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Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: woke capitalism, it’s here to stay; working from home, not the route to promotion; Germany’s energy mess (and India’s coal); bubble update; and Cisco’s hard lesson (now being ignored). To sign up for the Capital Note, follow this link.
Training the Cadres
The stakeholder capitalism advocated by the Business Roundtable, the World Economic Forum (“Davos”), and other groupings of oligarchs on the make, is, at heart, an expression of corporatism, an ideology based around the idea that society should be run in a way that recognizes the importance of interest groups rather than individuals. Thus, when it comes to determining what a company is for, shareholders are just one group of “stakeholders” who have to compete for management’s attention.
Corporatism can be a relatively benign influence — its traces are all over the formation of West Germany’s social market economy — or it can be something infinitely more sinister: It was a mainstay of fascist (or proto-fascist) theory (if not necessarily practice) both in the inter-war years and, more obliquely, in Argentina under Perón. Arguably, it has become the unspoken economic ideology of a regime in Beijing that increasingly looks more fascist than communist.
The structure of corporatism is one thing, but the uses to which that structure is put do not have to follow any one prescription. It is quite possible to have a corporatism that is drifting away from democracy but which has no interest in jackboots or the exaltation of the nation state. While those building the emerging corporatist state in the U.S. (and elsewhere in the West) may be busy designing it in a way that bypasses the ballot box, their objectives are more red (or reddish) or green than anything that Mussolini would have supported. We can see this in the way that stakeholder capitalism intertwines with both “socially responsible” investing and the related phenomenon of “woke” capitalism.
In the case of the last, companies may attempt to rebrand themselves as woke, perhaps through what they sell, or how they sell it. If this is a purely a cynical exercise in marketing designed to, say, win over a millennial client base, that might be something to be applauded, if nervously (propaganda has consequences), but something deeper appears to be going on. It is increasingly obvious that more and more companies are, quite genuinely, going woke, and that this is no longer confined to what was once (wrongly) thought as the harmless HR department, but is rising far up the management chain. And it is an ascent that shows no signs of slowing down. On the contrary, as younger generations who have been through the reworked universities of the last decade assume greater power within corporate America, this process is likely to intensify. The idea that people will grow out of it will prove, I suspect, to be wishful thinking. It is true that youthful conviction (mercifully) can often fade, but self-interest rarely does, and playing woke is likely to be the route to promotion, power, and cash, not only for now, but for the foreseeable future, as this way of thinking becomes more deeply entrenched within corporations.
Understanding that fact makes an already disturbing article by Bari Weiss for the Manhattan Institute’s City Journal more worrying still. The whole piece (the title, “The Miseducation of America’s Elites” is something of a spoiler) is well worth reading in full but, when looking at the changing American corporation, I would focus on this. To set the stage, Weiss opens with a group of “well-off Los Angeles parents who send their children to Harvard-Westlake, the most prestigious private school in the city.”
By normal American standards, they are quite wealthy. By the standards of Harvard-Westlake, they are average. These are two-career couples who credit their own success not to family connections or inherited wealth but to their own education. So it strikes them as something more than ironic that a school that costs more than $40,000 a year—a school with Charlie Munger, Warren Buffett’s right hand, and Sarah Murdoch, wife of Lachlan and Rupert’s daughter-in-law, on its board—is teaching students that capitalism is evil.
For most parents, the demonization of capitalism is the least of it. They say that their children tell them they’re afraid to speak up in class. Most of all, they worry that the school’s new plan to become an “anti-racist institution”—unveiled this July, in a 20-page document—is making their kids fixate on race and attach importance to it in ways that strike them as grotesque.
“I grew up in L.A., and the Harvard School definitely struggled with diversity issues. The stories some have expressed since the summer seem totally legitimate,” says one of the fathers. He says he doesn’t have a problem with the school making greater efforts to redress past wrongs, including by bringing more minority voices into the curriculum. What he has a problem with is a movement that tells his children that America is a bad country and that they bear collective racial guilt.
“They are making my son feel like a racist because of the pigmentation of his skin,” one mother says. Another poses a question to the group: “How does focusing a spotlight on race fix how kids talk to one another? Why can’t they just all be Wolverines?” (Harvard-Westlake has declined to comment.)
This Harvard-Westlake parents’ group is one of many organizing quietly around the country to fight what it describes as an ideological movement that has taken over their schools. This story is based on interviews with more than two dozen of these dissenters—teachers, parents, and children—at elite prep schools in two of the bluest states in the country: New York and California . . .
That fear is shared, deeply, by the children. For them, it’s not just the fear of getting a bad grade or getting turned down for a college recommendation, though that fear is potent. It’s the fear of social shaming. “If you publish my name, it would ruin my life. People would attack me for even questioning this ideology. I don’t even want people knowing I’m a capitalist,” a student at the Fieldston School in New York City told me, in a comment echoed by other students I spoke with. (Fieldston declined to comment for this article.) “The kids are scared of other kids,” says one Harvard-Westlake mother.
Much of the article is devoted to the discomfort of the parents, “trapped” (I suppose by credentialism: the importance of getting their kids into the right university) into shelling out large sums to educate their children in a manner of which they profoundly disapprove (although, as Weiss notes, this sort of teaching — to use a kind word — “is increasingly prevalent at the local public school”).
As for the children themselves, some will be damaged, perhaps severely, by the nonsense that they are taught, but as there are, I imagine, many bright kids among them, they will, for the most part, learn what to say, and what not to say. Some will believe, and others will work out how to fake that belief and fake it very well. And then, prep schools being what they are, many of these youngsters will go to elite colleges, where the process will be intensified — wash, rinse, and repeat. And they will emerge as even more-fanatical believers, or as doubly deep-died cynics who have grasped that wokeness may be nonsense, but that it is also for winners.
Weiss:
Power in America now comes from speaking woke, a highly complex and ever-evolving language. . . . Woe betide the working-class kid who arrives in college and uses Latino instead of “Latinx,” or who stumbles conjugating verbs because a classmate prefers to use the pronouns they/them. Fluency in woke is an effective class marker and key for these princelings to retain status in university and beyond.
And “beyond” for these princelings often includes positions in America’s leading businesses, where the rules too are changing:
Bain & Company is tweeting about “Womxn’s History Month.” . . . Coca-Cola employees were recently instructed to “be less white.” You cannot buy or sell the newly problematic Dr. Seuss titles on eBay. This ideology isn’t speaking truth to power. It is the power.
The ambitious and the talented will get the message.
Woke capitalism looks like it is going to be here for a while.
Around the Web
Working from home: Not the route to promotion
Ross Clark in The Daily Telegraph:
For every business planning to shrink its London office footprint, there is at least another which is quietly expanding it. Google recently added a satellite office to its Kings Cross HQ. Netflix has trebled its London office space. TikTok has taken out a new HQ at Farringdon. So it goes on. No matter what some of those businesses have said about home-working over the past 12 months, I don’t think they are planning to fill these new offices entirely with pot plants.
With due respect, BP, Lloyds, HSBC and the like are not exactly the most dynamic, fast-growing of businesses. Maybe their long-term future is to have fewer employees full stop. Either way, there is a paradox emerging: while old established, bricks and mortar businesses enthuse about remote working, tech companies are rushing to put down roots, perhaps while office space is going cheap.
What makes them think they will need large offices? Possibly because they have worked out that working from home – or the Goldilocks compromise – is not going to be best way to attract ambitious staff, nor to get the best out of them. There may be plenty of people looking forward to spending a more relaxed working life split between spreadsheets and making soda bread, but you can bet that they are not the ones who are going to be filling senior positions in a decade’s time.
What we are likely to see is the emergence of two classes of white collar workers: the working-from-home brigade, which is motivated more by work-life balance than career advancement, and the always-at-work brigade, which is prepared to sacrifice leisure time and the chance to watch butterflies in their suburban gardens in order to achieve their ambitions. It isn’t hard to work out which will become the officer class – the latter, who will have grabbed the best, most-visible hot-desks for their own.
This is not to say there is not virtue in seeking work-life balance. After all, we couldn’t all reach the top of a corporate pyramid even if we wanted to. It may well be that many of those who choose the working-from-home option will reach the end of their working lives feeling more fulfilled and in better health than those who insist on going into the office all the time. But it seems to me that it is pretty inevitable that while some eagerly take up the chance to work from home, ambitious people will seek to take advantage of their absence from the office: to catch the eye of their bosses, signal their keenness and intent – and to win promotion ahead of their more relaxed colleagues. Anyone prediction the end of the office may end up disappointed.
Digging a deeper hole: Germany’s energy mess
Ten years after the Fukushima nuclear disaster in Japan, German environment minister Svenja Schulze insisted that the country does not consider nuclear energy an option for low-carbon power production. “Nuclear power is neither safe nor clean,” Schulze said, rejecting the “myth” that the technology could help to find a way out of the climate crisis. “The future is for renewable energy,” she said. Germany’s phase-out decision, originally taken in the year 2000 and confirmed after the 2011 meltdown of the power plant in Japan, had “brought peace to a social conflict that raged for decades” and helped minimise a major risk at least nationally, Schulze said.
Nuclear power could not be in Germany’s interest when it is generated abroad either, “be it in our immediate neighbourhood, in the EU or globally”, the minister said, adding that “our work has not ended with the German nuclear exit”. The environment ministry published a position paper listing 12 key objectives required to reduce nuclear risk even further. They include actions under the three sections of a) completing the German nuclear phase-out: Close nuclear plants, promote final storage, accelerate the expansion of renewable energies; b) reducing nuclear risks in Europe, strengthen cooperation; and c) increasing nuclear safety worldwide, maintain nuclear risk competence and provide appropriate information.
With a view to the decision by Germany’s largest neighbour country France to extend the running time of old nuclear reactors, she said that while the “principle of energy sovereignty” would have to be respected, there are “technical and economic limits to retrofitting”. Especially plants near the German border would be “monitored very closely and critically”, the minister said, adding that the German government expected France to enable “comprehensive cross-border cooperation” on the matter. More than half of all EU states do not use nuclear power at all or are considering a phase-out, Schulze said.
Meanwhile . . .
Coal-fired power generation is projected to surge in India as the expanding wave of renewable energy capacity cannot keep up with electrification growth in the South Asian country, home to the world’s second biggest population.
India’s coal-fired power generation fell to a five-year low of 1,064 terawatt-hours (TWh) in 2020 due to the Covid-19-induced slowdown. However, this was only a dip, as coal still makes up a gigantic 70% of the country’s total electricity production. Significantly, coal-fired power is set to come back with a vengeance, expanding by 43% to 1,523 TWh in 2037, when Rystad Energy expects coal power to finally peak.
Still, the surge in coal consumption is not unexpected. India’s power generation is set to grow exponentially to 3,565 TWh by 2037, more than double the level in 2020. Electricity production will already exceed 2,000 TWh from 2025 and is set to break the 3,000 TWh ceiling from 2034, as a result of an electrification boost and rapid economic expansion, the latest research from Rystad shows.
Bubble, What Bubble?
After a flurry of more than 180 bids in the final hour, a JPG file made by Mike Winkelmann, the digital artist known as Beeple, was sold on Thursday by Christie’s in an online auction for $69.3 million with fees. The price was a new high for an artwork that exists only digitally, beating auction records for physical paintings by museum-valorized greats like J.M.W. Turner, Georges Seurat and Francisco Goya. Bidding at the two-week Beeple sale, consisting of just one lot, began at $100.
With seconds remaining, the work was set to sell for less than $30 million, but a last-moment cascade of bids prompted a two-minute extension of the auction and pushed the final price over $60 million. Rebecca Riegelhaupt, a Christie’s spokeswoman, said 33 active bidders had contested the work, adding that the result was the third-highest auction price achieved for a living artist, after Jeff Koons and David Hockney.
Billed by the auction house as “a unique work in the history of digital art,” “Everydays — The First 5000 Days” is a collage of all the images that Beeple has been posting online each day since 2007. The artist, who has collaborated with Louis Vuitton and pop stars like Justin Bieber and Katy Perry, uses software to create an irreverent visual commentary on 21st century life.
Beeple’s collaged JPG was made, or “minted,” in February as a “nonfungible token,” or NFT. A secure network of computer systems that records the sale on a digital ledger, known as a blockchain, gives buyers proof of authenticity and ownership. Most pay with the Ethereum cryptocurrency. “Everydays” was the first NFT sold by Christie’s, and it offered to accept payment in Ethereum, another first for the 255-year-old auction house.
Random Walk
Cisco’s hard lesson (now being ignored)
Jamie Powell, writing for the FT’s Alphaville:
At the turn of the new millennium, the IT hardware, software and networking equipment company was one of the hottest stocks in the US equity market. From the beginning of 1999 to March 2000 the shares rose 236 per cent to a market capitalisation of $555bn, or $80.06 per share, backed by a crazed-enthusiasm for the technological shifts bought about by the internet. The thesis was solid: as a provider of networking equipment for both telecom players and other businesses, Cisco was the shovel-seller in a dot com gold rush. What could go wrong?
And, some might argue, it had the numbers to back it up. In the 2000 financial year, Cisco posted revenue growth of 55 per cent, gross margins of 66 per cent and had a return-on-equity of 14 per cent. Sure, top-line growth had slowed from 1994 when revenue had doubled, but as one of the few players sitting at the intersection of several technological trends, it surely was going to be one of the big winners of the new millennium.
Well yes and no. In one way, investors were right. Cisco was a big winner. Over the next 21 years, Cisco’s revenues grew four fold to $49bn, with profits quintupling to $11bn. Return-on-equity even improved, with the figure averaging 17 per cent over the next two decades, 3 percentage points above its 2000 number.
The problem was the share price. It was, simply, too damn high. At the March 2000 peak, Cisco’s price-to-earnings ratio stood at 201 times, its enterprise value to sales at 31 times and its price-to-free cash flow at 176 times. By anyone’s standards, the valuation was over-egged.
And, suddenly, everyone cottoned on. Over the next two years, Cisco’s share price collapsed 80 per cent, a total market capitalisation loss of $431bn, as the dot com bubble deflated and telecom capital expenditure with it. Twenty-odd years later at pixel time, Cisco’s shares are at $46.25, still 42 per cent below their dot com peak.
Powell’s verdict:
Investors betting on a host of extremely expensive technology stocks today, whether it be cloud-software titan Snowflake, electric vehicle maker Tesla or fake meat purveyor Beyond Meat, would be best to heed the lesson of 2000: era-defining businesses, at the wrong price, make for terrible investments.
— A.S.
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