Tag Archives: Plan
Google announced changes to how it will handle claims of sexual harassment among employees, including making arbitration optional for individual harassment and sexual assault claims. While additional transparency and protection for workers is a sign of progress, the change is incremental rather than transformative, because Google’s arbitration provision still prohibits collective action. Harassment claims will no longer be forced into private arbitration, but only individuals can now bring their claims before a jury.
It’s unclear whether Google, which has a history of confusing its employees around confidentiality, will make the process of opting out clear or easy. Google has become quicker and more responsive to employee concerns. Nonetheless, a publicized email from CEO Sundar Pichai and an accompanying interview in *The New York Times* still seem like the kind of gauzy public relations efforts that motivated 20,000 employees to join a protest last week to demand transparency and meaningful change. *The Times* reported last month that Google executives were allowed to leave with multimillion-dollar exit packages following credible claims of harassment against them.
Arbitration agreements can be used to obscure harassment allegations and protect serial abusers because employees are required to resolve disputes privately with an arbiter, who is typically paid by the company, rather than in open court. In Silicon Valley, forced arbitration agreements, nondisclosure agreements, and confidentiality clauses are routinely included in employment contracts, just as nondisparagement agreements are tied to severance packages and private settlements.
Organizers of last week’s walkout are disappointed with Google’s response, which they found defensive and dismissive toward their demands for equity. The changes signal the power of collective action, but organizers said they were not consulted ahead of the announcement. They said Google ignored concerns about discrimination and the rights of contract workers, indicating the company wants to continue operating as it has in the past, with transparency stressed in name rather than action. An internal Google website is tracking worker sentiment about whether demands—such as employee representation on the company’s board, which Pichai seemed to brush off—were met.
Google held a company-wide meeting for employees following the announcement. “Overall I felt the town hall was primarily the leadership team centering their own feelings as a performative show of appearing to listen, while substantively ignoring” concerns about gender and racial discrimination, and instead focusing only on harassment, says software engineer Irene Knapp, who participated in the walkout, and also introduced a shareholder proposal to tie executive pay to diversity goals at Google’s last shareholder meeting.
Knapp says it’s unclear whether Google can effectively fulfill the changes it promised. “The leadership team is congratulating itself already, before anything they’ve announced has even been launched—they wouldn’t let any of us get away with that.”
Last week’s walkout was unprecedented in terms of support from Google’s 94,000 employes. Although a wave of worker dissent has been rolling through Silicon Valley’s corporate campuses, it has been difficult to gauge what portion of the workforce shares those concerns.
Pichai’s announcement was delivered in a company-wide email. “We recognize that we have not always gotten everything right in the past and we are sincerely sorry for that. It’s clear we need to make some changes,” he wrote alongside a rough outline of plans, such as providing a transparency report “around sexual harassment investigations and outcomes.”
In the same paragraph outlining the arbitration change, Pichai stressed existing worker protections. “Google has never required confidentiality in the arbitration process and arbitration still may be the best path for a number of reasons (e.g. personal privacy) but, we recognize that choice should be up to you,” he wrote.
But over the past couple of years, both employees and enforcement officials from the Department of Labor have questioned Google’s confidentiality policies, including a lawsuit that alleges the company’s internal process for investigating leaks is illegal. “This change looks like a step in the right direction,” says James Finberg, an attorney with Altshuler Berzon pressing a class-action lawsuit alleging gender bias in pay and promotion.
“Mandatory confidential arbitration can protect repeat sexual harassers, and result in more women becoming the victims of those harassers. Permitting women to file public lawsuits lets people in the company know about the bad behavior. Lawsuits, as opposed to individual arbitration proceedings, also permit women to band together, share resources, and bring about system change,” Finberg wrote in an email to WIRED.
He says the experience of one of the named plaintiffs in his suit, Kelly Ellis, is consistent with the report in The Times. “[Ellis] ended up changing departments, and eventually leaving Google, because a senior manager had been harassing her, and the company’s response was not to move him but to move her. Many women’s careers have been harmed by management not taking such complaints seriously and saying that it was their problem, not the problem of their accuser.”
The change to its arbitration policy brings Google in line with other influential tech companies like Uber and Microsoft, which have altered their binding arbitration policies in the past couple of years in response to disturbing revelations about sexual harassment from women and, in particular, women of color.
At Uber, too, changes came only as a result of internal protest from employees like former engineer Susan Fowler, attempts to sue the company, and public scrutiny over the abhorrent behavior of Uber executives.
More Great WIRED Stories
FILE PHOTO: German Finance Minister and vice-chancellor Olaf Scholz attends the weekly cabinet meeting in Berlin, Germany August 1, 2018. REUTERS/Joachim Herrmann//File Photo
BRUSSELS (Reuters) – Germany’s Finance Minister Olaf Scholz said on Tuesday the European Commission should revise its plan for a EU-wide tax on large digital companies and stressed the new levy should be applied only if there is no global deal by the summer of 2020.
Speaking to EU finance ministers at a streamed meeting in Brussels, Scholz also said that a revised proposal should reduce the scope of the tax and exclude the sale of data and the internet of things – sectors that if included could result in the taxation of German carmakers.
Reporting by Francesco Guarascio; Editing by Matthew Mpoke Bigg
Facebook‘s ongoing crusade against election-related abuse of its platform will involve the removal of some (but not all) disinformation that’s designed to suppress voting.
The company told Reuters that it would ban false information about voting requirements. It will also flag for moderation reports that may aim to keep people away from polling stations by alleging violence or long queues—if the reports are shown to be false, they will be suppressed in people’s news feeds, but they won’t be deleted.
Facebook (fb) generally does not remove falsehoods, even if they are demonstrated, so nixing false information about voting requirements is a notable step. It banned lies about voting locations a couple years back, but this latest move involves exaggerations about voter identification requirements.
In the wake of the mass disinformation campaigns that accompanied the 2016 election, Facebook has come under a great deal of pressure over its role in combatting the problem. It has partnered with think tanks in an attempt to better spot propaganda; it has removed “inauthentic” profiles that were aiming to spread misinformation; and it has sponsored research on the overall problem.
But, while the company is willing to suppress certain kinds of “fake news,” it won’t delete the vast majority of it.
“We don’t believe we should remove things from Facebook that are shared by authentic people if they don’t violate those community standards, even if they are false,” News Feed product manager Tessa Lyons told Reuters.
Facebook’s cybersecurity policy chief, Nathaniel Gleicher, also told the news service that the company is considering banning posts that linked to hacked material, as Twitter (twtr) recently did. As shown with the hacking of the Democratic National Committee in 2016 by Russian operatives, this technique can form part of a coordinated effort to sway elections. However, the dissemination of some hacked materials is in the public interest, making this a tricky tightrope for social media firms to negotiate.
Why are so many companies (i.e. so many top executives) embracing a strategy that’s so obviously unproductive and which employees almost universally dislike?
I originally assumed the continued growth of open plan offices (now around 70% of all offices in the U.S.) was a victory of biz-blab over science–the corporate equivalent of anti-vaccination and climate change denial. However, since open plan offices are so obviously stupid, I’ve concluded there must be something deeper at work here–a hidden agenda.
What could it be?
A clue to this hidden agenda may lie in the undeniable fact that while executives want their employees to work in these open plan environments, they almost always secure private offices for themselves.
Another clue may lie in the way that the growth in open plan offices matches declines in work-from-home policies, private offices, and cubicle offices, all three of which offer varying levels of privacy for regular employees which open plan offices totally lack.
The unifying theme is that executives want employees to remain physically visible and constantly on display while simultaneously retaining their own right to remain invisible. This desire must be something that’s highly valuable to top management for them to be willing to pay such a huge tax in productivity and morale.
I’m not talking about a conspiracy. Nobody got together, twirled their metaphorical mustaches, and with a “brou-ha-ha-ha” decided to stick it to their employees. No, what’s operating here is something more subconscious, like confirmation bias. It’s a cultural thing and therefore largely unexamined, like most hidden agendas.
So, then, what deep need does the open plan office serve?
One obvious answer is the need to control the behavior of others–a need to which executives (who are often quite insecure about their ability to lead) are particularly susceptible.
However, while it is no doubt easier to control people when you can constantly look over their shoulders, that kind of monitoring can be done electronically. Since employees have no privacy rights, there’s nothing to stop companies from monitoring their behavior online. Big Brother doesn’t need to be physically present to stick his nose in your personal business.
If the deeper need is not a desire to control behavior, what could it be? Put another way, what benefit to executives get from making their employees physically visible while retaining the right to remain themselves invisible?
A well-documented effect of open plan offices is that constant visibility puts women at a disadvantage by forcing them to expend extra energy focusing on their physical appearance. However, it’s not just women who suffer from being forced into a fishbowl. Open plan environments also put at disadvantage those employees who are overweight, disabled, or in any way fail to conform to American standards of conventional attractiveness, i.e.young, thin, and light-skinned.
For example, open plan offices are vehemently hostile to older workers (Gen-X and above) because as one ages, it becomes increasingly difficult to achieve that cultural standard of conventional attractiveness.
Furthermore, some elements of open plan designs–such the ubiquitous workplace playground slide–are specifically intended to humiliate older workers. To a 20-year-old, using playground slide is merely embarrassing; to a 40-year-old it’s actively humiliating; to a 60-year-old, it’s a recipe for chiropractic appointment.
Rather than attracting millennials, open plan offices help top management eliminate or disempower workers who aren’t young, conventionally-attractive, generally light-skinned and male.–the exact demographic from whence sprang the majority of top managers. While such environments also tolerate young, conventionally-attractive females, the fishbowl-like characteristic of open plan offices guarantees that they’ll kept off-balance and “in their place” by being put constantly on display.
Seen this way, the open plan office, far from being a forward-looking vehicle to create collaboration and innovation, are actually only a manifestation of a traditional 20th century business culture which favors the dominance of older, light-skinned males, a dominance that expresses itself in everything from the demographics of Fortune 500 C-suites to the investment choices of venture capitalists.
That open plan offices tend to reinforce the patriarchy seems less surprising when you consider that the original concept of the open plan office dates not from the so-called “information age” but from the early years of 20th century, when companies–to increase paper-pushing efficiency–started arranging office workers’ desks inside large rooms called “bullpens.”
Far from being a modern invention, open plan offices have been around for nearly 100 years. Within that history, companies have experimented with other workplace designs like private offices, cubicles, and telecommuting. Those experiments, however, fallen out of favor because those experiments gave employees more privacy, which was an assault on the status quo.
Companies have continued to embraced open plan designs not because they make employees more productive (they don’t) and not because employees find them inspiring places to work (they don’t) but because open plan offices reinforce the status quo–the same status quo that’s kept women and minorities out of positions of power, and that favors a younger, cheaper, more malleable workforce that’s less likely to challenge the dominance of the traditional powers-that-be.
TOKYO (Reuters) – Japan’s Sharp Corp scrapped a plan to issue up to $ 2 billion in new shares, changing its mind in a matter of weeks after the initial announcement prompted investors to dump its shares on fears of earnings per share dilution.
In a statement on Friday, Sharp cited worries about trade frictions between the United States and China. “Due to increasing market uncertainties, the company decided that carrying on with the plan to issue new shares would not yield maximum benefit for shareholders,” it said.
Sharp shares rose 17 percent by early afternoon as investors cheered the about-face. The plans to issue new shares, announced on June 5, had sparked a sell-off on the market as they would have eroded Sharp’s earnings per share by about 20 percent.
“The shares fell after the announcement, so they decided to quit. It’s that simple,” said Masayuki Otani, chief market analyst at Securities Japan.
“To announce a new share issue, and then say ‘we changed our mind’ because the shares fell… that’s not common but not unprecedented.”
Sharp had previously said it would use funds from the new shares to buy back preferred shares that were issued to banks in return for a financial bailout in 2015. The plan was finalised just a week ago.
The company had tried to persuade investors that the issuance would benefit them in the long run, saying dilution would be more if the preferred shares were converted into regular stock.
Sharp’s shares sank 21 percent since the June 5 announcement until Friday’s open, compared with a 1 percent fall in the broader Tokyo stock market over the same period.
The company said it would continue to discuss with the banks to dissolve the preferred shares.
Sharp has been showing signs of recovery under Taiwan’s Foxconn, the world’s biggest contract manufacturer which is formally known as Hon Hai Precision Industry Co Ltd.
It recently posted its first annual net profit in four years, helped in large part by cost cuts but also by Foxconn’s sales network in China. It has also said it will buy Toshiba Corp’s personal computer business for $ 36 million.
Some analysts said the Osaka-based electronics maker had become more decisive and responsive to shareholders since it was taken over by Foxconn two years ago.
“My impression is that Sharp has really changed as a company,” said Hajime Nakajima, chief strategist at investment advisory firm AsLink, adding the management’s decision on the matter was a speedy one.
Reporting by Makiko Yamazaki; Additional reporting by Chang-Ran Kim, Shinichi Saoshiro and Yoshiyuki Osada; Writing by Ritsuko Ando; Editing by Richard Pullin and Muralikumar Anantharaman
Small satellite makers have promised to do a lot of things: change the way we communicate, change the way we see our planet, change the way we predict the weather. They’re cheaper, faster to develop, and easier to update than their bigger and more sophisticated counterparts. But for all the revolution and disruption, they tend to keep their focus close, and largely cast their eyes down.
A new NASA program, called Astrophysics Science SmallSat Studies, aims to turn their gaze outward, toward the cosmos. Early this year, NASA asked scientists how they would turn smallsats into tiny (but mighty) telescopes. Answers are due by July 13.
While the space agency has other smallsat science programs, they have mostly hemmed themselves within the solar system. “The Earth is bright; the sun is bright,” says Michael Garcia, the program officer. “So small telescopes can see things very easily.” But trying to see the dim light from objects beyond our neighborhood usually demands much bigger telescopes. See: Extremely Large Telescope, Very Large Array, Large Binocular Telescope.
In space, above the blurring of the atmosphere, telescopes don’t have to be quite as huge to do the same job as an Earthbound observatory. But they are usually bigger than smallsats. That’s why, in the call for proposals, NASA emphasizes that the new smallsat program “is intended to capitalize on the creativity in the astrophysics science community.” And, indeed, it looks like that community does have some ideas for how to do more science with less instrument.
Last year, NASA sent a call out to scientists, asking if they had ideas that required more funding than a suborbital project, and less satellite than the smallest orbital missions. The agency wasn’t offering money, or collaboration, or anything. They just wanted a five-page paper about what astrophysicists would hypothetically do if, say, they hypothetically found a wallet containing between $ 10 million and $ 35 million and had to build an astro-studies smallsat with it. “We got 55 responses,” says Garcia. “We realized, ‘Wow, people really are interested in this.’”
Scientists, for instance, could use smallsats to do time-domain astronomy: watching for bursts and flares and flashes and pulses and all the other kinds of light-waves that appear and then vanish. Those phenomena work well for smallsats because, as their names connote, they’re often bright. Astronomers could also use the instruments to do surveys—to look at the whole sky in one wavelength band, for example—or to give brighter or nearby objects the attention that other telescopes may lavish on more distant and foreign bodies.
Knowing the interest was there, the agency pushed forward and put out this February request for proposals. The winners—six to 10 of them—will together get a total of $ 1 million of sweet NASA cash and six months to design a smallsat that could get astrophysical.
“We wanted to prime the pump,” says Garcia. Because next spring, soon after the six-month study of studying ends, the agency will ask tiny telescope dreamers to submit another proposal—but this time to actually build something.
That’s already three agency requests, before anyone gets started building. But this is still faster than NASA’s normal timelines. Its bigger missions can take many years in development, and have to work exactly as planned—or else. And when you know a complicated scientific instrument has to work or else, you’re going to use tried and true technology in tried and true ways.
On smallsats? Worth mere millions? With mere months of development? “You can take more risk than something that’s big and expensive,” says Garcia. For the suborbital program, which shot instruments to near-space, for instance, the agency aimed for an 85 percent success rate.
That’s not NASA’s usual goal. For more substantial observatories or human spaceflight, the agency needs to see A+s, not Bs. But the cool thing about these reckless smallsats is that they can carry aboard technology that may eventually make it into premier missions. They can test experimental new circuitry and sensors and software. And if they fail—oh well, there goes a few million. But if they work, engineers can bring them aboard fancier missions, faster, and perhaps disrupt some of our current understanding of the cosmos.
More Great WIRED Stories
WASHINGTON (Reuters) – Wireless companies Sprint Corp and T-Mobile US Inc have informed the Federal Communications Commission that they will formally file an application asking for approval to merge on Monday, according to a document seen by Reuters.
The document, which was filed to the FCC on Thursday, also requests a protective order that would shield sensitive corporate information from public view.
The two companies, which are the third- and fourth-largest wireless carries, agreed to a $ 26 billion all-stock deal in April that they said would create thousands of jobs and help the United States beat China to creating the next generation mobile network.
Two areas of potential regulatory concern focus on the companies’ large market share for prepaid and wholesale customers.
Neither Sprint nor T-Mobile immediately responded to a request for comment.
Reporting by David Shepardson; Writing by Diane Bartz; Editing by Dan Grebler
HONG KONG (Reuters) – Two Chinese bitcoin mining equipment makers plan to raise up to $ 1 billion each from Hong Kong listings this year, riding on strong global interest in cryptocurrencies, IFR reported on Tuesday, citing people familiar with the plans.
Canaan Creative filed a listing application to the Stock Exchange of Hong Kong on Monday, IFR, a Thomson Reuters publication, reported.
Zhejiang Ebang Communication has also started working with advisers on a proposed Hong Kong float of up to $ 1 billon, reported IFR.
Ebang listed on China’s National Equities Exchange and Quotations, also known as the New Third Board, in 2015 and was
delisted from the over-the-counter market in March after announcing in January that it would seek a Hong Kong listing.
Chinese bitcoin mining equipment makers are hungry for capital to fund their growth as the heightened interest in cryptocurrencies has led to a surge in demand for their machines.
Canaan, which sells “Avalon” mining machines with customised super-fast ASIC chips, made revenue of more than 1 billion yuan in 2017. Although cryptocurrencies can be mined using regular computer equipment, specialised processing devices dedicated to mining are more effective and can generate more income.
The company’s co-chairman Jianping Kong told Reuters in April that he expected China’s push to promote the domestic chip industry to help drive growth for the company.
Credit Suisse, CMB International, Deutsche Bank and Morgan Stanley are joint sponsors for Canaan’s float, according to IFR.
Canaan Creative declined to comment. Ebang could not be immediately reached for comment. All the banks didn’t immediately respond to a request for comment.
Canaan’s IPO valuation has yet to be set as there is no listed comparable and the prices of cryptocurrencies have
fluctuated a lot, reported IFR. It was valued at $ 500 million in mid-2017, IFR said, attributing it to one of the people.
Reporting by Fiona Lau at IFR; Additional reporting by Sijia Jiang; Writing by Julie Zhu; Editing by Muralikumar Anantharaman
Video: Microservices and containers: Eight challenges to this approach
We love containers. And, for most of us, containers means Docker. As RightScale observed in its RightScale 2018 State of the Cloud report, Docker’s adoption by the industry has increased to 49 percent from 35 percent in 2017.
All’s not well in Docker-land
There’s only one problem with this: While Docker, the technology, is going great guns, Docker, the business, isn’t doing half as well.
For users, this isn’t that much of a problem. Whatever Docker the business’ future, Docker the technology is both open source and a standard. Docker could close up shop today, and you’d still be using Docker containers tomorrow.
Of course, it’s a different story if you have a contract with Docker. But, while that would prove annoying — not to mention an ugly mark on the balance sheet — it shouldn’t impact your business flow. Containers are now a well-known technology. Securing and managing them continue to be troublesome, but deploying and running them? Not so much.
Still, you should be aware that all’s not well in Docker-land.
What’s the business plan?
Docker’s problem is simple: It doesn’t have a viable business plan.
It’s not the market. According to 451 Research, “the application container market will explode over the next five years. Annual revenue is expected to increase by 4x, growing from $ 749 million in 2016 to more than $ 3.4 billon by 2021, representing a compound annual growth rate (CAGR) of 35 percent.”
But to make that revenue, you need a business that can exploit containers. So, Google, Microsoft, Amazon Web Services (AWS), and all the rest of the big public cloud companies, earn their dollars from customers eager to make the most of their server resources. Others, like Red Hat/CoreOS, Canonical, and Mirantis, provide easy-to-use container approaches for private clouds.
Docker? It provides the open-source framework for the most popular container format. That’s great, but it’s not a business plan.
Confusion is not what you want
Docker’s plan had been, according to former CEO Ben Golub, to build up a subscription business model. The driver behind its Enterprise Edition, with its three levels of service and functionality, was container orchestration using Docker Engine’s swarm mode. Docker, the company, also rebranded Docker, the open-source software, to Moby while continuing to use Docker as the name for its commercial software products.
Read also: Docker appoints industry veteran as new CEO
This led to more than a little confusion. Quick! How many of you knew Moby was now the “official” name for Docker the program? Confusion is not what you want in sales.
Mere weeks later, Golub was out, and Steve Singh, from SAP, was in.
Docker has never explained why Singh was brought in from outside to become the leader, but it doesn’t take a genius to see that core container technologies were becoming commoditized. The Cloud Native Computing Foundation (CNCF)‘s Open Container Initiative (OCI) standard turned today’s container fundamentals, including Docker containers themselves, into open standards. There wasn’t much value-add that Docker could offer its enterprise customers.
As Dave Bartoletti, a Forrester analyst, told The Register at the time: “The poor guy has to figure out how to make money at Docker. That’s not easy when a lot of people in the community just bristle at anyone trying to make money.”
The rise of Kubernetes
When your main value-add is container orchestration and everyone and their uncle has adopted another container orchestration program, what can you offer customers? Good question.
Docker has also been dealing with internal changes. Solomon Hykes, a co-founder and former CTO, was kicked upstairs to vice chairman of the board of directors and chief architect. Hykes, a controversy lightning rod, was also the public face of the company. He’s been far more quiet lately.
Red Hat’s answer was to buy Docker’s chief rival, CoreOS. That gave Red Hat not only its own container platform, but its own enterprise Kubernetes platform: Tectonic.
Docker really needs cash from customers
So, what should you do if you depend on Docker the company’s support? I’d look to my operating system and cloud vendors for help. After all, most of them, Red Hat, AWS, Google Cloud Platform, Microsoft Azure, SUSE, VMware, etc., already incorporate Docker.
Read also: Docker, IBM expand partnership
In the last few months, Docker raised another $ 75 million in venture capital. This brings the total capitalization of Docker to a rather amazing $ 250 million from ME Cloud Ventures, Benchmark, Coatue Management, Goldman Sachs, and Greylock Partners. That’s a lot of money, but I still don’t see how Docker will pay out.
Cash from investors is great, but what Docker really needs is cash from customers.
For most enterprise users, there are no real worries here. Docker or Moby, the container standard is both open source and an open standard. For Docker investors, well, that’s another story.
Trump Tax Plan’s Effect on Inflation and Interest Rates
As everyone now knows, President Trump got his corporate tax reduction bill passed in late December, lowering the tax rate on domestic business from 35% to 21%. Thus far, most investors and pundits have focused on how the lower corporate rate is a boon to big companies nationwide. Obviously, lower taxes should lead to higher profits, all else remaining equal. However, what has received a bit less attention is the effect that the tax plan will have on future interest rates and inflation. According to the Congressional Budget Office, the tax plan will add an additional $ 1.4 trillion (yes, that’s $ 14 followed by 11 zeros – or, if one prefers, 1,400 stacks of $ 1,000,000,000 each) to the federal debt over the next decade. Clearly, with the economy already strong and with debt levels already high, the tax bill should almost certainly result in higher levels of future inflation and, hence, higher future interest rates.
Indeed, it took only a month and a half after the tax plan’s passage for investors to feel the first jolts from higher inflation, as CNN reported on February 6th:
Be careful what you wish for.
Wall Street partied hard while President Trump pushed for huge business tax cuts that the economy didn’t really need. Tax cut euphoria carried the Dow a breathtaking 8,000 points to levels never seen before.
Now comes the hangover. Investors are remembering that giving lots of medicine to an already healthy economy can have side effects, namely inflation.
Those inflation fears are suddenly rocking Wall Street. They sent the Dow plummeting 1,800 points in just two trading days. The losses wiped out a quarter of the gains since Trump’s election.
For months, investors basically ignored the threat that the tax cuts might backfire, causing bond yields to spike and raising the likelihood that the Federal Reserve will have to raise interest rates faster to fight inflation.
“We have an infinite capacity for self-delusion as investors,” said Bruce McCain, chief investment strategist at Key Private Bank. “When we feel good, we don’t want to be bothered by reality.”
How Inflation Swindles the Equity Investor
So, what does all this mean for shareholders? Back in May 1977, Warren Buffett wrote an article for Fortune magazine (full article linked here) entitled “How Inflation Swindles the Equity Investor”. Given that we now appear to be heading into an era of higher inflation, it pays to take a look back at Buffett’s thoughts on the subject from nearly 41 years ago. How does Buffett describe the relationship between inflation and equities in the Fortune article? First, he refutes the previously accepted view that equities act as an effective hedge against inflation:
There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn’t going to be a big winner. You hardly need a Ph.D. in economics to figure that one out. It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms, let the politicians print money as they might. And why didn’t it turn out that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds. I know that this belief will seem eccentric to many investors. They will immediately observe that the return on a bond (the coupon) is fixed, while the return on an equity investment (the company’s earnings) can vary substantially from one year to another. True enough. But anyone who examines the aggregate returns that have been earned by companies during the postwar years will discover something extraordinary: the returns on equity have in fact not varied much at all.
Basically, Buffett takes the view that equities are disguised bonds that pay around 12% on par value (i.e., book value, or shareholders’ equity). Thus, stocks are hurt just as much as bonds when inflation rises because the price-to-book ratio (and, consequently, price-to-earnings and price-to-sales ratios) for stocks must necessarily decrease just as a bond’s price decreases in inflationary times. Conversely, the lower the relative level of inflation, the higher bond prices rise and the more P/B, P/E, and P/S multiples for stock expand (all other things being equal).
Buffett goes on to identify a key additional characteristic of low inflationary environments: they favor companies that reinvest their earnings (versus paying them out via dividends). Why? Because when stocks are trading at 3.4X book value, as they are today, every $ 1 of cash from operations that gets reinvested in said book value should translate into an incremental $ 3.40 in market value for the shareholder (versus worth just $ 1 when paid out as a dividend, or even less after payment of taxes thereon). Buffett explains further:
This characteristic of stocks – the reinvestment of part of the coupon – can be good or bad news, depending on the relative attractiveness of that 12%. The news was very good indeed in the 1950s and early 1960s. With bonds yielding only 3 or 4%, the right to reinvest automatically a portion of the equity coupon at 12% was of enormous value. Note that investors could not just invest their own money and get that 12% return. Stock prices in this period ranged far above book value, and investors were prevented by the premium prices they had to pay from directly extracting out of the underlying corporate universe whatever rate that universe was earning. You can’t pay far above par for a 12% bond and earn 12% for yourself.
But on their retained earnings, investors could earn 12%. In effect, earnings retention allowed investors to buy at book value part of an enterprise that, in the economic environment then existing, was worth a great deal more than book value.
It was a situation that left very little to be said for cash dividends and a lot to be said for earnings retention. Indeed, the more money that investors thought likely to be reinvested at the 12% rate, the more valuable they considered their reinvestment privilege, and the more they were willing to pay for it. In the early 1960s, investors eagerly paid top-scale prices for electric utilities situated in growth areas, knowing that these companies had the ability to re-invest very large proportions of their earnings. Utilities whose operating environment dictated a larger cash payout rated lower prices.
We note here that the 30-year Treasury bond yield has jumped up recently, appreciating about 45 bps over the past six months to the ~3.20% level (source):
Granted, we are not even remotely close today to the ~15% level of the early 1980s, however, for equity investors, we currently appear to be moving in the “wrong” direction, at least if one buys into Buffett’s thesis. Indeed, looking at the very long view, it appears that the ~35-year bond bull market may finally be ending (source):
Now, we know why investors have been in love with so-called “growth” companies (especially big tech companies) during the recent moderate growth, low interest rate, and low inflation environment. These tend not to pay dividends but rather reinvest all their cash flows into existing or new operating businesses. Consider Amazon (AMZN) for a moment. All operating cash flow is plowed back by Jeff Bezos either into the existing retail business or in newer businesses such as Amazon Web Services. Unfortunately, the higher interest rates rise, the lower the relative benefit of the reinvested dollar for shareholders, and the less attractive “growth” stocks look compared to stodgy dividend payers like AT&T (T) or General Motors (GM) (again, other things being equal).
Buffett notes that a “reversal” phenomenon took hold in the mid-to-late 1960s just after major institutional investors had stampeded into growth stocks at nosebleed valuations:
This heaven-on-earth situation [regarding the superiority of growth stocks in low interest rate environments] finally was “discovered” in the mid-1960s by many major investing institutions. But just as these financial elephants began trampling on one another in their rush to equities, we entered an era of accelerating inflation and higher interest rates. Quite logically, the marking-up process began to reverse itself. Rising interest rates ruthlessly reduced the value of all existing fixed-coupon investments. And as long-term corporate bond rates began moving up (eventually reaching the 10% area), both the equity return of 12% and the reinvestment “privilege” began to look different.
Are we on the precipice of a new downward revaluation of stocks, given looming inflation? Today, stocks trade around 3.4X book value, compared to 2.0X book value in 2009 and just 1X book value in 1980. Let’s take an extreme scenario where interest rates are rising significantly and investors are only willing to pay book value for the S&P 500 again, as they did at the conclusion of the last bond bear market. Obviously, a growth company that trades today at 10X book value pays no dividends and earns 15% return on equity has much more potential downside than a dividend payer trading at 1.5X book value also earning 15% return on equity, since, even if the former were to trade at a consistent 3X the market multiple of book value (as it does now), it would still lose 70% of its value in the adverse scenario (i.e., its valuation would be reduced from 10X book to 3X book). In comparison, the dividend payer now trading at 1.5X book value might trade down to 1X book in the adverse scenario, meaning it would only have 33% downside, or less than half that of the growth stock.
Wither Tech Stocks Post-Trump Tax Reform?
So, how do some recent market darlings trade versus book value? Below are 5-year price-to-book charts for Amazon, Tesla (TSLA), and Netflix (NFLX):
We find that Amazon trades at 26X, Tesla trades at 14X, and Netflix trades at 34X book, or an average for the three of about 25X book value. This represents a multiple of over 7X the overall market’s (already historically high) P/B ratio. Moreover, none of these companies pays a dividend, so they receive maximum credit from investors for the fact that all cash (including cash sourced from incremental debt) gets reinvested in the underlying business at book value. As interest rates have relentlessly fallen during the current 9-year bull market, investors have logically marked up the equity valuations of these three to higher and higher multiples of book value. If Buffett is correct, however, these will be the very companies whose valuations contract the most when inflation and interest rates rise, as should occur in an era of higher and higher government spending and deficits.
Moreover, the likes of Amazon, Tesla, and Netflix are also the type of companies helped the least by the Trump tax cuts. For one thing, they are either unprofitable or marginally profitable, so cutting their tax rate yields minimal to no gain for them in terms of immediate earnings and cash flow. Second, the value of any deferred tax assets on their balance sheets is lower, since going forward, the amount of taxes they will be able to offset with their DTAs will be lower under a 21% tax regime than a 35% tax regime (for example, Tesla had $ 2.4 billion in DTAs on its balance sheet as of the end of 2017). Finally, the current market valuation for all three companies is largely based on investors’ expectations of massive profits many years down the line (under typical sell-side analyst DCF analyses, near-term profits for these companies remains subdued to nonexistent and then explodes to the upside in the out years, similar to a hockey stick effect). Yet if the tax cuts lead to higher interest rates, the present value of these out-year profits will necessarily be less, as the discount factor applied to them will be higher. Thus, we find that the Trump tax cut has a triple negative effect on companies such as Amazon, Tesla, and Netflix.
Indeed, media outlets noted the initial negative tech investor reaction to the tax bill:
Of course, certain highly profitable large-cap tech players such as Apple (AAPL), Google (GOOG) (NASDAQ:GOOGL), and Microsoft (MSFT) should benefit from the Trump tax plan, as their cash taxes should decrease significantly going forward. In addition, they will be able to repatriate billions of overseas profits at favorable rates. Thus, not all tech companies should be put into the same boat.
The passage of the Trump tax plan looks to be a major negative for companies like Amazon, Tesla, and Netflix. Not only do they fail to benefit immediately from the lower corporate tax rate (since they generate minimal to no profits), the present value of their future profits is less if higher government deficits lead to higher long-term interest rates (a process which seems to be already well underway). Not only that, but if Warren Buffett’s analysis is to be believed, higher rates will necessarily cause price-to-book multiples to contract market-wide from the current (historically high) 3.4X level. As a group Amazon, Tesla, and Netflix trade at a massive 7X the overall market’s P/B ratio, indicating that the downside risk from such a contraction could be significant. To be sure, the valuation of any individual company depends on many variables, including the quality of management and products, revenue versus expense growth, market share dynamics, etc. However, the truly scary thing for Amazon, Tesla, and Netflix shareholders about the Trump tax bill is that the negative knock-on effects for these companies, as outlined in this article, are completely outside their and their company managements’ collective control.
Disclosure: I am/we are long GM, AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are also short TSLA and NFLX.