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In 1990, the three biggest companies in Silicon Valley had a combined market cap of $36bn.
Today, the three biggest – Facebook, Google, and Apple – have a combined market cap that is some 60 times bigger. It’s now over $2trn.
A bitcoin is worth roughly seven times an ounce of gold.
This inexorable growth in the value of the intangible economy is even reflected in money itself – 97% of it does not exist in physical form; 97% of money is digital.
Can anything derail this trend?
The vast value of the intangible economy
This is the new world in which we live. Huge value is ascribed to the intangible economy.
A quick glance of the Sunday Times Rich List shows Britain’s next generation of millionaires and billionaires have all, almost without exception, made their money in the intangible economy somehow. Whether it’s in video games, designing apps, or some other form of tech, it doesn’t matter. They haven’t made their money in agriculture, mining, traditional industry or manufacturing.
Even when it comes to protecting wealth, the same rule now applies. The traditional way to defend against inflation has been to hold physical assets. But in fact, the best hedge has been intangible assets.
The value is in brands and trademarks; in design, copyright and intellectual property – not in the factory or the machinery. They can both be outsourced.
The intangible economy is where the big bucks are. And there’s a very simple reason for this: scalability.
I can design a fantastic app, upload it to the app store and it can be downloaded a million or a billion times. Digital means something is endlessly and instantly copiable.
But let’s say I design a fantastic widget. I would still have to build and distribute a million or a billion of those widgets. That means workers, factories, regulations, delivery, borders – a never-ending ocean of surmountable, but nevertheless practical problems that take much longer to overcome.
And this is just widgets we are talking about. If I want to design and distribute something bigger – cars, or sofas or washing machines – the logistics get more complicated.
Then there’s the issue of employees. Those three largest companies in Silicon Valley that are 60 times more valuable today than the three largest in 1990 also employ just a quarter of the people.
The intangible economy is so much more scalable than the tangible.
And as things can happen so much more quickly, investors see a much quicker return on their investment. You don’t have to wait for the ten years or so needed before the mine starts producing. Quicker returns attract more investment – and so this virtuous circle is created.
What could swing the pendulum back towards tangible assets?
Low rates and quantitative easing (QE) have played their part too. You’d think it would drive up the value of hard assets, but instead the low-growth, cheap-capital world means that money flows towards easy returns based on hope, rather than hard ones based on results.
If rates go up, the easy tangible business plan based on delivering returns today rather than jam tomorrow might become the order of the day, but then rates might not rise significantly any time soon.
This has been the trend of the last 30 years or more. Scalability explains the ascent of tech, of Silicon Valley, of Facebook, Amazon, Apple and Google, of bitcoin – and the extraordinary sums that have been made in these sectors.
This change has even manifested itself in the values of the next generation. Generation Rent does not want the hassle of ownership. It prizes experience over material things. It would rather rent the Rolls-Royce than own it.
One economy is roaring ahead, growing at a rate of knots. The other is chugging forward, anaemic by comparison.
This trend will not last forever, of course. Nothing does. But is there any evidence that it might be changing? I can’t see any. It is the paradigm in which we live, and I can see no reason why it won’t go on for another 30 years or more.
Surely then a major investment theme in your portfolio should be investing in the intangible. That is where greater future growth lies.
I was having a conversation with a friend at the weekend. What could derail this trend? Not a lot was our view. Higher rates, of course, might slow it down. But the other idea we came up with was oil at $150 a barrel.
Neither of us could precisely put our finger on how or why, but a spike back to $150 oil and a sustained period at or above the level, would bring chaos to an economy that has got complacent about energy prices at $50 or $60 or $70.
If the oil price went to these levels – and it really is not all that far fetched – other fossil fuels would go to similar levels. Around 85% of global energy still comes from burning dirty stuff. We have got complacent about how cheap that dirty stuff is, and what it makes possible.
A spike in the price would cause a change in attitude. The value of fossil fuels would perhaps once again be recognised. That might get us to think a little bit more about real things.
But $150 is probably years away. Until then, intangibles rule the roost.