Thirty years ago, it was simple… Now, it’s as if somebody took corporations and exposed them to atomic bomb test radiation.
Something strange has happened to capitalism. Something weird, horrible, and freakish. If you don’t know what I’m talking about, look at the biggest companies in America:
Capitalism has undergone a mutation. It has become unrecognizable.
When I see the 1987 Top 12 list, I can tell you what every one of those companies did. Today I’m utterly ignorant about what seven of the Top 12 companies really do.
Not only am I confused by the purpose of these corporations, I’m also perplexed by how – and indeed, if – they make a measurable profit. Plus, I’m dumbfounded by the way they’re priced on the stock market. Just look at the below chart…
Thirty years ago, it was simple…
GM, Ford, and Chrysler made the cars. Exxon, Mobil, Texaco, and Chevron pumped the gas to make the cars go. Where the cars went was shopping. GE manufactured the things you went shopping for – washers, dryers, stoves, toaster ovens, locomotives, jet engines, etc. At work, you used IBM. They had typewriters you could pound on in a way that would send a modern touchscreen straight to the Mumbai e-waste disposal. They had real computers, too – not these flimsy silicon chip-dip kind, but big manly computers that took up whole rooms, spewed out punch cards, and helped put an American on the moon. While you were smoking a Marlboro cigarette, you called home on an AT&T phone that you never lost because it weighed as much as a boat anchor, and you couldn’t accidently drop it in the toilet because the cord wouldn’t reach that far. DuPont made the glue that held it all together and lots of other chemicals too, back when “Better Living Through Chemistry” was still considered a good idea.
Now… it’s as if somebody took corporations and exposed them to atomic bomb test radiation in a cheap Japanese science-fiction movie and out sprang Godzilla, Mothra, and Rodan – or, as investors call them: Amazon, Facebook, and Google.
Thirty years is a brief period in terms of economic evolution. For example, there was no evolution from the fall of the Roman Empire in 476 A.D. until the increased crop yields and trade of the 1400s. Industrialization supposedly happened at blinding speed, but in fact took 200 years to reach the far corners of the globe.
I am frightened of fast-changing mutant corporations like what we have today. They fall into four scary categories:
As far as I’m concerned, what Apple, Google, and especially Facebook sell are annoyance, noise, and distraction. I’ve got kids and dogs. Annoyance, noise, and distraction are unlimited free goods at my house.
I don’t want to see photos of the adorable grandchildren of everyone I’ve ever met and videos of the cute things their cats do. Even less do I want to hear about the world’s dullest experiences and most banal thoughts – which people save up for their Facebook postings. If Facebook wants to make money from me, I’ll pay the website handsomely to go the hell away.
Google is a very handy device for getting facts… If you don’t mind the facts being wrong. I’m a journalist, so I’m in constant need of wrong facts and therefore use Google all the time. So it’s good for me. But how good it is for you, a reader of journalism, is another question.
Google has caused my research skills to degenerate to the point where I have to sing the kindergarten “ABC Song” to use the dictionary. Google is like the worst librarian in the world. You ask her a question and she says, “Well, there’s a big pile of books over there, but we haven’t gotten around to sorting them. However, we do have a tattooed skinhead and a Bernie supporter with a braided beard and a pink pussy hat in the reading room and you could ask them.”
Then there’s Apple with its gosh-darned iPhone. I hate talking on the telephone. I consider being unable to come to the phone to be one of life’s greatest luxuries. The last thing I want is a telephone that fits in my pocket, can find me wherever I go, fills my head with things like Trump tweets, bowling tournament scores, and how I didn’t win the lottery again, and calls me a cab because my wife says I should quit drinking and get home right now.
I want a phone the size of a cement block, like AT&T used to make, and I want it connected to an answering machine that says I can’t come to the phone.
I understand – sort of – why Microsoft is successful. It makes the most popular desktop-computer operating system.
What I don’t understand is how to make that operating system quit operating. Every time I click my mouse I am confronted with complexities that wouldn’t be out of place in a Rube Goldberg cartoon.
A computer is a fundamentally simple device – a combination IBM Selectric, filing cabinet, post office, and pocket calculator. But if I make one wrong move on my computer, the filing cabinet mails me the Selectric and the mailman drops the package on my desk – smashing the pocket calculator.
There is no excuse for the complications of the Microsoft operating system. I picture a room the size of Redmond, Washington, full of pear-shaped nerds adding “features” because they can. I want to lock each of them in a small room with an IBM Selectric, a filing cabinet, a mail slot, and a pocket calculator… and not let them out until my computer is as simple to use as my automatic garage-door opener.
There is also no excuse for Microsoft making the most popular desktop-computer operating system and then punting the mobile-device operating-system ball to Google’s Android OS on first down in the mobile-device game. Why is Microsoft considered a blue-chip stock again?
JPMorgan Chase, Wells Fargo, and Bank of America are three more WTFs. Not because of the companies themselves or their fundamentals (low P/E ratios and some dividend yield, see chart). But I have my doubts about whether banks should be among the American corporations with the highest market capitalizations. In fact, I have my doubts about whether banks should be publicly traded corporations at all – instead of partnerships, as they once were. Before 1970, the New York Stock Exchange (NYSE) banned banks from being listed. Maybe the NYSE was right the first time.
All corporations face what’s known as the “agency problem.” The goals and interests of management can conflict with the goals and interests of proprietors.
It’s a familiar enough problem. It happens around the house. Let’s say I have a teenage daughter. (And I do. But she’s remarkably well-behaved… Either that or she’s incredibly discreet. Anyway, I’m not using her as an example. I’m using a hypothetical teenage daughter.)
My hypothetical teenage daughter is at an age where she insists that she can manage her own life. Her goal is to have a good time. Her interests are clothes, boys, and loud music with obscene lyrics.
Being a dad, I feel a proprietary interest in my daughter. My goal is to get her through college, settled in her career, and, eventually, happily married with adorable grandchildren whose pictures I can post on Facebook. My other interests are not paying for too many of her clothes with my credit card, letting the boys know I have a shotgun, and getting my daughter to turn down her mobile device so that I can’t hear the obscene lyrics leaking out her earbuds.
Bankers, as we learned during the 2008 financial crisis, can be every bit as bad as hypothetical teenage daughters – except they weren’t being hypothetical, they were going broke.
For all sorts of reasons – pay, perks, ego, stock-option greed – the senior managers of banks got themselves involved in financial transactions that no ordinary stockholder could understand. And as it turned out, no senior manager could understand either.
Because the banks were owned by clueless stockholders, the banks’ clueless senior managers were allowed to forget what banks are supposed to do – move money around in a safe and wise manner, taking a little cut for their trouble.
Then there are two WTFs who aren’t answering attempts to contact them and determine what their mission is. “Earth to General Electric… “ “Earth to Berkshire Hathaway… “
Search for “General Electric” and something like this comes up (see below).
What does all that even mean?
Out in the Midwest where I come from, the last “connecting wind to the land” tweet from GE would mean, “Hurry up, Maw, get down in the root cellar. There’s a twister a-coming!”
“Builds, powers, moves & cures the world”? According to this description, GE produces accretion of dust and gas in the early solar system 4.6 billion years ago then asks, “Did the earth move for you too?” And when our planet suffers from climate ills, we’re supposed to call GE CEO Jeff Immelt – who just got fired – and he’ll tell us, “Take two asteroids and call me in the morning.” As for “powers… the world,” I guess we’re supposed to think that the sun shines out of GE’s…
How is a retail investor supposed to think anything cogent about this kind of company?
And I’m not even touching on GE’s almost innumerable subsidiaries… such as GE Capital (which GE is trying like hell to get rid of), GE Automation & Controls, GE Wind Energy to make us less dependent on petroleum, Baker Hughes oil-field services to make us more dependent, GE Jenbacher that manufactures “cogeneration modules” whatever those may be, and Amersham with its “radioactive material for peacetime uses.” (Got a termite problem? Contact Bikini Atoll Pest Control.)
Berkshire Hathaway is even more of a dog’s breakfast. I count 64 companies it controls, but it’s early in the day and the number may have gone up by now.
Except for a group of insurance providers, most of the businesses the Berkshire companies are in bear a chalk-to-cheese relationship to the businesses the other Berkshire companies are in… Here are 10 of them:
2. The Omaha World-Herald
3. Acme Brick
4. Fruit of the Loom
5. Borsheims Fine Jewelry
7. Burlington Northern Santa Fe Railway
8. Dairy Queen
9. Benjamin Moore
There’s a story in there somewhere…
“Hop on a G3 and get here quick because – stop the presses – I’m marrying a brick. Need some new underwear. Already have the ring. The little lizard was going to be my best man, but he got run over by a train. We’ll serve ice cream cones at the reception then go out and paint the town red. It will recharge your batteries!”
But what’s the story for the retail investor? It would take a genius to keep track of all this different stuff. Maybe Warren Buffett is a genius. But he’ll be an 87-year-old genius on August 30. Think he remembers everything he’s bought?
The Price Puzzlers
Amazon, which is basically a glorified yard sale, doesn’t pay a dividend, had a net income return of 0.5% on its market capitalization, and has a P/E of 192 (see chart).
Meanwhile Apple, which is considered to be a legendarily brilliant and innovative company, does pay a dividend, had a 6% net income return, and has a P/E of 17.6.
What’s happening here is far beyond the brain power of an old liberal-arts major like me. But I’m told Apple’s stock price is low because gigantic investment funds already own so much Apple stock that they can’t stay diversified unless they buy something else.
That might cause a more conspiracy-minded person than myself to wonder how much freedom there really is in the Free Market.
The For-Profit Not-For-Profits
Four of America’s top 12 companies – Amazon, Facebook, Google, and Berkshire Hathaway – don’t pay dividends. All of them have net income (see chart). Even famed burner-through-capital Amazon had 2016 net income in excess of $2 billion and Berkshire Hathaway had 2016 net income in excess of $24 billion. Not a penny of it went to shareholders.
I understand the idea behind plowing profits back into the business. There’s a website called “the balance” with an “Investing for Beginners” feature that uses your dad’s and your uncle’s apple orchard as an example.
My dad and my uncle didn’t sell apples, they sold cars. Plow your profits back into that business and you’re buying the cars you just sold.
The motives, strategies, and tactics behind “Zero-Profit Corporations” are well-explored in this issue of American Consequences. But I’ll throw in my two cents anyway. (That’s more than you’ll get from Berkshire Hathaway dividends.)
Buying a stock only because I expect someone else to buy the stock later for a higher price makes me feel slightly like I’ve been plopped down in Giza between Khufu and Khafre in the land of pyramid schemes.
Never taking a profit from a healthy business also reminds me – more than slightly – of my supposed savings account when I was a kid. Every Christmas and birthday $5 bill that I received… along with all of what I was paid for mowing the neighbor’s lawn… went in there. The balance was several hundred dollars. “We’re saving for your college education,” my mother would say.
Maybe we were saving for my college education. But I was saving for a Wham-O slingshot.
I had $2.38 in an old Prince Albert can, mostly from pop-bottle deposits and change found under the sofa cushions. To this day, I believe I would have been happier with taking one less English Lit. course and shooting a lot more squirrels and pigeons. And I could have done it if Mom had at least let me collect my savings-account interest payments.
Furthermore, Jeff Bezos, Mark Zuckerberg, Larry Page, Sergey Brin, and Warren Buffett don’t seem to care about money as much as I do. Too much trouble counting it, probably.
Warren Buffett lives very modestly and has promised to leave all his money to charity.
I have more respect and affection for money than that… I care.
Would you let somebody who didn’t care about kids take care of your kids? Allow them to jump off roofs, tease vicious dogs, and stick silverware into electric outlets? I rest my case.
Fighting the Mutants
Thankfully there are a couple of old school holdovers in the Top 12. ExxonMobil is standing by to wash your windshield and check your oil – or these days, to feed you fatty snacks at the gas-station convenience store.
XOM’s P/E (see chart) is a non-insane 33.7 and its dividend yield is a fat 3.8%… Not bad for the middle of an oil bust.
Oil prices may never again reach a peak like 1979 when the sweater-wearing peanut farmer with the thermostat set to 60 was in the Oval Office. Or a peak like 2008 when China’s tiger and India’s… sacred cow, I guess… were first unleashed. But given what a cost/benefit flop “alternative energy” has been, it will be a long time before Exxon gas stations are selling bottled water for more than unleaded premium.
Johnson & Johnson, the pharmaceutical, medical-device, and personal-care products company, seems fairly priced (see chart) at a P/E of 22.6 with a 2.5% dividend yield. That’s about where the current Dow Jones averages are – a P/E of 21 and average dividend yield of 2.5%.
JNJ makes baby powder, Band-Aids, and Tylenol. People aren’t going to stop having kids. Kids aren’t going to stop having skinned knees. And there are going to be some big headaches if the most bizarre of the Mutants – Amazon, 192 P/E, 0% dividend yield – go the way of Godzilla in Godzilla, King of the Monsters (1954). Spoiler alert: Dr. Serizawa’s Oxygen Destroyer.
We’d better get Dr. Serizawa back to work.
“Mutant Capitalism” is terrifying. But fortunately, what’s immutable is capital itself. Capital is the accumulation of wealth (of any kind, including skill and knowledge) to be used for producing more wealth.
We don’t blow all our money, time, and smarts making whoopee. Instead, we deny ourselves a little bit of fun. We set aside (or we should set aside) some cash, some work hours, and some intelligence to make ourselves richer, more leisured, and increasingly savvy in the future.
This has been going on since cave people deliberately chipped extra flint spear points to trade with for the smoked mammoth slices the neighbors in the cave next door intentionally didn’t eat all of.
And it will continue to go on until we are taking our excess gray matter to the brain farm to grow an additional medulla oblongata to exchange with space aliens for the Whoopee Rays they didn’t use up.
Capitalism, on the other hand, is the means by which capital is put to work. And capitalism is capable of taking some very strange forms.
For example, socialism, communism, fascism, and crony capitalism are all types of capitalism. The difference being that, unlike free-market capitalism, the capital isn’t primarily held by private parties and/or isn’t put to work according to market principles of supply and demand.
• With socialism, the capital is held by dopey, dreamy, featherhead political and bureaucratic know-it-alls who are – occasionally – well-meaning but who are always self-serving.
• With communism, the capital is held by murderous totalitarian thugs.
• With fascism, you get the same thugs, plus the business people who have brown-nosed them.
• With crony capitalism, you hold the capital… but you’d better do what Putin, the Saudi royal family, or Bill and Hillary Clinton tell you to do with it.
We’ve survived the pinkos, the Reds, the Nazis, and (I hope) Bill and Hillary. If we keep a level head and put our common-sense Oxygen Destroyer to work sucking the air out of the monsters, we’ll survive Mutant Capitalism too.