What TikTok tells us about the paradox of markets right now
There are not many issues that attract bipartisan support in Washington these days. TikTok, however, is one. On Wednesday, the House of Representatives passed a bill to ban the social media app unless it is sold by its Chinese-based parent ByteDance — by a resounding 352-65 votes.
This might yet be blocked by the Senate or the courts; when Montana lawmakers tried to ban TikTok last year, there were legal appeals. Alternatively, ByteDance might agree on a sale — although this could be hard if antitrust issues hang over natural buyers, such as Microsoft. What’s more, Beijing says it opposes a sale, probably because it does not want to lose control of TikTok’s content algorithm (which is arguably a bigger national security flashpoint than data storage).
Either way, Wednesday’s vote has tossed TikTok into limbo in a way that most observers (including myself) did not expect a few months ago, given that this could anger many youthful voters — something Congress rarely wants to do.
There is a big lesson for investors here. Most notably, it reveals a paradox now haunting markets. On the one hand, the price of many assets, including both equities and bonds, have surged in a manner that suggests investors are not only optimistic about the short-term economic outlook — but also confident that they can forecast the medium-term trajectory as well.
On the other, as Ángel Ubide, head of macro analysis at Citadel, points out, the world currently faces more medium-to-long-term dangers than most investors have ever seen in their lifetimes, be that domestic politics, geopolitical tensions, climate change or innovation. A sense of cognitive dissonance abounds, creating the potential for shocks — good and bad.
Consider TikTok. The company is often described by western politicians as a “Chinese” entity. However, as I have noted before, some 60 per cent of the group is actually owned by “international” investors, overwhelmingly American. An estimated $8bn has been invested by private capital companies, including Sequoia Capital, Susquehanna, General Atlantic and Coatue Management. Mainstream investment funds such as Fidelity, T Rowe Price and BlackRock are exposed, too.
A year ago, the buzz in tech circles was that these investors were on track to reap massive profits — at least on paper. Fundraising rounds suggested ByteDance had a putative valuation of as much as $300bn, and groups such as Fidelity have reportedly been valuing it between $260bn and $320bn.
Moreover, some key US investors told me they were confident last year that they could navigate political risks, particularly since their ranks include big donors to both Republicans and Democrats. Jeff Yass, the billionaire co-founder of Susquehanna, for example, is a huge donor to Republican groups and met Donald Trump shortly before the presidential contender reversed his stance on TikTok (Trump told CNBC they hadn’t discussed the subject).
However, the new decision could vaporise billions of dollar of paper profits. Indeed, even before Wednesday’s vote, there were signals that ByteDance’s valuation had dropped. A sale to employees last autumn valued it at $223bn, and I am told some funds are marking it nearer to $180bn.
TikTok is thus partly a tale about the investment cost of geopolitical risk. But it is also one about the capricious nature of US domestic policymaking, particularly in a world where Trump’s policy stance can change on a dime, and his control over Republicans is unpredictable.
An optimist might retort that ByteDance is just an idiosyncratic case. Perhaps so: few other companies generate this level of fury from both diplomatic pundits and parents. But it would be foolish to assume that all other assets are shielded from such risks. Tech stocks, for example, have surged in value in the past year — yet no one really knows what Trump might do to Silicon Valley, if elected, or whether the giants could cope with further worsening of US-China relations. Policy risks in other sectors are rising too, from Joe Biden as well as Trump; just look at US Steel.
And while Treasury bond prices have rallied, Trump’s stance on fiscal policy — and the Federal Reserve — is another risk. Maybe a second Trump administration would repeat the pattern of the first and outsource most fiscal decision-making to the (relatively) steady hand of Steven Mnuchin, his former Treasury secretary. Perhaps a divided Congress could block fiscal expansion. But with a clean Republican sweep all bets are off, and since Mnuchin himself is apparently trying to organise a TikTok deal, he may never return to government.
Either way, the point is not that these risks exist, but that investors are daring to price Treasury bonds today not just around the short-term monetary policy outlook (which they have always done); they are also projecting the medium-to-long-term outlook — which, as Bridgewater hedge fund recently pointed out, they did not do two decades ago. This seems foolish.
It is little wonder, then, that the price of gold has hit record highs, along with its digital proxy of bitcoin. Investment theory implies that a rally in “flight to safety” assets is odd if the price of risky assets is rising, too. But the pattern makes more sense if investors need to hedge unfathomable political risk. In that sense, then, TikTok is a powerful symbol of our uncertain times in both a political and financial sense.
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