Credit Suisse's report from 2018 made some interesting points which are applicable to this day. The report focused on the analysis of $1tn in corporate savings sitting in offshore accounts, held mostly by big tech firms. One important similarity of all the big tech companies is the rise of the value of intellectual property and brands, as intangible assets relative to tangible assets.
The report's results showed that only 10% of those companies, the largest and the richest ones, controlled as much as 80% of this stash of an offshore $1tn. Among those companies, there are very familiar names: Apple Inc AAPL, Microsoft Corporation MSFT, Cisco CSCO, Oracle Corporation ORCL, Alphabet Inc GOOG, and others. The size seems to be the problem. The bigger the company gets, the harder and harder it becomes to control it and to regulate it.
Intangible Assets
All tech companies have tons of intellectual property and brands, whose valuation is by no means an easy task. No one can know with certainty how much a brand or a given intellectual property will be worth in the future. No one can evaluate it with 100% accuracy, neither the company nor the auditor or regulator.
But by increasing the values of assets, whether they are tangible or intangible, the company is altering its results.
So, in addition to increasing its profit results, the Silicon Valley giants belong to the least controlled industry on the planet. Having in mind the sizes of tech giants and their position in the stock market, if some of those seriously bubbled up assets should be downsized to lower values, that could seriously upset the whole market. In previous crises, the banks were too big to fail. Today, maybe we have a new ‘too big to fail' industry.
Offshore Cash Savings
Credit Suisse report went further away, stating that mentioned cash piles were not in cash, but in bonds. More than half of it, in corporate bonds. This little treasure was a giant bond portfolio, held by the wealthiest American companies. Previously, banks and mutual funds were the typical owners of such large financial assets. Today, those are the biggest technology companies in the world. In contrast to banks and other financial institutions, those technology companies belong to one of the least regulated industries.
Take Apple for example, one of the most profitable companies. One of Apple's reports had around $210 bn in cash, as well as a big portion of the debt, around $110 bn. Instead of using spare cash to decrease that debt, funds were sitting in offshore bond portfolio accounts for many years. Furthermore, the low level of interest rates, used to boost the economy with "easy and cheap" money, is just additionally encouraging the companies to behave like Apple.
Conclusion
History has shown us that companies or industries which were heroes in the period before the downturns, ended up being the bad guys who caused the downturns, as they were too big and too complex to understand and consequently regulate. They thought they could play on their own terms. The truth is that slumps tend to make an appearance once every decade.
The previous one was caused by ‘too big to fail' banks and financial institutions, triggering the plunge of stock portfolios, salaries, and home prices. That was after the same banks and financial institutions have been pushing up the market for a while. Today, tech companies are responsible for leading the market growth. Does this mean we're in for a similar scenario? Hopefully not, but the above similarities are too obvious be ignored.
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