Last few days have been interesting to say the least. Big tech CEOs hearing with Congress, MSFT potentially acquiring TikTok and then Trump deciding to ban it, GDP compression, and much more.
In this letter, I’ll share quick bites on each of topic and things that are top of mind.
Enjoy.
TikTok ban?
TikTok’s ownership by Chinese conglomerate, Bytedance, has become a subject of heightened scrutiny over the last few months. There are two sides to this.
On one end, it’s encouraging to see the US taking a strong stance against China’s own internet policies. Historically, Chinese policies have been off-balance and provided leverage for the region to operate as they please. Google is a great example of this… it operated in China from 2006 until 2010 when it was banned from the region due to censorship amongst other reasons. If you want to explore further, here’s the full timeline. Compound this with the latest CNBC survey that suggests that 1 out of 5 companies are claiming that China has stolen their IP within the last year (link). If you look deep enough, you realize the issue with tariffs from 2018 has a lot more to do with the US's attempt to protect their IP than it is about actually taxing the goods being imported.
On the other hand, don’t ban it but aim to make an example out of it. Here’s a great NYT article that captures this ethos. In short, banning TikTok alone doesn’t really help. The author makes a fair argument that “If TikTok is a threat, so are WeChat, Alibaba and League of Legends, the popular video game, whose maker, Riot Games, is owned by China’s Tencent. And since banning every Chinese-owned tech company from operating in America wouldn’t be possible without erecting our own version of China’s Great Firewall — a drastic step that would raise concerns about censorship and authoritarian control — we need to figure out a way for Chinese apps and American democracy to coexist.”
Further suggesting that “Instead of banning TikTok, or forcing ByteDance to sell it to Americans, why not make an example of it by turning it into the most transparent, privacy-protecting, ethically governed tech platform in existence?”
There’s no simple or easy answer. Whether or not the ban will go through remains to be seen. The mechanics of banning it indefinitely will be a challenge. There’s also a 3rd dimension to this whole thing with Microsoft willing to make an acquisition offer for TikTok US…
One thing is clear: banning the app will likely exacerbate the cold war between US and China.
We’re already seeing an uptick of new video and social apps popping up as top downloaded on the App Store. This screenshot was taken today, Aug 2, 2020.
GDP compresses -32.9%
It’s no surprise that GDP was compressed -32.9% in Q2 (link). A few weeks ago, I shared some thoughts on making sense of capital markets amidst COVID, where I discussed the original expectation of GDP compression being -42%.
Here’s what we can expect from Congress and The Fed in the near future.
Congress will continue to push for stimulus programs. With unemployment at record highs and individual consumption down meaningfully, this is a lever Congress can pull. This is a bipatisan issue that should be resolved asap.
The Fed effectively has two main tools in their toolbox. Controlling the money supply and affecting interest rates. With short term interest rates expected to be near 0 until 2021, we direct our energy to money supply. Today, The Fed is actively practicing quantitative easing (QE). If you’re unfamiliar with QE, here’s a snippet: The Fed can buy financial assets (often government bonds) to inject liquidity in the economy. It’s not always intuitive, but there are a few reasons why The Fed implements QE. Those reasons range from encouraging lending and borrowing, accompanying low interest rates; ultimately, aiming to stimulate the economy when there are fears of a deeper recession.
So, why is this important? Beyond the obvious, we need to keep an eye on consumption behaviors. People reading this are operators, business owners, executives, freelancers and analysts. GDP compression impacts all of us.
I’m keeping a close eye on personal savings rate. In April, the personal savings rate was the highest the United States has ever seen at 33.5%. In May, it dropped to 24.2% and in June 2020, it was 19.0%. The higher the personal savings rate, the more fear there is in the market and the less consumption. Because 70% of US GDP has historically relied on consumption, this is an overall positive trend from the worse of April 2020. If you want to know why higher personal savings rate is perceived as net-negative by economists, here’s a short essay on paradox of savings.
Photo of the week
Bezos bought Ring like we buy books online. Ring acquisition was slightly above $1B.
This image comes from documents released to Congress prior to CEO hearings.
Links worth sharing
Regulating technology
Well-written essay by Ben Evans. The key issue with regulating tech is that everything is “tech.” To properly regulate mega cap companies, Congress has to carefully study each sector within tech. The mechanics of social media companies are different than e-commerce platforms are different from hardware producers. Yes, there’s overlap, but the nuances are what makes them vastly different. Just like we regulate electrical utilities differently than other utilities and regulate oil & gas differently than all of energy, we need to break down each component of “tech.” Attempting to regulate all of “tech” is a near impossible task. Link (8-min read)
Jeff Bezos opening statement
Bezos is as eloquent as they come. His opening statement is worth a read. Jeff’s upbringing and Amazon’s success is one of the greatest American success stories. Link (8-min read)
Here’s the voiceover and video of the opening statement.