Wednesday Briefs – 13 January 2021

Follow populyst to receive this weekly commentary in your inbox every Wednesday.

This week: Revolution!; Social Media Blows Up; Parler Silence.


Most revolutions end badly. They tend to start with romantic and idealistic visions promoted by charismatic leaders, but are then hijacked by extremist actors who are more interested in control and power than in democracy or the common good.

The American Revolution turned out better than most for the rebels. But the same cannot be said about other revolutions. The French Revolution resulted in protracted turmoil for decades before a true republic could emerge and endure. In the meantime, Robespierre’s Terreur and the Napoleonic era featured death and destruction on a grand scale. As to the various communist revolutions around the world, the cost in suffering and human lives has been beyond imagination. These revolutions delivered very little if anything in terms of improving living standards.

The Prague Spring of the early 1990s in Eastern Europe fared better because prevailing conditions at that time and at that place were unusually ripe for change. The Soviet Union, principal patron of those communist regimes, was exhausted and in dire financial straits after the collapse of energy prices in the late 1980s. Twenty some years later, the Arab Spring was a dismal failure. Very little has changed except in Tunisia, according to this study from the Council on Foreign Relations.

Are we on the eve of another American revolution? Some segments of the population, on both sides of the political spectrum, are angry and feel disenfranchised. On one side, some demand restitution or some rebalancing from a system that they see as long rigged against their advancement. On the other side, some believe that the election was stolen and also see a system that is stacked against their advancement. Obviously, the two paths forward are escalation or de-escalation of the more extreme rhetoric and actions. After de-escalation, new possibilities can materialize.

READ MORE on the demographic and income factors of a revolution, including why aging countries may be more prone to populist revolts >>> So You Want a Revolution, or >>> Why ‘Occupy Wall Street’ Failed.

Social Media Blows Up

After the dust settles, the clearest consequence of banning President Trump from Facebook and Twitter and of removing Parler from Apple, Google and Amazon services will likely be a big jump in competition for social media and search providers. This would be a good thing and long overdue. Users of Facebook and Instagram are captive in at least two ways: 1) they have invested years of content on the platform and would be reluctant to walk away from it and 2) they have built their network of contacts over a long period and would be reluctant to restart from scratch on another platform.

What the world needs after last week’s social media events is a new open-architecture or agnostic platform. The way this would work is a user would create his content (a post, a photo, etc.) on that new platform and would then choose on which of the incumbents to publish it. The incumbents are the social media companies that already exist today, Facebook, Instagram, Twitter etc. The user could choose to publish a single piece of content on one incumbent, for example only on Facebook, or on several, for example, on Facebook and Twitter and others etc.

The user would own his content at the new platform, a parent platform of sorts, and could shop his content to algorithms designed by the incumbents. In some cases, though not all, the incumbents would pay the user for his content, a case we had made separately in Tech Giants Should Pay Users.

As to the user’s content and contacts accumulated in previous years, a user should be able to segregate them in a separate file at the incumbents and to lift them out or to copy them in a few clicks, say out of Facebook, and onto the new parent platform.

Parler Silence

Parler’s banishment from Apple, Google app stores and Amazon servers may prove to be the best thing that happened to the company, if for no reason other than a full-blown Streisand effect. Parler, formerly relatively obscure, is now known to all and has in addition a grievance that may earn it broader sympathy on first amendment grounds or other.

The road back to respectability and acceptance should not be difficult if the company plays its cards right. One is a revision of the Code of Conduct and some tightening of rules. Two is an effort to invite non-conservatives to join Parler and to turn the service into a true debating forum instead of just an echo chamber for the right. Three is to be the main alternative to Twitter, whom they can paint as the bad guy across town, whether that characterization is fair or not. Of course, the challenge will remain that most people do not want to micro-blog on multiple platforms. Which brings us back to the need for a parent platform that feeds several.

Our own view about the suspension of accounts is that Twitter and Facebook have a right to do it. Everyone has a right to speak up but no one is entitled to speak with a megaphone on someone else’s turf. Our preferred solution was to charge a fine to users who violate the Code of Conduct, instead of banning them outright.

The chart below summarizes more generally how Twitter could charge heavy users with a large number of followers. The x-axis represents a user’s frequency of tweeting (or posting on Facebook) and the y-axis how important tweeting is to such user. Social media companies are providing us the equivalent of small billboards to advertise our views and products. As with real life billboards, these digital billboards should not be free to the user when he/she derives an outsized benefit from tweeting or posting. In addition to those in the green box below, users who violate the Code of Conduct can be billed at a different dollar rate, one that is sufficiently high to deter future violations. Would this be practical and effective in imposing some decorum and discipline? We can’t know for sure until we try it.

Access all Wednesday Briefs™ here.

Wednesday Briefs™ is a trademark of populyst and its owner. Copyright © 2020, 2021 populyst. All Rights Reserved.

It’s the Demography, Stupid

11 November 2014

(See also the post Demography Charts – 1)

America’s anemic recovery can be explained by its slowing demographics.

Politicians tend to overstate the positive impact of their policies on the economy and to also exaggerate the negative impact of their opponents’ policies. In all likelihood, there are other more potent factors at work.

Instead of GDP, we look at wealth creation as the main measure of the economy. GDP measures economic activity which means that building roads to nowhere is a positive contributor to GDP in the near term because of the jobs provided and the material and services purchased. But building roads to nowhere is a waste of money. By contrast, wealth creation accounts for the return on invested capital and differentiates between good and bad projects.

And wealth creation has three main drivers: innovation, demographics and the economy’s institutional framework.

To illustrate the importance of innovation, consider a country where there is little innovation and therefore little creation of intellectual property assets. The main assets in such an economy are hard assets, such as real estate, natural resources and the like. Unless there is strong demand for these assets from foreign markets, the economy of that country would stagnate or grow slowly with its population. Good examples of such countries today are commodity economies like the leading oil producers, industrial metal producers etc.

Now consider a country where there is innovation but where the population is small. Here the amount of wealth created by innovation would be quite small unless there is strong foreign demand for the products and services brought about by that innovation. A new iPhone that can only be marketed to a small population would create a lot less wealth than one marketed to a large population. Good examples are Switzerland and Finland which are quite innovative, have relatively small populations but export their products in large quantities.

Innovation is back.
Innovation is back.

Finally, consider a country that has lots of smart innovators and a large population but that suffers from a poor institutional framework. It is a country where the government and citizens are corrupt, where contract law is nonexistent, where capital markets are small, where property rights are not protected. There would be little wealth creation in such a country because the innovators would emigrate to another country where they could more readily prosper from their innovations.

Since 1945, the United States has been blessed by all three major contributors to wealth creation: strong innovation, strong demographics and a stable and supportive institutional framework. The same has been true for Europe, albeit with slower innovation and slightly worse demographics. The same has been true for Japan, with still worse demographics.

So where do we stand today? Of the three main engines in the US, innovation and the framework are still going strong. But demographics have weakened in several ways. First, after declining for several decades, the dependency ratio (number of dependents per worker) has been rising since 2005. Second, the number of Americans aged 30-60, arguably the most economically active age bracket, has stagnated at a little over 120 million people. Previously, the 30-60 group had grown steadily in every year from 1978 to 2005.

Presidents Reagan and Clinton are credited with a successful economy but their years in office also benefited greatly from a falling dependency ratio. The same is true for the second President Bush until mid-decade when the dependency ratio bottomed out and started to rise.

The anemic recovery since 2008 can largely be explained by our deteriorating demographics. The US population used  to grow by 1 to 2% every year, which meant that companies could count on real growth of 1 to 2% and another 2 to 4% of inflation. But since 2007, annual population growth has fallen below 1% and inflation has also fallen. So what used to be safe annual domestic revenue growth of 3 to 6% is now looking more like 1 to 3%.


In Europe too, the dependency ratio bottomed and started to rise in the middle of the 2000s decade. In addition, Europe has been less innovative than the US in the past ten years, which explains its stock market lagging the US market. The rise of Google, Facebook and others and the resurgence of Apple have all taken place in the new millennium. Europe has had no such large success stories. Worse, one of its former superstars, Nokia, has nearly disappeared. So Europe still has a strong institutional framework but its other two engines of wealth creation are sputtering.

Japan’s dependency ratio bottomed in the early 1990s which may explain the country’s stagnation since then. It remains highly innovative but perhaps not sufficiently so in new focused companies with higher returns on capital.

The lesson of recent years is that US innovation may be strong enough to counter the effect of weakening demographics, but not strong enough to produce strong GDP growth. In addition, revenue growth in several industries has become highly dependent on exports to emerging markets. The economy and markets will do well if export demand continues to grow. But if emerging economies experience an important slowdown, our worsening demographics means that there will not be sufficient demand at home to pick up the slack.

For more data on US and world demographics, please refer to these previous posts:

The Economy’s New Boss: Demographics

Is America Heading Towards Zero Population Growth?

European GDP: What Went Wrong

Demographic Megatrends of the 21st Century

US Demographics and Housing

Facebook in a Perfect World

24 July 2014

Using Google as a comp for future growth and valuation.

Last Thursday, Jim Cramer compared Facebook (FB) to Merck (MRK). According to this Seeking Alpha report,

Cramer compared Facebook to the early days of Merck, when many were skeptical about the value of the big pharma company. Some declared Merck “the most overvalued stock on Earth,” because its valuation surpassed that of General Motors (GM). Cramer had to face angry clients when his hedge fund held Merck, but his call ended up being a winner; Merck’s products ended up becoming the biggest blockbuster drugs of all-time.


Facebook has real earnings. Cramer thinks FB could earn $3 per share for 2016, and it has 60% growth. This means it should trade at $90, a 30% premium to where it is currently trading. CEO Mark Zuckerberg outlined a multi-year growth strategy. Cramer thinks it is “preposterous” that FB is that cheap. A couple of years ago, FB had no mobile strategy, and now it is the “king of mobile.” User-generated content is good for gross margins and for advertisers. Facebook may be one of the most lucrative stocks of the era.

Generally, the business model and operations of Facebook have little in common with those of Merck. But even if Merck and Facebook were similar in some ways, it would still be possible for Cramer to be right about Merck back then and less right about Facebook today. As to Facebook’s valuation, a stock price of $75 may be cheap when we look back years from now, but only if the intervening years deliver on today’s more bullish forecasts. A long-term promise is not as good as a near-term projection. And on this and next year’s metrics, the stock certainly looks richly valued.

I mention Cramer to make a point about the way investors influence each other’s decisions. I wrote recently that, because investors and traders influence each other, for example through shows like Cramer’s Mad Money or articles on Seeking Alpha or other platforms, large cap stocks like Facebook and Apple (AAPL) could at times be mispriced by very wide margins of 20%, 30% or even 50%+. We certainly saw how this could be the case in the bubble of 1999-2000 and again in 2006-07. And we are now again in a similar ‘influence’ game which further pushes up market favorites, against a very helpful backdrop of near-zero interest rates.

Instead of Merck, the company that is probably a good comp to Facebook today is Google (GOOG). Not a perfect comp, but close enough. So here is a comparison of their evolution.

Facebook’s market cap is now very close to $200 billion. Its projected sales for 2014 are around $12 billion, which means that its stock is trading at over 16x forward sales. To many, this valuation seems justified by Facebook’s very high margins and growth rates.

Google’s market cap reached $200 billion for the first time in 2007. Back then, its revenue growth rate was similar to that of Facebook today (not far from 60%) and its margins were slightly lower. Google stock in that year traded in a range of 8 to 14x sales, significantly lower than Facebook today.

Judging by what happened in subsequent years, you could say that Google’s 2007 peak valuation was justified. Since then, Google’s market cap has doubled to exceed $400 billion today. So if you are a Facebook bull, you can pencil in $400 billion as a target market cap and $150 target stock price.

The main problem with this logic is that things rarely evolve in a linear fashion. In other words, on the road to $400 billion and $150, we may first see $100 billion and $38.

An investor who bought Google stock in late 2007 and who held until today has outperformed the S&P 500 by a wide margin. But all of this outperformance has occurred in the 18 months from July 2012 to December 2013. In 2008, Google stock crashed like everything else, falling by two thirds, and its stock did not regain its 2007 high until late 2012.

Nonetheless, despite the 2008-09 crisis, Google sales continued to grow, albeit at a lower rate. Revenue growth was 56%, 31%, and 9% in 2007, 2008 and 2009. It reaccelerated in the subsequent years 2010-2013, to 24%, 29%, 32% and 19%.

Screen Shot 2015-04-22 at 4.15.25 PM

(Tables show 2014 year to date.)

As shown in the table, these are attractive growth rates but a far cry from what they were in the years to 2007. Even if you ignore the 2008-09 collapse, sales growth at Google has been on a long-term downward trend. It is very difficult if not impossible for a large company to maintain 50% growth rates.

Screen Shot 2015-04-22 at 4.15.25 PM

Going back to Facebook, there are no doubt multiple justifications to hold the stock: the increased role of mobile, the potential for higher revenues per user, the integration of acquisitions etc. But a long position is betting on both flawless execution and a supportive macro environment.

At current valuations, the stock is priced for perfection not only at the micro level (its own operations) but also on the macro level (the overall economy and market). The odds are we will not see a major crisis like 2008 again soon, but what happens to Facebook stock if the economy slows down? Advertising is a notoriously cyclical business. What if Facebook’s own growth rate slows from 60% to a still strong 30%, as happened at Google? From a level of 16x sales, Facebook’s stock would certainly fall by 20%, 40% or more, depending on the severity of the slowdown.

Disclaimer: The views expressed here are not intended to encourage the reader to trade, buy or sell Facebook stock or any other security. The reader is responsible for any loss he may incur in such trading.