Tags: big tech | inflation | interest rates | ukraine war

George Mentz: Why Big Tech May Outperform During Higher Inflation, Interest Rates and Even War

George Mentz: Why Big Tech May Outperform During Higher Inflation, Interest Rates and Even War

George Mentz By Tuesday, 15 March 2022 03:07 PM EDT Current | Bio | Archive

With technology stock prices falling to three-year lows in many cases, there is a new set of arguments for buying tech and growth stocks. While conflicts abroad can greatly affect stock markets, many now can argue that Gig Economy stocks and funds are ripe for the picking. Further, the key fundamentals between Internet companies 22 years ago and e-business stocks today can be easily analyzed.

In 2000, the technology, i.e. the Internet Bubble, began to burst. After the Federal Reserve began raising rates, the stock market boom began to unravel. There were several reasons for the Internet Gold Rush.

  1. E-Business was predicted to grow at exponential rates.
  2. E-Commerce was going to be huge and have less overhead than Bricks and Mortar.
  3. Technology would make doing business more efficient and be cost effective reducing staff, rents, theft and more.

There are several problems that occurred when Federal Reserve rates began to rise in the late 1990s.

  1. Many e-business companies had great ideas but no revenue yet.
  2. Many Internet companies did not have the money to pay employees or office rent as rates began to rise.
  3. When Federal Reserve rates went up in the last 1990s, the cost of borrowing money went from about 6% up to 9%-10% interest rates. [i]
  4. The higher interest rates began to bankrupt or ruin the balance sheet of most Internet companies. [ii]

As a lawyer, I was licensed to practice law, but I had also been trained and licensed as a broker with the NASD (which is now FINRA).  I did testify as an expert in arbitration in 2003. During that time, my research found that technology had become almost 35% of the S&Ps value.  Thus, the S&P was not as safe as it had been in the past for investors. Many retirees lost 35% or more of their 401(k)s or annuities in 2000-2001 with index funds in their accounts.  Some arbitration panels awarded customers their principal back to the customers based on rules of:  fiduciary duty, retirement time horizon, prudent investing, and suitability issues.

In the last 12 years, the Dow Jones had gone from Obama’s 16,000 DOW in 2016 up to Trump’s recent DOW 29,000 in 2019. Why was Obama’s GDP so slow to recover?  Basically, GDP under Obama went from $14.4 trillion to $18.4 trillion; however, Obama borrowed an extra $10 Trillion to try to shore up a failing economy and employment numbers.

During Obama’s term, the NASDAQ barely reached the market valuation highs that were achieved 16 years prior in 1999 before the Clinton Market Crash of 2000, which was the largest stock market crash since the Great Depression in today’s dollars.

While a few of the Clinton years felt great, in Clinton’s last two years of office, the economy blew up with the biggest market crash since the Great Depression.  i.e. The Dot-Com Bubble Crash [iii].

Between $6 trillion and $10 trillion was lost in the Financial Crash of 2000, where many retirees never recovered from losses from over exposure to technology stocks in their funds, mutual funds, annuities and pensions. Many lost their homes, their jobs and their future. In comparison, about $6 trillion was lost in the housing crash of 2008-2009, otherwise known as the Great Recession, but more working families were hit with the housing crash under Bush and Obama.

With Trump, between six and 10 million new jobs were created -- and saved -- in three years, real wages were up to all-time highs for all ethnic groups, and job expansion for Hispanics and African Americans was at record highs.

Then, as we all know, the COVID SARS invaded the U.S. and Europe from abroad. While Trump’s travel bans and restrictions may have saved millions of lives, Trump travel bans were obstructed, and the U.S. and many of our allies have lost millions of citizens. Trump created roughly $10 trillion in new wealth between 2017 and 2019, but that wealth largely evaporated with the pandemic coming into the U.S. from abroad.

What is different in 2022 compared to 2000?

  1. Nasdaq and technology stocks & funds have largely corrected already to three-year lows.
  2. E-business companies can become extremely profitable very quickly as compared to 20 years ago.
  3. Most startups that have gone public already have income and fundamentals that are sustainable going forward.
  4. Low-cost funding is available to any company with profits or by collateralizing an equity stake in stock.
  5. Securities owned by founders can also be collateralized or used for lower-cost funding.
  6. Operating income can be sought from investors from around the world including from crypto sources.
  7. Inflation is so high right now that people are being forced to buy online to get better prices.
  8. COVID activated the young and old to learn how to shop online with laptops and phones. Some call it a silver lining. [iv]  These abilities transfer in to greater numbers of active users of e-commerce.
  9. Many of these companies can remain effective and streamline their staffs if needed or outsource activities at cheaper rates.  There are multitudes of freelancing companies now based in countries around the world.
  10. Many tech companies operate offshore and sell their stuff to the other 95% of the world’s population outside of the U.S. Some companies in the U.S. will thrive with little or no customers. International sales for many companies are huge.  [v]
  11. Cryptocurrency is being accepted by online companies, which may also boost ecommerce payments and long term sales while reducing credit card fees.
  12. Many shoppers are still avoiding or mitigating state and city taxes via Internet purchases.
  13. Tech companies are moving to lower cost tax jurisdictions every day.
  14. COVID artificially boosted many online and work-from-home stocks and funds, but those funds and stocks have come back to reasonable 2019 prices.
  15. War and conflict has created higher energy costs where Internet and Tech companies can survive this inflation more easily  over the brick and mortar companies.
  16. Many U.S. tech companies have more than half of their offices, staff and operations offshore. These costs are less due to lower rents, less benefits for employees and other cost savings.
  17. Tech companies can lean up much easier than other companies while engaging “No Time” inventory where companies only secure inventory when it is already sold to customers.
  18. Corporate, Federal and State Taxation of businesses offshore is much less than the tax rates in the U.S., which creates higher margins and return on investment (ROI) in global Internet sales.
  19. Tech companies keep minimal inventory; thus, they pay very little ad valorem taxes on items situation in various jurisdictions.
  20. With fuel prices up over 100% in 2022, buyers can save time and money with online shopping and delivery.
  21. There are tax benefits from buying online from out-of-state, and many times the buyer wouldn’t pay sales tax from out of state and country shipments.[vi]

George Mentz JD MBA CILS is a CWM Chartered Wealth Manager ®, global speaker - educator, tax-economist, international lawyer and CEO of the GAFM Global Academy of Finance & Management ®. The GAFM is an ESQ EU accredited graduate body that offers certification training in 150+ nations under ISO 21001 and ISO 9001 standards. Mentz is also an award winning author and graduate law professor of wealth management in the USA.

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With technology stock prices falling to 3 year lows in many cases, there is a new set of arguments for buying tech and growth stocks.
big tech, inflation, interest rates, ukraine war
Tuesday, 15 March 2022 03:07 PM
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