| Chapter 1 | THE EFFECT OF BIG TECH |
| Chapter 2 | THE AUTOMOTIVE DOWNTURN |
| Chapter 3 | THE JAPANESE DOWNTURN |
| Chapter 4 | THE INEVITABLE FATE |
| Chapter 5 | CONCLUSION |
THE EFFECT OF BIG TECH
People love to hate big tech and their pursuit of infinite growth, but have you ever considered what would happen to the American economy if it wasn’t for big tech? The vast majority of growth America has seen since the 2008 financial crisis is thanks to tech. Just take a look at S&P 500 returns over the past 10 years for example. The index has grown a total of 216% over the past 10 years or a little more than tripled.
But the sole reason for this return being so good was the technology sector which has delivered an incredibly impressive return of 570% over the past 10 years. The second best performing sector was health care and that comes at less than half at 212%.
For there, consumer discretionary drops to 206%, industrials drops to 169%, financials drop to 155%, and so on. There’s no easy way to calculate S&P 500 performance without just the tech stocks, but we can take a look at the S&P 500 value index for a general idea.
Over the past 10 years, the value index has barely grown 100%. In other words, over half of the S&P 500’s return is thanks to tech. But, we can take it even further. It’s not just the tech sector that has been holding up the market but actually just 7 stocks within the tech sector. This includes Apple, Google, Amazon, Nvidia, Tesla, and Meta.
Since the beginning of 2023, these stocks have returned an average of 92% and have single-handedly lifted the entire stock index by 12.4%. You don’t even have to remove these companies from the index to see how big of a difference they make.
If you simply reduced these companies to be equal weight with the other top 500 companies in America, the index would have only returned 0.1%. Accounting for inflation, that’s a negative real return. Now of course, the stock market and the economy are not a 1:1 comparison, but this gives you a general idea of just how big of a role big tech has played in American economic growth.
It’s pretty much the only reason that people’s 401Ks, Roth IRAs, and retirement funds have been performing well during these turbulent past few years. But, it seems that a lot of the big tech companies are approaching their last stages of growth. So, what will happen to America once these companies stop pushing the economy forward?
THE AUTOMOTIVE DOWNTURN
Well, fortunately, we don’t have to do too much speculating because we’ve already seen similar events unfold in the past, most recently with the automotive industry. The American automotive industry peaked during the 1960s when American brands like GM, Chrysler, and Ford dominated the market.
At the time, GM controlled 48.6%, Ford controlled, 26.6%, and Chrysler controlled 13.6%. Together, they controlled a whopping 88.8% of the market. These companies didn’t just immediately fall off, but starting in the 1970s, they slowly began bleeding market share to the Japanese car brands: Toyota, Nissan, and Honda.
And by 2018, their combined market share would be cut in half down to 44.2%. This might not sound like a big deal given that 44% is still a sizeable chunk of the market, but this actually led to massive repercussions. Starting in the 70s, we would see regular layoffs within the auto industry of tens of thousands in any given year.
During the worst of it between 1978 and 1980, a total of 800,000 automotive employees were laid off leading to an unemployment rate of 30%. Sound a bit familiar? Last year, a total of 240,000 tech workers were laid off, and that’s with tech stocks recovering extremely well.
If tech stocks get beaten down for a few years consistently, we can easily see tech layoffs at the same magnitude that we saw with the auto industry. But, you couldn’t even blame these automakers because they were struggling to survive themselves.
All of the American automakers would pile on tons of debt to just keep their operations afloat and compete against the Japanese giants which is still true to this day. In fact, American auto companies are the most debt-ridden companies in the entire world.
Ford’s total liabilities, for example, currently stand at a whopping $230 billion. GM stands at $204 billion. And Stellantis, Chrysler’s parent company, stands at $84 billion. Seeing this, I don’t think you’d be surprised to hear that all of the legacy automotive giants have filed for bankruptcy other than Ford leading to an $80 billion bailout in 2008.
This massive government stimulus along with rising SUV and truck sales have kept the American auto industry alive, but they’re still very much a shell of their former selves. Take the state of their employees for example. Working in a car factory was never a particularly glamorous job but it paid extremely well and had a great work-life balance.
In fact, it was Ford that popularized the 40-hour work week and high factory salaries. Ford’s goal was to ensure that car ownership was attainable for all of their employees and it was. Ford factory workers were paid $5 a day which doesn’t sound like much but context is key. At the time, Ford Model T’s only cost $260.
In other words, the average factory worker could afford a Model T with just 11 weeks of pay. Today, however, it’s a far different story. The average Ford factory worker makes $42,000, but the average new car costs $48,000. So, affording a car today takes more than a full year’s worth of pay. Even the base-level Toyota Corolla will cost half a year’s worth of pay. This too sounds eerily familiar.
Engineers at big tech are paid extremely well due to their massive profit margins and ever-increasing stock prices. But, you can bet that these companies won’t tolerate massive stock dilution for employee stock comp if the stock isn’t growing. And again, you don’t even have to speculate here.
Just take a look at the compensation figures of legacy tech companies with lackluster stock growth like IBM. The base salary at IBM for software engineers is not all that different from what you’ll find at Google or Facebook, but the stock and bonuses are 75 to 80% lower across the board.
But the saddest part about the decline of the auto giants wasn’t decreasing real salaries or layoffs but how they devastated their respective cities. Detroit has more or less turned into one massive ghetto. In fact, it’s common for houses to be listed for just $1 in Detroit because people just wanna get out and don’t wanna pay the property taxes anymore.
But, even at $1, it’s extremely difficult to sell these properties. So, is this what’s ahead for multi-million dollar Silicon Valley properties after the tech boom?
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THE JAPANESE DOWNTURN
It might seem like this sort of demise will The Japanese Downturn never happen to Americans given that historically America has always found a new vector for growth. First, it was railroads, then telephones, then cars, then oil, then computers, then smartphones, and now maybe AI.
But, one of the biggest rules to keep in mind is that past performance is not an indicator of future results. Just because America has found new growth vectors in the past does not mean that this pattern will keep repeating and one of the best examples of this is of course Japan.
After World War II, the country was able to pivot to automotives and then electronics. And these two industries gave Japan global notoriety and dominance allowing the country to build up a massive economy. But, Japan wasn’t really able to capitalize on the computer boom and definitely not on the smartphone boom, and do you wanna guess what this has done to the Japanese economy?
Well, unprecedented levels of debt and stagnation. If you thought that America has a lot of debt with a debt-to-GDP ratio of 129%, well you’re right, America does. But, Japan is on a whole other tier coming in at a debt-to-GDP ratio of 264% which is the highest of any country in the entire world. But, it’s not just their debt that looks bleak but almost all other financial indicators as well like their stock market.
The Japanese equivalent of the S&P 500 is the Nikkei 225, and I think the chart will pretty much tell you everything you need to know. This index peaked out in 1989 and only now, 35 years later, has the index recovered.
This is actually really big news for Japan and speaks volumes about current investor confidence, but it should be noted that this doesn’t account for inflation. Japan hasn’t experienced anywhere near as much inflation as the rest of the world over the past 35 years, but the Yen has nonetheless lost a little more than 20% of its value.
So, the Nikkei 225 still has to rally another 20 to 25% to make a true new all-time high which it may very well do, but again, it took 35 years to do so. And if you take a look at Japan’s GDP growth rate, it’s just as depressing as many years don’t even see 1% growth. One of the main reasons for this is Japan’s declining demographics.
Japan’s population is not only not growing, but it’s actually been shrinking since 2010. In fact, the UN projects Japan's population to fall by 40% by the end of this century. Also, Japan is not just fighting against a shrinking population but an aging population. In fact, 30% of Japan is over the age of 65 and 10% is over the age of 80.
This becomes a serious concern in America as well when you consider that the birth rate has been less than 2 for 50 years now. The only reason that America has been able to outgrow this decline is thanks to generous immigration policies which have kept the population growing.
But as fewer and fewer people choose to have kids, you can see that the population graph is expected to top out similar to what Japan experienced back in the 70s and 80s. And this especially becomes a concern when you consider that a large portion of the American population, baby boomers, are now entering retirement.
So, we’re essentially entering the last stages of big tech’s explosive growth at the same time that our demographics are starting to stall out. Not to mention, high inflation, high interest rates, a stock market that’s held up by just a few names, and a shrinking middle class. Seems like the perfect storm that could cause a repeat of Japan.
THE INEVITABLE FATE
So, is an automotive industry Japanese fate what’s eventually in store for America? Well, the answer is absolutely. Not trying negative or pessimistic here, but that’s simply the pragmatic truth. No matter how great a country or empire is, eventually, all empires come to an end. Whether that’s the ancient African and Asian kingdoms of Greece, Rome, and the British Empire, eventually, all empires fall.
This isn’t to say that this is what’s ahead immediately after big tech stops growing. It’s very possible that America will continue its stellar record thanks to the AI or space industries. But, the key point to note is that each of these transitions becomes harder and harder as empires naturally build up more and more baggage over time.
This includes things like increasing national debt, bigger and bigger changes needed to continue moving the needle forward, a deteriorating demographic, shifting global trends, high inflation, and a potential new reserve currency, just to name a few.
Conclusion
The silver lining is that these sorts of downtrends take an extremely long time to play out, usually hundreds of years. Even if big tech truly is the last frontier for America, we still have decades of stagnation followed by decades of slow bleeding ahead before we enter a true collapse sort of downturn.
And that’s only if America isn’t able to pivot to yet another industry but it does make you think: what would’ve happened if it wasn’t for big tech?
Well, as much as we love to point out the shortcomings and pitfalls of the big tech monopoly complex, without them, it’s likely that America would be a lot more like Japan or Europe, a faded giant, as opposed to being the modern tech giant that it is today. Do you think that’s for the better or worse? Comment that down below.
