

What other analysts call “big tech” I refer to as “Cloud Czars.”

I do it for a reason.

What distinguishes Apple, Microsoft, Amazon, Google, and Facebook isn’t their managements’ “ruthlessness.” It’s their heavy investment, over many years, in cloud computing centers.

Even early in the 2010s, it took $1 billion of capital each quarter to get into the cloud market. That has only increased with time. Now it averages $4 billion each quarter.

The money must come from somewhere. Cloud is a capital-intensive business. If you’re handing out dividends, it’s because you don’t know what else to do with the shareholders’ cash.

False Dawn

Because the government (once again) threw money at people who didn’t need it, Wall Street is great again.

Anything that works, the growth stocks and the big retailers, is overpriced. People are even throwing money at things that don’t work, like airlines, cruise lines and casinos.

But this is a false dawn.

Opening too early puts us on track for what the underwriters at Willis, Towers & Watson call their “limited success” scenario.  In this case, deaths continue through the summer, but the fall brings a new, even more-severe outbreak than before.

This is precisely what happened in the 1918 flu pandemic. There were three outbreaks. It was the second one, in the fall of that year, that was the killer.

People think this thing is licked because, as restaurants open and idiots demand haircuts now, there has been no spike in cases. That’s only because most people aren’t going to those restaurants or running out for haircuts. If no one around you has the virus, you’re safe. If one does, and you’re around them for about an hour, then you and dozens of other people get sick at once.

On top of that, we have outright lying about how many people are sick and dying. Georgia, where I live, transposed dates so it seemed case loads were declining. Florida fired a woman who refused to fudge the numbers.

The virus doesn’t care about any of this.

The Great Bull Trap of 2020

Three times in the 12 years, Republicans have convinced the rest of us to bail out common stockholders.

• During the Great Recession, banks were bailed out by the Federal Reserve creating cash, subsidizing consolidation, and forgiving them the crime of creating fake “insurance” for mortgages.
• In 2017, the Trump Administration bailed out the bull market with a tax cut that went almost entirely to propping up stock prices, extending the disconnect between stock values and the real economy.
• In 2020, the Federal Reserve created trillions of dollars of new money, and Trump wound up giving it to people who didn’t need to spend it, once again propping up assets like stocks.

Toward a New Normal

A new, post-pandemic normal is coming into view.

It looks different from the world we left.

Presidents and Governors won’t decide when states open back up. Consumers will. Most Americans believe what medical experts are telling us.

That’s not what we’re seeing from Trump, or any other Republican. This willful ignorance is going to get people killed.

The most logical program is to practice social distancing for a year or two, until the pandemic has passed, and vaccines are widely available. Meanwhile, all industries that depend on crowds will have to build new business models. When sports come back, it will be to empty, or near-empty, stadia. Movie theaters and malls are gone. So are restaurants where people sit close together. So are cruise chips and casinos. Bailing them out is throwing money down the drain.

Meanwhile, the Federal Reserve has dramatically expanded the money supply, handing out cash to keep the economy going now. The money will remain after the storm has passed. Further money supply increases will be needed to repay today’s debt. The pandemic has whipped deflation. The worry now is the value of money.

The economy is getting through thanks to the Internet. The Internet lets us continue to work from home. The Internet lets us order the goods we need to get through this. The Internet is telling us what’s what and what’s not.

The 1918 “Spanish flu” pandemic happened two years before the first radio broadcast. It makes a difference. (To learn more, I recommend Pale Rider  by Laura Spinney.)

Cooperation in a New Century

There are two kinds of cooperation between people and government.

There is the kind China has engaged in, cooperation by force. It seems to have worked. They’re getting back into business. Many people will say, out of ignorance, that this proves authoritarianism works.

Then there’s the second kind of cooperation, voluntary cooperation. It’s a cooperation of the mind, not just the body. It’s what I’ve talked about for years now. It’s what makes America great. We call it liberty.

It’s this kind of cooperation that will be essential to America’s comeback, not just over the virus but over the authoritarian Chinese threat, which will be the hallmark of the coming decade. It’s why getting rid of Trump is essential.

I’ve written a lot about economics here. I’ve talked about various economic eras in American history, how each featured a dominant industry, which rose to power and fell as the next took over.

But there’s something these earlier eras had in common. They were all built on resources. They were all built with possession of physical goods as the limiting factor to growth, as the main ingredient in the wealth of nations.

The Second Gilded Age

As Congress, and the American people, put $2 trillion, plus $4 trillion in Federal Reserve created cash, into bailing out the economy, a lot of criticism fell on companies that bought back stock, paid out fat dividends, and kept cash balances low over the last decade.

I take a back seat to no one in my criticism of companies like AT&T, IBM and GE, whose dividend-first policies acted as a slow liquidation while the cloud grew up around them. A company needs to grow if it wants to survive. It must keep investing if it wants to have a business tomorrow.

But it is hard to do because of the real villains in this piece.

Hedge funds. Vulture capitalists.

Assets vs. Investment

The recent fall in the stock market makes now a good time to talk about the difference between assets and investment.

Assets, as you’ve seen, are worth only what someone will pay for one of them.

If you bought Apple at $300 and now have a share worth only $240, it’s because the last guy to buy Apple bought it at that price. One sells for that, they’re all worth that. Collectively, they’re all worth that. So it was that nearly $300 billion got wiped away.

Spending, investment, is something else. Buying something, building something, improving something creates value that lasts. Facebook began investing in cloud data centers, at $1 billion/quarter, before it had $1 billion/quarter in sales. Amazon.Com invests nearly everything it brings in. It leads its financial records with the cash flow statement, which includes the amount of money it spent on data centers, on delivery vans, and on warehouses.