Rebalancing tech stocks may free capital to support real economy
Stock market volatility in Japan is linked to exchange rates and impacts on exports; tech stocks may be overvalued; the real economy needs more diverse, consistent, and sustainable investment.
Let me start by clarifying: I am not a market analyst, and I am not telling you here what to do with your money. I do, however, spend a lot of time thinking through the needed structural evolution of the mainstream economy—partly toward sustainability and partly toward a better balance between labor and capital share of income. If a rising tide lifts all boats, the tide cannot only rise in stock portfolios; it has to rise across the real economy, where people work and earn and spend and live.
It was this background principle that informed this piece from January 2006 pulling together various analyses showing the property-based financial boom was a bubble that could not last. There are two other currents that inform my assessment of what is going on right now in the global financial sector:
Common sense: If everyday needs are out of reach for many people, but stock prices keep soaring, or the fastest rising stocks are for something generally not proven to be useful, something is not working;
Ecological economics: If the most profitable ventures depend on massive unfunded costs being dealt with by others, then value is being miscalculated, and the allocation of wealth and opportunity is likely skewed.
Reporting on why Japan’s stock trading saw catastrphic losses yesterday has been all over the map, but the most salient point seems to have been captured in this reporting from the Financial Times:
Japan’s equities have erased all of their gains for the year following Monday’s plunge, stung by a rapid rise in the yen after the Bank of Japan last week hoisted its main interest rate to 0.25 per cent, the highest level since the global financial crisis in late 2008… A stronger currency is a big headwind for the country’s exporter-heavy stock benchmarks.
So, “fears of recession in the US” and rumors about the Federal Reserve might not be the core of what happened in Tokyo. There is also the question: What do common sense and ecological economics tell us about the state of the global economy?
In 2024, major technology stocks have surged in valuation, with six companies now valued at more than $1 trillion — three at more than $3 trillion. Fossil fuel stocks have also seen rising profits and stock prices, driven by the OPEC+ cartel’s market-rigging agreement, and some say Saudi Aramco specifically has driven a distortion of oil company stock pricing. Nearly 200 governments, after all, have agreed the world must “transition away from fossil fuels”. With interest rates high and small-business and consumer lending stretched, fossil fuels are running out of elasticity — meaning: most people and small businesses cannot and will not continue to tolerate cartel-driven energy price inflation.
Add to this the irrational exuberance around “generative AI”—which is not really AI. Companies thought to be positioned to cash in on the proliferation of computerized writing and image generation, and other possible uses of the technology, have seen stocks rise so quickly, there is no way to confidently test the claim of relevant future value creation. NVIDIA shares, for instance, increased 1,100% in value since October 2022. Some AI-associated stocks are trading at over 30 times their earnings.
All of this comes together with the signal from Warren Buffet’s Berkshire Hathaway that it will unload some major stocks to build up its cash reserves. Some have observed this could be seen as a “signal to sell”, which could be one of the triggers of the tech selloff. Others note Buffet’s track record of moving just ahead of markets, by reading the tea leaves with a mix of astute calculation and clearheadedness about what constitutes real-world value.
Stocks will need to find their level, getting closer to a rational—and sustainable—price-to-earnings ratio. (It should be noted, many analysts make room for high P/E ratios when certain signs are there that earnings will grow quickly in coming years.) Meanwhile, banks, small businesses, homeowners, renters, and everyone else, will continue their day to day existence, in an economy where people’s economic activity is not valued by markets at 30 times their cash income.
It has been argued that big tech has been siphoning investment away from Main Street and new start-ups, precisely when we need to reinvigorate local economies. Where major public investment in local economies has been keeping banks focused on the everyday economy, building roads, bridges, improved water management systems, and the ingredients of new manufacturing capacity—as in the United States—the selloff might just be a momentary correction.
Other tech news adds weight to the argument that the overall allocation of financial wealth is out of balance. A federal judge in the United States ruled on Monday that “Google is a monopolist” due to the business practices it uses to establish and maintain dominance in internet search. Since search is a major bottleneck controlling how people access information of all kinds, this ruling has significant potential to invite a proliferation of new investments in smaller rivals and in new ways of making the internet accessible to users.
The ruling is also a warning to those participating in the generative AI arms race: Services need to have value to end users, and monopoly control of information technologies is not in keeping with open societies or market economies. Business models should be designed to let more players onto the field, and to compete fairly and forthrightly by providing the best services for people’s real-world needs.
When you take all of the numbers together, there is enough real investment in real, everyday economic activity, to suggest that the right-sized correction scenario is the more plausible. It is also true that in 2024, generative AI and OPEC+ are not where most people need to see new investment. What most people need—and will need for generations to come—is for institutions large and small, public, private, and multilateral, to realign their financial priorities with sustainable and climate-resilient business models.
Even with the steady surge in new investment into clean energy technologies, the climate value economy has still not achieved the mainstream status it needs to. We need unprecedented surges of new investment in clean tech, regenerative and agroecological food systems, in climate risk reduction and resilience-building, and in climate-smart trade. Each of these areas offers real-world returns on investment that far outweigh the handful of major tech stocks hoarding new investment in the generative AI arms race.
For example: unhealthy, unsustainable food systems are costing us in excess of $10 trillion in economic and financial waste every year. Climate-related pressures—including disaster response and regional destabilization—have pushed dozens of countries into or close to debt distress. That is a global economic, fiscal, and security time-bomb—potentially blowing up tens of trillions of dollars in at-risk capital—that needs to be resolved equitably, constructively, creatively, and at historic speed. New and better investment opportunities will naturally follow the responsible, inclusive, restructuring of unsustainable financial arrangements.
The opportunities inherent in addressing these massive challenges through innovation, sustainable development, and multilayered cross-sector co-investment, are unprecedented. The world needs to move away from the arms race in fake content generation towards a cooperative innovation surge in sustainable future-building, for the benefit of all. Nothing could be more important, or a wiser use of capital, industrial capacity, and talent.