Weekly Comment - January 15, 2018

Jan 15, 2018 | Nick Foglietta


One of the most powerful themes of investment has been the concept of investing in “disruptive technological change,” and profiting from how the disruptive company would destroy its traditional competitors and grow exponentially.

Is Disruptive Technology Another Trend that is Changing?

“It is in the very nature of power that it will expand unchecked until it is checked by an opposite power.” – George Washington

One of the most powerful themes of investment has been the concept of investing in “disruptive technological change,” and profiting from how the disruptive company would destroy its traditional competitors and grow exponentially.

Examples of such disruptiveness are Amazon, Uber, Facebook, and to a lesser extend Tesla. The latest disrupters are considered to be cryptocurrencies and blockchain.

This is not a new investment concept.

13D Global Strategy head, Kiril Sokoloff, wrote an excellent article about the history of disruption that he has experienced over the decades. If you have some time it is worth a read!

If you don’t have the time to read the entire article, below is the summary statement:

So the cycle goes on over and over and over again. From capital accumulation to capital distribution. From rising interest rates to falling interest rates. From rising inflation to falling inflation. From stability to chaos to autocracy. From the accumulation of power to the distribution of power. As George Washington wrote in his famous Farewell Address: “It is in the very nature of power that it will expand until it is checked by an opposite power.”

I believe that paragraph holds true through most of history.

So I ask: Are we nearing the opposite power check where push back against disruptive change overtakes the rampant acceptance of disruption as acceptable?

Clearly not a question that can be definitively answered in a moment, but a question that should be used to guide our thinking about what that change might look like.

I am going to pick on Amazon for a moment to make this point.

Amazon is a “disruptive retailer.”

By being deemed a disruptive retailer, it has been allowed to live by a different set of rules—in terms of its stock price—than all other retailers.

Profits are optional for Amazon, plain and simple.

As long as Amazon is seen to be disrupting the landscape of retail it makes no difference how much money it makes or loses. The stock goes up because the company is a great disrupter.

The carnage from these two different sets of playing rules is pretty clear.

Amazon can raise as much money via equity or debt as it pleases, and their marketing terms are always in Amazon’s favour. Traditional retailers struggle with all the realities of rents, leases, triple net, employee costs, benefits and allowing people to come in to try their sizes or see if they really like something so that they can stand in the store and order the very thing they are looking at on their phone from Amazon online. Come on…I’m just sayin’.

If Amazon’s stock was forced to be judged by the same fundamental investment yardsticks as tradition retailers, all of the financial advantages above would be forfeited.

Consider the Uber model and how much red tape that company bypasses compared to traditional taxi companies.

The concept that all technological change is acceptable because it is ultimately inevitable needs to be challenged.

Let’s swing over and consider the Facebook debate.

There is now a large groundswell of criticism being directed at Facebook to clean up its content and “clickbait” advertising, because it has become socially disruptive and an easy platform for “cyber-bullying.”

Video games are another example.

The industry ran ahead and created more and more addictive games, while society left the process unchecked. Now the American Psychiatric Association via the Diagnostic and Statistical Manual (DSM-5) has deemed Internet Gaming Disorder as a mental issue. Push back is coming here too.

The George Washington quote becomes important to consider when viewing the ideas stated above.

The POWER of disruptive technology has relentlessly grown for the past 20 years. The successes have been trumpeted by the majority of the media, and the financial rewards reaped have been considered the just rewards for forward thinking people.

At the same time, the negative underbelly of the disruptive technology has been ignored, or deemed too small to worry about, given the inevitable nature of disruption.

Maybe this is about to change.

If the tide is turning on disruptive technologies acceptance as inevitable, and society is going to demand higher standards of these and future technological disruptors, then it may be another sign that the present cycle for global stocks is coming to a close.

We will continue to watch these developments

Oil and Gold

Thursday morning last week I had a shock to my system.

Among the barrage of calls and emails telling me or asking me about “pot” stocks, cryptocurrencies and blockchain I had a client call and ask me about gold stocks.

I nearly fell off my chair. I didn’t think anyone noticed anymore!

Ok, I am being a little sarcastic, but it is true, I had a client call and ask me about gold.

Actually, a number of Tweets and articles started drilling down on both the gold and oil rallies that are taking place showed up on my feed late this week.

The chart above shows a 1 year trend for Gold bullion in US dollars.

Nothing there to get too excited about, but a move above $1370 US would get the world’s attention.

Oil looks significantly more advanced in its breakout from a long downtrend and sideways range.

What strikes me about both of these commodity moves is that the stocks of companies mining or producing have not moved very much…yet.

If the oil and gold charts keep strengthening, I would expect company share prices to play catch up in the future.

One word of caution.

The move higher in commodity prices is a knee-jerk response to the “inflation trade” that is supposed to be the hallmark of the final leg in a BULL market. I have no argument with that narrative, BUT a stock market reversal would likely include a reversal in the gold and oil trends too.

I read some pundits stating gold and oil will keep rising after the stock market peaks.

Maybe, but play good defense first!