Tech sector index nearing all-time highs

An important measure of the strength of the tech sector has been climbing rapidly over the past two years and surpassed its turn of the millennium level in June. This doesn’t mean there is another tech bubble, but investors should take heed. 

From 1995 to 2000, millions of US households purchased personal computers and used them to connect to the internet for the first time. It was apparent at the time that new technologies, often from government origins, were bringing massive changes. Private investment poured into the tech sector, including to many companies that had never generated a profit and even some without revenue. Money coming into the sector began to overflow and pour back out in the form of lavish executive spending and absurd demonstrations of wealth. When the speculative “dot-com” bubble burst, people lost jobs and retirement savings.

The tech pulse index, produced by the Federal Reserve Bank of San Francisco, tracks what is going on in the tech sector by looking at relevant changes in investment, employment, industrial production, and consumer spending. The index nearly tripled from 1995 to its peak in October 2000, growing at an average annualized rate of 18.7 percent. By the bubble’s trough in 2003, the measure had fallen to nearly half of its peak. From the 2003 trough until the recent uptick in 2016 the index increased at an average annualized rate of 2.9 percent.


The tech pulse has been on a tear since 2016. From May 2016 to the latest data, covering July 2018, the index has increased at an average annualized rate of 11.4 percent. In June, the index passed its January 2000 level, and it is currently about 13 percent below the all-time high achieved at the peak of the bubble.

There are many similarities between the current tech boom and the dot-com bubble, such as: absurd demonstrations of wealth, the failure to convert money coming in into new productive assets, a backdrop of rising interests rates, and highly-valued companies not generating profit. In some cases, valuations are so high that it seems people are betting not necessarily on tech companies ability to create game-changing technology, which is already priced in, but on their ability to either force competitors to fail or to absorb competitors until market share allows for monopoly prices and monopsony wages. In some cases, the competitor is a public good, such as local and regional public transportation in the case of Uber and Telsa, respectively. Once our public asset is taken over or goes broke and stops operating, the private alternative can raise its prices and allow its quality to deteriorate.

In the case of Amazon, which currently generates a profit mostly through its web services division, investors seem to be betting that eventually the company will have enough power to raise prices without consumers being able (or willing) to shop elsewhere. It’s also worth noting that Amazon got where it is by not paying sales tax. Apple and Alphabet (Google), which already generate massive amounts of profit, still benefit excessively from not paying taxes.

While I don’t know whether the current tech boom is a bubble, and I lean towards thinking it is not, it’s always good to be cautious and to pay attention to growth rates, like those captured in the very clever tech pulse index (here’s info on the methodology). In general, investors should be wary about buying into companies that are already expensive and where the remaining upside requires the alignment of several events in the unknowable future.


Dashboard update: bond yields fall with renewed demand for safe assets and lower interest rate expectations

Monitor more than 80 economic indicators with the macro and markets dashboard:

United States Macroeconomic and Markets Dashboard: Updated June 11, 2016

Dashboard weekly update summary:

The latest labor market data show continued overall improvement in wages and low levels of new jobless claims, offering some consolation after the surprisingly weak May jobs report (see last week’s update). Equity market volatility increased, however, as already lackluster global growth forecasts were revised down by the World Bank. Domestic and foreign investors are shifting their portfolio of assets to fixed streams of income. Global bond yields, including on U.S. government and corporate debt, fell considerably during the past week’s rally. Investors are searching for higher returns on safe assets and responding to lower interest rate expectations.

Wages grow faster than productivity

Narrowing a long and persistent gap between productivity and wage growth, recent data suggest wages have been increasing in many industries. For most of the past decade, worker’s productivity (the output for each hour of work) grew more rapidly than their wages. The gap was in part from technology making work more efficient, but it also came from a weak labor market. An economy in which there are many qualified workers for each opening makes workers less likely to quit and more likely to accept no or small increases in wages. Companies simply do not need to rely on pay increases as a motivation when fear of unemployment is very strong.

While wage growth crawled along for a decade, productivity growth remained strong. Recent data suggest, however, that the long upward trend in productivity may be facing at least a hiccup. Meanwhile, overall measures show wages have been growing at a reasonable pace since mid-2014. Revised first quarter 2016 index data on wages and productivity shows the former nearly catching the latter.


When oil prices fall, for example, there is a transfer of wealth from the stakeholders of oil producers (who face a fall in revenue) to households (who spend less on fuel and energy). Likewise, a fall or stagnation in corporate profits can result in an increase in worker’s relative share of output. Wages, unlike commodity or stock prices, tend not to be cut. Where the past year has seen labor markets and workers’ bargaining power improve, it has seen productivity and corporate profits stagnate.


Additionally, data for the week of June 4 on new claims of joblessness was strong, with only 264,000 such claims. Overall, reasonable wage increases, an increasing labor share of output, and low headline unemployment paint a better picture for households and aggregate demand than the last jobs report’s payroll growth and participation rate data suggest. That said, labor market improvements are traditionally slow and gradual, while deterioration is rapid and steep. The June jobs report should therefore have major implications for the Fed’s rate hike decision.

Equity market volatility climbs

U.S. equity markets gains over the first four trading days of the week were erased on Friday by a large sell off. The CBOE volatility index, VIX, increased to 17 from 13.5 a week earlier. The bond rally described below suggests that there has been a flight to safety. Investors have been adjusting in part to new forecasts of generally lower global growth. Likewise, there are several large events on the horizon (brexit, elections, central bank policy divergence, etc.) suggesting fluctuations and jumps in equity markets (as well as debt and forex markets).


Bond markets rally as investors seek safe assets and interest rate expectations fall

Over the past week, U.S. treasury bonds, t-bills, and corporate bond yields fell. Elsewhere, ten-year German bund yields are nearly negative and Japanese ten-year government bond yields have fallen to -0.13%. People’s tolerance for extremely low returns is limited, and U.S. government debt offers a relatively higher return. During the past week, ten-year U.S. treasury bonds reached a four year low, partially as a result of strong foreign demand.


The spread between 10-year and 2-year treasuries sits currently at a nine-year low. Potential causes for the flat yield curve include the following: 1) investor search for return driving driving down long- and medium-duration bond yields, 2) investor fear of a business cycle downturn and a near future need for monetary easing, and 3) lower interest rate expectations as a result of recent data taking June (and potentially July) rate hikes off the table.


Check out the full dashboard for more than 80 indicators of U.S. economic activity:

U.S. Macroeconomic and Markets Dashboard, June 11, 2016

I also updated the dashboard for Japan:

Japan Macroeconomic and Markets Dashboard, June 11, 2016