Why the Trends of Income Inequality & Redistribution of Wealth Could Reverse (w/ Trevor Noren)
TREVOR NOREN: My name is Trevor Noren. I'm the Managing Director at 13D Global Research and Strategy. I cover disruptive innovation and contribute weekly to our flagship publication, What I Learned this Week. Yeah, at 13D, our focus is not just providing our clients with actionable investment advice, but also providing the predictive frameworks that can help business leaders and asset managers figure out how best to allocate capital. No trend has been more influential over the past 30 years than consolidation. We see it in almost every corner of the global economy. Personal wealth is consolidated. Inequality is at its highest point since the Great Depression in the US. The top eight wealthiest individuals in the world now control as much wealth as the poorest 50%. We see it with corporations. 75% of US industries are more consolidated today than they were in the mid90s. We see it in real estate. The top 25 biggest metro areas in the United States accounted for greater than 50% of US GDP last year. We also see it with asset management. The top 10 biggest asset managers in the world now control 34% of all assets under management in the world. History has been defined by the cycle of wealth accumulation, shifting to wealth distribution from the consolidation of economic power, shifting to the diffusion of economic power. We see this from the fall of the Roman Empire to the French Revolution to the Gilded Age to the US post-Depression. The last cycle of wealth distribution lasted 34 years. It ended in the early 1980s and the average American worker saw their wages double over that time. We believe that the combined forces of globalization, digitization and postfinancial crisis central bank policy, quantitative easing has brought us to a tipping point where wealth will shift from its accumulation phase to its redistribution phase. Obviously, trend is long lasting and entrenched as consolidation won't shift overnight. It won't also shift at equal pace throughout the global economy, but on a week by week basis, we see evidence that the shift to diffusion is accelerating. We see it in the rise of anti-trust and digital regulation ambition from the EU to Australia to Asia to the US. We see it in the backlash against CEO pay and shareholder primacy with some of the most prominent business leaders in the world calling for greater corporate accountability in order to protect the stability of democracy and capitalism and we see it in the rise of labor unrest. One example we often come back to in conversation with clients is in the 2018 midterms, a young Democrat in Iowa named JD Scholten nearly unseated 8-term Republican incumbent Steve King in one of the Redis districts in the United States. When asked how he got so close, Scholten had a simple answer. I talked about consolidation. One staggering stat in 2015, 85% of steer slaughtered in the US were slaughtered by just four companies, farmers' wages have been squeezed by the consolidation of agriculture. Just in the three years leading up to the 2016 election, farmers' wages fell more than at any point since the Depression. It's not just farmers, I think across the ranks of labor, people recognize that consolidation and concentration are not just an academic issue, they manifest in the day to day lives of workers throughout the economy. Obviously, change is not just going to come from politics but this shift to diffusion is not going to be propelled just by the political. We see three primary forces involved. There's the cultural, what people choose to buy, where they choose to live, how they choose to live their lives. Then there's the technological. There are a lot of reasons we got to this point of extreme consolidation, there was the disempowerment of labor. There's the rise in the Borg standard, which said, price was the only justification for anti-trust intervention. There was of course, globalization, which advantaged large companies that were better able to shift their supply chains abroad than smaller competitors. Then there's QE, which inflated the value of assets at the same time that fewer and fewer people owned assets, but more and more we understand the role that technology has played the digital revolution. A handful of sector leaders and digital natives have seized the vast majority of efficiency gains enabled by digitization, network effects of entrenched power and because global governments have been slow, if not reluctant, to define regulations to oversee the digital age, data aggregators have been able to act with utter impunity. What we're seeing now is the emergence of enabling technologies that at least have the potential to start reversing that cycle from 3D printing to blockchain, to 5G and the IoT, even artificial intelligence. In our conversations with thought leaders and of the research we do, we see a rising movement amongst innovators, a rising recognition that consolidation has gone too far and they need to author technologies that enable the diffusion of power. When the people that are going to define the future have a consensus that the future needs to be less consolidated then that future becomes near inevitable. We have three key fronts that will swing the pendulum from wealth accumulation to wealth distribution, from consolidation to the diffusion of economic power, and they're the political, the cultural, and the technological. In What I Learned this Week, we've argued for almost three years that the EU would be the table setter for global digital regulation. We've seen their ambition escalate over in recent years, from the record fines of tech giants on anti-trust grounds to GDPR to the recent copyright reform passed by the EU parliament which is a seismic measure. Margrethe Vestager was just recently promoted from EU Competition Commissioner to Digital Tsar, which means she'll oversee anti-trust as well as the formation of digital regulation. She's long been Silicon Valley's European nemesis, and she now possesses more power. The basic point is that Europe believes that if they can define digital age, Europe believes that defining digital age regulation leading the world on this front is a way to increase their soft power. The US, that is an interesting case. Regulators and politicians have been reluctant to pursue digital regulation because they viewed the power of tech giants as being-- they viewed America as the greatest beneficiary of the power of tech giants. That worm is turning. There are 16 investigations ongoing, both federal and state, into the market power of just four companies: Facebook, Google, Amazon and Apple. California just passed a bill that would, if passed into law, functionally forbid the dig economy within California. Donald Trump has spoken out regularly against the power of tech companies. Pretty much, every Democratic presidential candidate has an anti-trust agenda. The outcome of the 2020 election, both the presidency, the House and the Senate will go a long way to determining how quickly and what shape digital regulation takes in the US. We believe it will happen faster and be more decisive than most investors anticipate. The cultural side will be pushed forward by the young, specifically the millennial and Gen Z generations. We see in their buying patterns already that they gravitate to two small local niche brands over big mass market brands. We see where they're choosing to live. They're migrating away from big cities and into smaller communities. That may be a financial decision. That probably is a financial decision, but it will still shape the culture of the US moving forward. Where we really see it acutely is how they're embracing attacks on the various systems that drove the consolidation of power. Cryptocurrencies are the clearest example of this. They were a backlash against the power demonstrated by central banks after the financial crisis and the power of the big banks themselves that led to the financial crisis. We also see it with Gen Z and millennials embrace of labor unions. In 2017, 250,000 people in the US joined labor unions and of that 250,000, 74% are under the age of 35. Poll after poll shows that millennials have a much more negative view of big corporations than they do have labor unions. The fact is, millennials are the worst off American generation since World War II. You see it in the rhetoric of millennial politicians as well as the politicians that millennials gravitate to. The idea of the rigged system, the system that's been rigged by the power of corporations, by the power of the wealthiest individuals in the nation. Millennials and Gen Z will not be powerless moving forward. Their earning potential will increase and they will inherit more wealth than any generation that came before them. They're already rising in the political ranks and they will exert that power to fix the system that they view has held them back. I would say that the scars of their early professional years certainly will heal. Every generation generally shifts their political beliefs the more assets they accrue, the more they have children. No, my guess would be some of the ideas will hold up and this gets to the timeline of this process. Millennials and Gen Z are inventing the technologies that will define the future which gets ahead of where we're about to go. Those technologies will have an influence for years to come even after the potential political and culture of politics and the culture of millennials and Gen Z shifts. Two core challenges facing innovators. Number one, too much power over the digital ecosystem sits in the hands of too few companies. Number two, the technologies themselves are too centralized creating vulnerabilities. We see the ladder with the increasingly large data breaches that dominate the news. We also saw, tragically, in the aftermath of Hurricane Maria in Puerto Rico. When the centralized grid in Puerto Rico failed, it led to one of the biggest blackouts in human history that still hasn't been fully recovered from. What we're seeing in the rebuilding of Puerto Rico's energy infrastructure is this shift towards micro grids, to localize solar power. Alternative energy in general can be and likely will be a diffusion airy force. You will have more energy sources, and those energy sources will be more localized. We're also seeing diffusion in action with the rise of software as a service companies. The migration of corporate data into the cloud created an opportunity for software providers. The deployment of 5G and the IoT will dramatically increase the scale and reach of that opportunity as enterprise data creation quintupled over the next five to 10 years. You will of course big companies, Microsoft, Google, Amazon, Salesforce and even Slack and Zoom that author technologies that can be software that can be applied across enterprises. The fact is, region by region, sector by sector, companies face idiosyncratic challenges that require idiosyncratic expertise from the people writing the software, whether it's healthcare, whether it's agriculture, whether it's construction, software providers will emerge that have specific sector by sector and region by region expertise. A level of diffusion we did not see in the era where consumer data centric companies were rising. In conversation to clients, we often reference Flexport. It's the only freight forwarding company of its size founded since Netscape. It's grown quickly and brought in a lot of VC funding. Its success is predicated on the fact that it has sector expertise in its written software that can help springboard a laggard industry into the digital age and shipping has lagged substantially. Obviously, there are technologies emerging, blockchains most importantly, that are going after decentralization and the diffusion of power more directly. There's also 3D printing, which could empower local manufacturing that make them able to create at better scale and at higher quality. The fact of the matter is innovators recognize that there's both a profit, opportunity and a social responsibility to author technologies that help shift the pendulum away from consolidated power in the digital world and beyond to more diffused power. 5G, combined with the IoT, are poised to dramatically spike the amount of enterprise data generated around the world. Throughout the past decade and a half of the digital era, consumers have generated more data than enterprises have. Not coincidentally, the companies that have risen to the greatest power have been consumer centric data companies: Google, Facebook, Amazon. That, over the next five to 10 years, is going to flip and the enterprise data opportunity is going to be greater than the consumer data opportunity. The rate of growth of enterprise data creation is going to outflank the rate of growth of consumer data. This is a huge opportunity for software companies to provide whether it's artificial intelligence technologies that can make sense of all that data, or it's platforms that allow for the right data entry. A lot of industries-- and I've covered some of them, healthcare, construction, shipping have lagged in their digital transformation. Software as service companies can springboard those industries into the digital aid opening up efficiencies and reversing their laggard digital path. A company like Google, they authored Search as their primary. That is a need that all consumers have. Amazon houses everything anyone wants to buy. Well, that's a service that meets the needs of all consumers. Facebook, same can be said about social networking. Enterprises face much more idiosyncratic challenges and need software that can provide insights very specific to those challenges. Meaning one company Microsoft, a behemoth company, is unlikely if it's not impossible to build expertise in shipping, in healthcare, in construction able to meet the challenges the software demands of every one of those sectors. Individual companies with very sector and regions specific expertise will rise. That's something we have not seen on that scale during the consumer data, the era in which consumer data dominated opportunity. At 13D, our primary focuses is offering value opportunities to our subscribers. Let's start with the investor opportunity. There's the opportunity to get in on the ground floor of the companies that will lead the decentralization movement that will provide the technologies that diffuse power, whether they're in the private or public market. This phase of technology is still in its infancy, and the upside potential is huge. As we argued with Flexport, the software as a service opportunity, the explosion of enterprise data could allow springboard laggard industries into realizing digital efficiencies. This, to our mind, is a tailwind for values outperformance of growth. There's two opportunities we see are pretty clear. One thing to understand about this is this is an enormous systemic shift, and the basic architecture of modern markets, the machinery has been built around consolidation is a durable trend. Consider passive investing, when a small handful of sector leaders and digital natives are greatly outperforming all other companies, it makes it much easier for indexes to outperform active managers. The same could be said with the algorithmic revolution in asset management. Algorithms depend on the past being indication of the future. When you have a durable trend, like consolidation, that relationship also becomes durable. When the pendulum shifts, algorithms can be caught flat footed I think we're seeing this already with flash crashes in the market with the unexpected catching algorithms off guard. We saw this with the recent rotation, a violent rotation from growth and the value. On a broader societal level, when the cycle shifts from wealth accumulation to wealth distribution, it has always resulted in extreme turbulence. War has often been the result. Obviously, we hope that's not the case and optimistically expect it not to be the case, but there will be significant political, economic and market disruption. From an investment standpoint, this is a key reason for our bullish case for gold moving forward. All that being said, I think a shift this significant is really shapes the world. It has throughout all of history. It will be a tailwind for wage growth. It will be a tailwind for middle class spending power. We will see how it unfolds but one way or another, we believe it's a durable shift to diffusion and it will reshape the world.