2 “Shiller PE Ratio,” Multipl, accessed June 22, 2021.
3 Jay R. Ritter, “Economic Growth and Equity Returns,” Pacific-Basin Finance Journal 13 (2005): 489–503.
4 Daniel L. Greenwald, Martin Lettau, and Sydney C. Ludvigson, “How the Wealth Was Won: Factors Shares as Market Fundamentals,” NBER Working Paper No. 25769, April 2021.
5 “Is There a Link between GDP Growth and Equity Returns?,” MSCI, May 2010.
6 It is also necessary to acknowledge an important asymmetry: although rising asset values are not associated with strong growth or rising wages, a rapid fall in asset prices will almost certainly trigger a financial crisis of some kind, credit freezes, and distress in the “real economy.” Hence the Fed has been more reactive than proactive—lowering rates after the dot-com bubble burst, amid the financial crisis, and during the Covid-19 collapse—acting to stabilize an economy dependent upon high asset valuations. But it is more difficult to argue that the central bank created that dependence, or to explain why those interventions have failed to produce the desired effects beyond stabilizing asset values, such as increased investment.
7 Ritter, “Economic Growth and Equity Returns.”
8 Julius Krein, “Share Buybacks and the Contradictions of Shareholder Capitalism,” American Affairs, December 13, 2018.
9 Project for Strong Labor Markets and National Development, “American Investment in the 21st Century,” U.S. Senate, May 2019.
10 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, vol. 1, ed. Edwin Cannan (Chicago: University of Chicago Press, 1976), bk. IV, ch. 2.
11 Current tax policy advantages buybacks over dividends for most corporations.
12 Munsif Vengattil, “IBM to Break Up 109-Year-Old Company to Focus on Cloud Growth,” Reuters, October 8, 2020. It is worth noting that some analysts are skeptical of IBM’s ability to succeed in cloud computing, given the paltry capital expenditures the company has devoted to this goal relative to competitors: Charles Fitzgerald, “Follow the Capex: Separating the Clowns from the Clouds,” Platformonomics, May 24, 2018.
13 Though, notably, stock price and P/E are still significantly off 2012 highs, when IBM began ramping up its buyback program in earnest.
14 Milton Friedman, “A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits,” New York Times, September 13, 1970.
15 Michael C. Jensen, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function,” Business Ethics Quarterly 12, no. 2 (April 2002): 239. Perhaps in the theoretical long run, all equations have to balance, but as the saying goes, in the long run, we’re all dead.
16 Project for Strong Labor Markets and National Development, “American Investment in the 21st Century,” 30.
17 Project for Strong Labor Markets and National Development, “American Investment in the 21st Century,” 30.
18 At the very least, no one should be surprised that conventional approaches to promoting investment and growth, such as cutting interest rates or taxes, no longer seem to work, since they do not address issues of earnings quality or hurdle rates.
19 Anna Stansbury and Lawrence H. Summers, “What Marco Rubio Gets Right—and Wrong—about the Decline of American Investment,” Washington Post, May 31, 2019.
20 Germán Gutiérrez and Thomas Philippon, “Investment-less Growth: An Empirical Investigation,” Brookings Institution, September 2017.
21 A more accurate term might be “captured.”
22 “Frothy Market Masks Margin Compression in Private Equity Investments: What Firms Need to Focus on Going Forward,” Bain & Company, October 22, 2019.
23 Daniel Rasmussen, “Private Equity: Overvalued and Overrated?,” American Affairs 2, no. 1 (Spring 2018): 3–16.
24 See, for example, Mark R. DesJardine and Rodolphe Durand, “Disentangling the Effects of Hedge Fund Activism on Firm Financial and Social Performance,” Strategic Management Journal 41, no. 6 (June 2020): 1,054–82.
25 Consider the recent history of Texas Instruments, as discussed in Ben Hunt, “Yeah, It’s Still Water,” Epsilon Theory, October 25, 2019.
26 Gerald F. Davis, The Vanishing Corporation: Navigating the Hazards of a New Economy (Oakland, Calif.: Berrett-Koehler, 2016), 69–78.
27 Herman Mark Schwartz, “Corporate Profit Strategies and U.S. Economic Stagnation,” American Affairs 4, no. 3 (Fall 2020): 3–19.
28 The concurrent weakening of antitrust regulation—which overlapped significantly with the shareholder primacy movement—also encouraged monopoly concentration and intensified the process of polarization.
29 Jeremy J. Siegel, The Future for Investors: Why the Tried and the True Triumphs over the Bold and the New (New York: Crown Business, 2005).
30 Krein, American Affairs.
31 Stansbury and Summers, Washington Post.
32 Madison Darbyshire, “Value and Growth Investments Gap at 25-Year High,” Financial Times, June 10, 2020.
33 Seth A. Klarman, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor (New York: HarperBusiness, 1991), xix, 87–104.
34 Katherine Lynch, “Value vs. Growth: Widest Performance Gap on Record,” Morningstar, January 11, 2021; Michael Bell, “Does This Recession Favor Growth Stocks?,” J.P. Morgan Asset Management, January 5, 2020.
35 Bell, “Does This Recession Favor Growth Stocks?.”
36 Klarman, Margin of Safety, 164.
37 Private equity firms, on the other hand, can use these valuation models to hide volatility in their portfolios; see Rasmussen, American Affairs.
38 In theory, asset coverage could substitute for cash flows, but old value investor stories about finding companies trading below net cash value no longer happen in real life.
39 Lisa Lee and Tom Contiliano, “America’s Zombie Companies Rack Up $2 Trillion of Debt,” Bloomberg, November 17, 2020.
40 Value investors used to claim that they could still find unique opportunities in “complex” areas like distressed debt and other special situations, but today there is more capital chasing distressed debt investments than there are distressed debt opportunities.
41 David P. Goldman, “China’s Attempt to Avoid the American Tech Monopoly Trap,” American Affairs 5, no. 2 (Summer 2021): 33–45; Capital Ideas Editorial Team, “Where’s All the Volatility in Tech Stocks,” Capital Group, August 24, 2017.
42 Matt Stoller, “Warren Buffett: America’s Folksiest Predator,” BIG (blog), August 9, 2020.
43 Leanna Orr, “‘I Can’t Believe I’m Saying This, but I’m Passing on Seth Klarman,’” Institutional Investor, August 31, 2020.
44 See, for example, Guo Shuqing, “Promoting the New Development Paradigm and Preventing the Resurgence of Financial Risks (speech, 13th Lujiazui Forum, June 10, 2021), China Banking and Insurance Regulatory Commission; Ding Gang, “Sticking Strong to Industrialization, China Will Win Competition with US,” Global Times, June 30, 2021.
45 Michael Pettis, “What Is GDP in China,” Carnegie Endowment for International Peace, January 16, 2019.
46 Hung Chan, Kamal M. Haddad, and William Sterk, “Capital Budgeting Practices of Chinese Firms,” Journal of Global Business Management 4, no. 2 (October 2008).
47 Kamal Haddad, William Sterk, and Anne Wu, “Capital Budgeting Practices of Taiwanese Firms,” Journal of International Management Studies 5, no. 1 (April 2010): 178–82.
48 Michael Pettis, “China’s Troubled Transition to a More Balanced Growth Model,” New America, March 1, 2011. See also: R. Stephen Brent, “Misunderstanding Investment in the United States and China,” American Affairs 4, no. 4 (Winter 2020): 92–102.
49 Robert D. Atkinson, “Who Lost Lucent?: The Decline of America’s Telecom Equipment Industry,” American Affairs 4, no. 3 (Fall 2020): 99–135.
50 “Huawei to Start Demanding 5G Royalties from Apple, Samsung,” Bloomberg, March 16, 2021.
51 Sara Germano, “Nike Chief Executive Says Brand Is ‘Of China and for China,’” Financial Times, June 24, 2021.
52 See, for example, George Parker and Stephen Morris, “Sunak Insists UK Must Bolster China Ties as Access to EU Markets Declines,” Financial Times, July 1, 2021.
53 See Goldman, American Affairs; Jeanny Yu and Abhishek Vishnoi, “Down $831 Billion, China Tech Firm Selloff May Be Far from Over,” Bloomberg, July 6, 2021.
54 Branko Milanović, Capitalism Alone: The Future of the System That Rules the World (Cambridge: The Belknap Press of Harvard University Press, 2019).
55 Hence national bourgeoisies, in so many cases, are antidevelopment. See also: Alex Hochuli, “The Brazilianization of the World,” American Affairs 5, no. 2 (Summer 2021): 93–115.
56 Peter Thiel and Blake Masters, Zero to One: Notes on Startups, or How to Build the Future (New York: Currency, 2014), 106.
57 Antonio García Martínez, Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley (New York: Harper, 2016), 285–86.
58 Bethany McLean, “‘He’s Full of Shit,’: How Elon Musk Fooled Investors, Bilked Taxpayers, and Gambled Tesla to Save Solarcity,” Vanity Fair, August 25, 2019.
59 Matti Friedman, “WeShtick,” Jewish Review of Books (Summer 2021).
60 Tom Nicholas, VC: An American History (Cambridge: Harvard University Press, 2019).
61 Bill Gates’s mother sat on the board of United Way with IBM’s CEO, facilitating a connection.
62 Andrew Orlowski, “Bill Gates, Harry Evans and the Smearing of a Computer Legend,” Register, August 7, 2012.
63 Sean Braswell, “The Agreement That Catapulted Microsoft over IBM,” OZY, May 28, 2019.
64 Marc Andreessen, “Why Software Is Eating the World,” Wall Street Journal, August 20, 2011.
65 Andreessen, who apparently never tires of talking his book, mentions other investments like Facebook, Groupon, Twitter, Zynga, and Foursquare in his “Eating the World” essay. Is it particularly surprising that these companies have not driven meaningful gains in productivity?
66 Raicho Bojilov, “Indigenous Innovation during the IT Revolution: We Never Had It So Good?,” in Dynamism: The Values That Drive Innovation, Job Satisfaction, and Economic Growth, by Edmund Phelps, Raicho Bojilov, Hian Teck Hoon, and Gylfi Zoega (Cambridge: Harvard University Press, 2020). The lack of productivity growth also contradicts the common refrain that lower overall investment is due to cheaper capital inputs. Of course, cheaper capital inputs were traditionally thought to encourage more investment, but beyond that, if capital had suddenly become much more productive, one would expect to see higher overall productivity. See Weicheng Lian et al, “The Price of Capital Goods: A Drive of Investment Under Threat,” IMF Economic Review 68, no. 3 (September 2020): 509–49.
67 Yanis Varoufakis, “Techno Feudalism Is Taking Over,” Project Syndicate, June 28, 2021.
68 Siegel, The Future for Investors. Includes dividend reinvestment.
69 Hubert Horan, “Uber’s Path of Destruction,” American Affairs 3, no. 2 (Summer 2019): 108–33. What matters in investment decisions is return expectations, not actual returns, which cannot be known in advance.
70 Doris Kwon and Olav Sorenson, “The Silicon Valley Syndrome,” Center for Open Science, August 5, 2019.
71 Marc Andreessen, “It’s Time to Build,” Andreessen Horowitz, April 18, 2020.
72 Niccolo Soldo, “The Dubrovnik Interviews: Marc Andreessen—Interviewed by a Retard,” Fisted by Foucault (blog), May 31, 2021.
73 Soldo, Fisted by Foucault.
74 Incidentally, Andreessen’s remarks make for a striking contrast with Chinese authorities’ critique of the virtual economy and its parasitism of the real economy; see Shuqing, China Banking and Insurance Regulatory Commission; Gang, Global Times.
75 Soldo, Fisted by Foucault.