Finance History Mass Rentiers Politics

One Bubble to rule them all: US Big Tech

Since 2020 financial markets are animated by an exponential growth of a select number of technological stocks. Various acronyms have been introduced for this group: the most common is FAANG (Facebook, Amazon, Apple, Netflix, Google). Other companies that are sometimes included are Tesla, Nvidia and Microsoft.

While all other stocks struggled with the effects of Covid-19 crisis, these companies surged to record highs against all odds.

Stocks set new record in summer 2020. But 99.9% of the titles did not recover from the collapse caused by the pandemic crisis

The Tech Bubble is nothing really new. There has been a similar one in the late 1990s, that peaked in the year 2000. It was better known as the Dot-Com bubble or Internet bubble.  Shouldn’t bubbles just burst? Well, this one has been reflated in twenty years. It’s probably a first in the history of economics and for sure there are good reasons. As railroads in the XIX Century, Internet did not die after the market crash: it developed and became the backbone of every service in the world. There were good, solid reasons to ‘buy Internet’ in the 1990s. Was it enough to just hold the dot-com stocks after their fall? No, most of them eventually disappeared, but a few champions survived and became strong, while new ones were created just a few years later: the best managed internet companies have become global monopolies and Tech Giants. Now everybody wants a share of them, again.

This time is different: the bubble that burst in the year 2000 is back in 2020, stronger and bigger

It is a clear case of FOMO (Fear of Missing Out). Market moralizers will be fast in criticizing retail traders when this mania will be over. But honestly, it absolutely makes sense to want to be part of tech craze. Look at the incredible performance of a stock like Amazon, compared to wages. In 2001 and 2002 the average price of one Amazon share was around 10$: today is 3.500$, 350 times more

Amazon stock exponential growth in logarithmic scale

It means that if you invested 30.000 dollars in a company that was already utterly famous (Jeff Bezos was Time Person of the Year in 1999) and that had almost the monopoly on e-commerce, that is the whole retail sales of the future, you would now be able to sell those shares for more than 10 million dollars . What if you had $30.000 as an annual salary? Today your wage would be just a little higher, around $33.000.

Median wage – real wage, without inflation – did not increase in generations: goodbye middle class

If we go back in time for another twenty years, the $100k that Forrest Gump invested in Apple’s stock would now be worth over 50 billion!

Forrest Gump would be a multi-billionaire today with this single investment

Low Interest Rates + Monopolies = Explosive Valuations 

The Tech Giants are monopolists within their own market, or at least have a dominant market share (Tesla is the only exception). This means that they will have a constant flow of income from their activity. On the other hand, if we want to invest in the bond market, thanks to a long lasting Zero Internet Rate Policy (ZIRP), there is no flow in sight for many years. This justifies very generous valuations for these stocks, where the sky is the limit. 

Real interest rates are negative: bond investors are actually losing money. Buying Big Tech is the only way left to get a rent under ZIRP.

In general monopolies, oligopolies and tech giants have always dominated the market. Tech was the protagonist in the hope and dreams of investors since World War II: at the beginning it was AT&T, then IBM, then Microsoft with Dot-Com companies, now Apple with Amazon, Google, Facebook and Microsoft again. 

But since at least 2010 something changed due to ZIRP. The only path left by monetary authorities to some form of gain from capital is investing in high risk assets. It is not really a free choice, or a speculation led by dreams of big gains: investors act like mice in a maze, following the only path leading to cheese.

And what happened in 2020 with COVID-19? The pandemic crisis brought pessimism in the future of the economy and even lower interest rates and that caused higher stock valuations. People consumed less and saved more, and that led to more investment in financial instruments. Plus, life became even more virtual and the Big Tech had just the right products for this point in time (cloud services, e-commerce, etc). All in all, it has been like pouring gas onto the fire.


In the last post we scrutinized past bubbles. We learned many lessons and summarised them in few key elements, ReLLANPI:

  • Retail involvement: is everyone already crazy about it?
  • Legislator role: is the price rise influenced positively or even caused by laws?
  • Liquidity and leverage: how much money is in the system? Is it sustainable? Do people invest their own money, or do they invest borrowed capitals?
  • Asset class: is it totally new? If not, what do historical data tell?
  • News: how much hype is around?
  • Product: is there a technological and/or financial innovation? How will it impact peoples’ lives? Is there still room for improvement/adoption?
  • Investment plan: do people invest following a plan and/or generic prudency or are they under psychological pressure? And you, do you have a plan?

Let us evaluate every factor for US Big Tech.

Retail involvement: it is no secret that retail investors are deeply involved. The more conservative ones put their money in passive funds that reproduce indexes where Apple and the other tech companies are predominant nowadays. The most daring use leverage, options and services like Robinhood. 

Billions invested in highly leveraged instruments mean actually trillions moved on the markets by trade-from-home amateurs.

Legislator: In the last twenty years these companies enjoyed clemency from the legislator. Not only has there been no antitrust procedure until now (with the notable exception of the EU market regulators against Microsoft 15 years ago), but Washington always defended their champions against foreign regulations and taxations. 

How long can this honeymoon last? It would be normal that at some point successful, almost monopolistic companies get regulatory and legal pushback. Some cracks are appearing on the surface, but it seems too early to expect serious changes. Political attention on user data usage has increased in recent years, especially in the EU, and that could jeopardize the business model of Facebook and Google. If China and Russia will continue to use these platforms to influence elections and to damage democracies, some sort of action on both sides of the Atlantic will be taken. Amazon has been criticized for many years in the US for the disruption of the retail market, whereas the EU pushes for a level playing field with brick and mortar competitors at least on taxation (they need the money too). Apple has good track record for privacy, but its App Store ‘30%’ policy has drawn calls for government action. Microsoft on the other hand is now viewed as utterly virtuous, although during the previous Tech Bubble it was targeted for breakup. 

Although no change in legislative attitude seems probable in the short term, in the medium and long term most tech monopolies will be regulated very differently (that is: they will actually be regulated and taxed), unless the market precedes the legislator, as happened for Microsoft last time.

Liquidity and leverage: this is the most important factor at the moment. The general framework for all markets in 2020 is that liquidity poured by Central Banks is so gargantuan that every asset class is in a bubble. 

Looks like a race: who will inflate this bubble more? Many central banks even buy stocks with freshly minted cash.

On top of that, it must be noticed that Tech companies sit on a hoard of cash, like dragons in old myths. 

And what do they do with all that cash? Not much at the moment: when they would move it, it could change the cash market for good. 

But Apple has been particularly creative, financially. Although Cupertino does not need cash at all, it asked the market for more at very low prices (the zero interest rates we talked above) through bond emissions, to corner its own stock!

At least 35% of all Apple stocks are in Apple’s own treasury

The history of Apple’s shares outstanding from 1996 to 2020 is shown above. Shares outstanding can be defined as the number of shares held by shareholders (including insiders) assuming conversion of all convertible debt, securities, warrants and options. This metric excludes the company’s treasury shares.

Apple shares outstanding for the quarter ending June 30, 2020 were 4.355B, a 5.36% decline year-over-year.

Apple 2019 shares outstanding were 4.649B, a 7.02% decline from 2018.

Apple 2018 shares outstanding were 5B, a 4.79% decline from 2017.

Apple 2017 shares outstanding were 5.252B, a 4.52% decline from 2016.

Due to a stock split on a 4-for-1 basis on August 28, 2020 all above numbers must be multiplied by four at the time of writing.

Apple shares are becoming increasingly rare, year after year, and that pushes its price higher and higher. Until market authorities or the legislator will stop this practice, Apple, instead of investing in new innovative ventures, will end up becoming the owner of Apple itself.

It is so crazy, that while Warren Buffet, through Berkshire Hathaway, owns ‘only’ one billion shares, more than nine billion have disappeared in Apple’s vault. And Buffet’s Apple position is so enormous that it represents 50% of its own portfolio (contrary to any wise advice on diversification) and a 5.9% stake in the Cupertino company.

Berkshire Hathaway portfolio, September 2020. 120 billion dollars out of 240 invested in a single title, Apple

Asset class: stocks are quintessential to modern economies and they are here to stay. This story has already been told: tech stocks, like all stocks, are subject to volatility, but you are buying a tangible good that will not disappear as a vision or a dream. 

News: at the moment there is a discrete interest by the media, but not really any excitement.

Product: Big Tech companies have monopolies in the most advanced technological markets and are still innovating. 

Investing plan: The market seems driven by incautious retail investors through services such as Robinhood that do not charge fees (but thrive selling their personal data) and a new boom in options trading (highly leveraged and very dangerous instruments, usually handled only by professionals).

Notice the acceleration after Covid boosted work-from-home

Is it a ‘bubble’ then? Under many indicators yes, but only changes in law and market liquidity can stop its race. 

In the end one rule stands: don’t bet against the central banks, they can make the impossible, possible.

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A History of Bubbles

Piketty, as we have seen before, states very clearly that workers are getting poorer and enjoy no mobility due to r > g: return on capital goes from 4 to 5% whereas GDP growth is stuck between 0 and 1%.

What if you do not want to wait for the Government to do something about it? What if you want to repair the mobility elevator at least for yourself? In this case, financial markets offer a very powerful but also dangerous tool, a sort of nuclear lift: asset bubbles.

Riding a bubble, your small capital can increase a hundredfold in a short time. But you could also lose everything.

The usual narrative about bubbles is that bubbles are evil and they must be recognized to be avoided: they are like the Big Bad Wolf for the Little Red Riding Hood investor. That is often true of course, but tells only a part of the story. Bubbles, as any investment, represent a risk and an opportunity at the same time, require much knowledge and preparation to be managed, technical skills but also psychological ones; financial competences are not enough, a thorough knowledge of the business/product/industry in question must be acquired. 

Let us learn something about bubbles analysing a few of the most famous ones in history.

The Dutch Tulip Mania


Historical accounts are still under discussions for this very first and iconic bubble (1). We can underline a few facts: 

  • Tulips were a new asset class and as an asset class they did not last long.
  • Being a new asset class, a lack of historical data gave way to large swings in prices.
  • In a way, tulip bulbs were prototypes of something new and unknown, and as a technological breakthrough they inspired hopes that could not be limited by experience.
  • Only a small group of merchants was involved in the market, the effects on the overall economy of the boom and bust were negligible.
  • As a flower they proved really extraordinary: the Netherlands are still famous for their tulips!

The South Sea Bubble

The “night singer of shares” sold stock on the streets during the South Sea Bubble (Amsterdam, 1720)

At the very origin of the word ‘bubble’ (2), the South Sea crash gives us plenty of good lessons:

  • Business was not particularly new or innovative: only the financial formula changed.
  • A crucial active role was played by legislators, that were hired as testimonials and guarantors, and even passed a law to block any other competing ‘bubble’ (i.e. corporation).
  • A financial innovation swiftly mutated into a fraud.
  • The affluent classes were widely involved.
  • An economic crisis followed the crash.

There is a special story in the story: documents revealed for certain that even the great Isaac Newton incurred in heavy losses during the market frenzy (3):

“at the beginning of 1720, Newton had around 40% of his considerable wealth (comparable, based on average earnings, to around $30 million today) in South Sea stock, which can be thought of as a book-entry equivalent of shares. This stake had been acquired over some years, mostly at considerably lower prices.

But then, as the bubble was inflating, in April and May 1720, he sold most of that, at prices that were three to four times his cost. This liquidation appears to have stretched roughly over the period shown in the price chart. However, a few weeks after the last of those sales, in mid-June 1720, he appears to have jumped back into the market, at prices about double those at which he had sold. He then continued making further investments for himself until the end of August, just before the collapse of the bubble.

There had to be vigorous debates among all the executors and Hall about the prospects of the South Sea venture, with Hall likely the most fervent enthusiast. Those debates, together with the rapidly rising market price, apparently led Newton to change his mind.

It should be noted that Newton did become a truly ardent believer in the bubble, more ardent that other people in his circle, even though he started out as a sceptic and was slow to change his views. The Hall estate made some purchases of South Sea stock as late as the middle of September, when prices were in a free-fall and about half their peak level. However, this estate did keep a substantial fraction of its assets in a more stable investment, that of the Bank of England. On the other hand, Newton appears to have put all of his assets into South Sea stock.”

Newton in 1702 by Godfrey Kneller

Even one the greatest scientists in history and for sure a very rational man, under the pressure of continuous discussions, news, and an astonishing price rise, lost his principal. We then learn that a plan is necessary from the beginning. Probably if Newton did not liquidate completely his first very lucky investment, he would not have entered later.

In the same period, the great writer Daniel Defoe ran The Commentator, a newspaper that was likely subsidized by the government. He attacked the similar bubble plan designed by John Law in France and was vociferous in his condemnation of the various visionary London schemes, such as a company “For extracting Silver from Lead.” He called them various names, such as a “lunacy” caused by the “bubble infection.” (3)

The Railway Mania

‘Can you tell me how to make £10,000 HONESTLY in Railways?

The first high tech bubble, Railway Mania was really close to modern day disruptive technologies markets (4)(5)(6), but still the similarities with the South Sea were even more striking:

  • Strong role of the legislators: railroads were not centrally planned in Britain as in the rest of the world. Companies were required to submit a Bill to Parliament for approval of new railroad lines, there were no limits on the number of railroad companies and nearly anyone could form a railroad company and submit a Bill to Parliament. Financial viability of railroad lines was not a requirement for Parliament’s approval and most Bills were approved due to the fact that many Members of Parliament were heavily invested in railroad companies.
  • A technological innovation swiftly mutated into a fraud, with many impossible railway projects, that just worked in enriching their initiators.
  • Low interest rates, abundant liquidity in the system, was a key factor.
  • A rising pressure on the middleclass through newspapers news, discussions among peers and a constant rise of price: as railroad company shares continued to rise, investors became increasingly wrapped up in the speculative fervour and many middleclass families invested all of their savings into them. Many famous figures became involved in railroad stock speculation including Charles Darwin, Charles Babbage, John Stuart Mill, the Brontë sisters and Benjamin Disraeli.
  • An economic crisis followed the crash.
  • In the long run. railroad companies became lucrative in the strong hands of the big investors that bought them after they went bust.

As is noted on Wikipedia: 

“Unlike some stock market bubbles, there was a net tangible result from all the investment: a vast expansion of the British railway system, though perhaps at an inflated cost. Amongst the high number of impractical, overambitious and downright fraudulent schemes promoted during the mania were a good number of practical trunk routes (most notably the initial part of the Great Northern Railway and the trans-Pennine Woodhead route) and important freight lines (such as large parts of what would become the North Eastern Railway). These projects all required vast amounts of capital all of which had to be raised from private enterprise. The speculative frenzy of the mania made people much more willing to invest the large sums required for railway construction than they had been previously or would be in later years. Even many of the routes that failed when the mania collapsed became viable (if not lucrative) when each was in the hands of the larger company that had purchased it. A total of 6,220 miles (10,010 km) of railway line were built as a result of projects authorised between 1844 and 1846—by comparison, the total route mileage of the modern UK railway network is around 11,000 miles (18,000 km).”

The money lost by many small investors became, in a way, an unearned income for the next generations. And the technology did not die, it prospered and we still use it today.

Lessons learned

Bubbles are usually lucrative for a few and disastrous for many. The key elements that we have learned from history to assess new market trends are:

  • Retail involvement: is everyone already in?
  • Legislator role: is the price rise influenced positively or even caused by laws?
  • Liquidity and leverage: how much money is in the system? Is it sustainable? Do people invest their own money or borrowed capitals?
  • Asset class: is it totally new? If not, what do historical data tell?
  • News: how much hype is around?
  • Product: is there a technological and/or financial innovation? How will it impact people’s lives? Is there still room for improvement/adoption?
  • Investing plan: do people invest following a plan and/or generic prudency or are they under psychological pressure? And you, do you have a plan?

ReLLANPI is our swiss knife to analyse (and build plans for) today’s bubbles.