We don’t make anything in this country anymore. While he didn’t say it quite that way, I assume that’s what a client of mine meant when he was lamenting the shrinking of our “tangible” economy. Now in his mid-sixties, my client, I’ll call him Nate, grew up around Pittsburgh when steel mills were firing 24/7 and men were forging molten steel and aluminum into products we used every day. A lot of it that is now gone. We still use a lot of those products, but they come from somewhere else. As a retiree who relies on his investments to generate a lifetime of income, Nate wonders whether an “intangible” economy can produce the juice to power the markets or whether we are headed for a “day of reckoning” – his words, not mine.
Nate is not alone in his concerns about the future of the economy. If you’re old enough to remember watching your dad adjusting the rabbit ears antennae on top of the TV, you might feel the same way. You grew up during a period of unprecedented innovation and growth, with new and improved products endlessly rolling off the line. The biggest and most familiar companies back then were GE, GM, US Steel, Dupont, and General Dynamics. Those companies are still around today, but, in terms of market capitalization, they are dwarfed by companies that don’t produce tangible products, such as Google, Amazon, Netflix, and Facebook.
It’s a Different World Today
The fact of the matter is we live in a different world than we did four decades ago. Back then, tangible assets made up nearly 85% of all enterprise value on the S%P 500. Today, that’s been flipped, with intangible assets comprising almost 85% of total enterprise value. Tangible assets are things like manufacturing plants, trucks, and equipment. Intangible assets are things like patents, goodwill in the form of brands or reputation, or unique processes or experiences. For the biggest companies in the S&P 500, such as Apple, Amazon, Facebook, and Google, the percentage of intangible assets increases to more than 90%. What concerns investors like Nate is that, since it’s difficult to measure the value of intangible assets accurately, we can’t be certain of the company’s actual value and what it can be expected to produce in the future.
However, when viewed in the context of economic evolution, there’s no reason to be concerned. As investors, we should be celebrating this next stage of evolution because of its boundless growth opportunities.
Next Up: The Experience Economy
At the time of our country’s founding, the economy was agriculture- or commodity-based. We then moved into the industrial age, where we took commodities and refined them into products. As the leading economy in the world, we’ve continued to innovate and evolve. With the advent of endless technological wonders, we are now entering a new economic stage, what I call the “experience economy.”
Whereas the agricultural and industrial economies addressed our basic needs and wants, the experience economy is tapping into our desires. We know that our essential needs, such as food, shelter, or safety, are going to be met. In fact, we take most of it for granted. These days, we get anxious when the internet goes down, or we’re separated from our smartphone for five minutes. During the COVID lockdowns, we even experienced what it’s like not to be able to walk into a Starbucks or go to a theatre to watch a movie. Having access to the internet or your smartphone, or being able to buy a coffee at Starbucks is not the fulfillment of needs or wants – because you could easily live without them – it is the fulfillment of desires, and that’s the crux of the multi-trillion experience economy.
How Would You Like Your Experience Today?
You could buy a cup of coffee almost anywhere. Heck, you can make your own coffee at home. But Starbucks built an experience that turns a five-cent commodity into a $4 cup of coffee, which generates $4 billion of annual profits. Amazon makes nothing, but it has created the ultimate shopping experience, allowing people to buy products with a couple of clicks and have them show up at their doorstep the next day. For that, Amazon is worth $1.6 trillion. Apple doesn’t just make iPhones. It packs each iPhone with a multitude of experiences to delight its customers and improve their lives. Disney’s business model for 70 years has been to create experiences for tens of millions of their theme park customers each year, for which they net more than $3 billion.
The thing about manufacturing experiences is that they cost very little to produce so that profit margin growth can be exponential. So, if I put my investor hat on, I’m looking at this experience economy as a way to tap into the highest growth and highest margin opportunities any type of economy has produced.
Certainly, I’m concerned that we don’t make a lot of things anymore. The COVID pandemic revealed several significant vulnerabilities our country has when relying upon other countries for critical supplies. I hope our country gets wise to the need to bring more manufacturing home to meet the vital needs of our people.
I’m concerned about those things right alongside Nate and other Americans, and that’s why we need to be actively engaged in public policy through our elections. But, as an investor, I think we are incredibly well-positioned from a capital allocation standpoint to benefit from the new experience economy.
