How Stock Bubbles Die

The megatrends in the next decade are increased wages for workers and declines in corporate profit margins. The political tailwinds are in place. There is high-income inequality; the large-cap companies are earning extremely high-profit margins. Politicians have these large-cap firms squarely in their crosshairs. One proposal that supports this point is the global minimum tax.

Aligned with this trend is universal basic income which might be experimented with beyond the recent COVID-19 stimulus checks. We also could see an increase in union membership. Amazon employees have been attempting to unionize, but Amazon has thwarted some of these efforts. As you can see from the chart below, there has been a minor uptick in unionization in the past few quarters. This follows a very long period of decline since the 1970s.

Pensions are completely unknown to most millennials. Increased worker pay catalyzed by unionization would hurt the mega-cap companies. In the long run, many companies plan to replace a lot of their workers with robots. While that’s the case, Amazon, for instance, increases its headcount each year. A spike in union membership could easily come before robotics causes workforce cuts. Now, it’s more about making workers more efficient than getting rid of them completely.

Supply Crashes Bubbles

In the past few months, we have been discussing that bubbles come cratering down when supply surpasses demand. In all bubbles, supply increases. For example, if there is a bubble in a commodity, supply will eventually be created to make money off higher prices. In an equity bubble, the financial world will make sure to take any company that is part of the bubble public. Sales and profits don’t matter in a bubble. Wall Street will take a company with a good name public if it thinks it will sell well. Is that Wall Street’s fault, or is it investors’ fault for encouraging such a situation?

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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