Mike’s Note: Welcome to our first-ever True Options Masters Predictions Week! All week long, you’re going to hear what the whole TOM team is banking on for 2022 and beyond.
I’ll be frank: Mike decided to borderline parody the idea of a prediction with this one. Yet even as he started out by going for the most extreme version of a prediction possible, it turned out to be the most fascinating example of history “rhyming” I’ve ever seen. And it could have huge implications for your portfolio not just in the coming years, but the coming decades…
As part of a “predictions series” that we’re doing this week in True Options Masters, my editor Mike Merson required me to write a forecast article.
I protested, because I think making predictions is foolish. Nobody can tell with certainty what’s going to happen in the future.
But he insisted that readers expect one. That this time of year is perfect for this sort of thing.
So instead of ignoring his request, I looked for a loophole.
His email only said it had to be a forecast. We all know he meant to look at 2022.
But instead, I want to look past 2022. Far past 2022.
I want to look at 2122.
A hundred-year forecast might seem ridiculous. But I have a unique view of the tech sector that explains what we should expect to see in the next century.
This is something we’re already starting to see play out, so you can position yourself to profit now regardless of the time frame.
Tech companies — especially Amazon, Google, and Facebook (now Meta) — have caught the attention of regulators.
In the case of Facebook, the Federal Trade Commission is challenging Facebook’s past acquisitions of Instagram and WhatsApp. They say the social media giant engaged in an illegal “buy-or-bury” scheme to beat out competition after failing to innovate. But it’s nothing new…
Facebook Took a Page out of This Book
This was a tactic that was used in the Gilded Age, when railroads were the largest companies of their day. In fact, railroads were the largest companies that had existed in U.S. up to that time, and they controlled nearly all domestic commerce in the late 19th century.
Owners of railroads generally bought up the competition. When they achieved a monopoly status, they often dictated terms to other businesses, in effect determining which businesses profited and which failed.
Replace railroads with Facebook, Amazon, or Google, and it sounds familiar to what we see today.
If you’re not seeing the relationship, think of Apple’s App Store or Google’s search engine as the rails linking businesses to consumer markets. Facebook, as a ubiquitous social media platform that tracks its users’ activity to optimize what ads they see, isn’t too far off either.
This relationship is why many of the tactics being used by regulators today date back to the railroad era.
The FTC itself dates back to 1914, when it was founded to break up trusts that included railroads and their allies, like John D. Rockefeller’s Standard Oil.
It’s likely regulators will continue to use all the tools they have available to rein in what they perceive to be the abuses of tech companies. It’s also likely regulators will develop new tools to limit the scope of the companies’ operations.
That’s part of my century-long forecast. The tech leaders will face increased government scrutiny. That will lower their earnings potential as regulatory costs rise. This will lead to lower valuations and the stocks are unlikely to be leaders decades from now.
While it’s not an exact fit, a look at the history of railroad stocks during their prime could help us forecast how tech stocks will fare in the very long run.
Unfortunately, there weren’t a lot of stocks trading in the U.S. during the early 1800s, and so it’s difficult to draw any conclusions from that period.
However, markets in the United Kingdom were more mature at that time, and railroads became popular investments in that country.
In the chart below, the brown line shows the price of railroad stocks in the United Kingdom in the 1800s. The blue line is the financial sector, and the green line shows a broad market average.
Source: Global Financial Data
For the first half of the century, railroads were a speculative favorite. They significantly outperformed the broad market.
Two bubbles formed during that time. In the 1820s, rail stocks doubled while the broad market gained about 60%. In the 1840s, rails gained about 70% while the broad market gained about 35%.
After 1850, railroads closely tracked the broad market. Financials, which provided capital for railroad operations during and after the speculative bubble, became the most important sector in the market.
Is This the 2nd Bubble for Tech Stocks?
Jumping back to the present, with tech stocks, we’ve seen two bubbles. The first one, in the late ‘90s, led to the rise of the current leaders.
The second one — like the railroad bubbles, about 20 years after the first — is arguably underway now. When it bursts, that won’t be the end of the companies. But it will be time to look for the next big thing in the stock market.
The rise of the finance sector was the obvious choice in 1850. Companies were getting bigger during the Industrial Revolution that was enabled by the railroads. Big companies needed access to capital. Big banks would profit from that.
The rise of the tech companies also enabled a new revolution. This one is in innovation.
This means no one sector will be the clear winner in the future. Instead, there will be winners in each sector, but market dominance will be short-lived. A biotech company will develop a breakthrough and lead for a time, until a new biotech reveals the next innovation. This process will play out in each industry.
That’s the real lesson from the railroad stocks in 19th-century England. They created the pathway to the next big thing, just like Facebook, Amazon, and Google have.
As traders, we need to look for the next big thing and expect it to enjoy a relatively brief period of leadership. We need to be nimbler than ever to spot these trends in the coming years.
Michael Carr, CMT, CFTe
Editor, One Trade