Technology is facing a substantial crossroads as policy changes with global resonance, such as China’s new crackdown on the country’s big tech companies (such as Ant Financial and Didi Global), the rising resistance to social media behemoths like Facebook, and the need for governments, whether in the United States, Western Europe, or China, to manage and control technological development. Regardless of any good intentions, this will add friction, inefficiency, and underperformance to the most dynamic global industry. The best intentions usually bring disastrous consequences. China cannot escape the law of unintended consequences. Trying to “manage” innovation and creativity takes away the often unplanned and serendipitous breakthroughs that make many significant advancements possible in the first place. From an economic perspective, capital is not going to invest in an uncertain environment where prosperity is managed and, despite great risk where most ventures will fail, the truly successful ones which make up for the losses and encourage capital to keep investing, will be mitigated. The vanguard of capital flight from China is beginning, and it will not ease if this policy and attitude are not revised. This attempt at “fairness and more equal distribution” will do nothing more than keep capital away and stifle any attempt at creativity, technical innovation, and economic advancement. The intention of this policy will yield the opposite outcome as a consequence. The signal means substance. Substance means innovation, creativity, and competitive dynamics that create the most effective innovations, the best solutions, and the most sustainable companies. Central planning, bureaucratic industrial policy, government-led economic management, and dictatorial focus have always failed, and always will. The US should not fall into this trap, regardless of how appealing it may be.
It is only noise.
The “Thucydides trap” is where a rising nation-state – for Thucydides it was Athens – must eventually have a violent confrontation with the existing dominant nation-state – Sparta in his time. It is a zero-sum game where there can be only one dominant nation-state as the eventual winner – and it is usually assumed to be the rising nation-state outdoing the dominant nation-state.
Today, many “experts” (and I have great disdain for self-proclaimed experts) believe this is the circumstance between the US and China. We are headed toward violent confrontation where there can be only one winner. I read the book by Thucydides about the conflict between Athens and Sparta (I cannot be dispassionate here about that outcome because my family is from Sparta on my father’s side). But I fundamentally disagree with Thucydides’s historical descriptions being used as analysis by anyone to describe global events, especially those between the US and China.
Digital currencies, crypto assets, digitized securities, and distributed ledgers require an enormous amount of power. While the combination of these assets is subject to tremendous hype, the environmental impact has been mostly ignored. However, this is changing because there has been increasing alarm about crypto’s carbon footprint and environmental impact. While there are attempts to use alternative energy, such as solar farms, thermal heat, and wind farms, sustainability for processing digital assets is still evolving. One thing is clear, as advancements are made in clean and renewable energy, digital asset mining will reduce its requirement for carbon-based energy. This is an essential trend if digital asset processing is to be sustained as an important component of global finance. The trend toward digital assets disrupting global finance is irreversible, thus green energy solutions are essential, and a condition precedent in order to participate and profit from this economic opportunity. It is crucial for crypto mining to address the environmental concerns attached to digital asset processing and creation. There is an irreversible shift to decarbonization and lower carbon footprints. The digital asset market is not going to go away, but since energy is such a critical component, energy efficiency and green energy are the essential components to any long-term perspective of a digital asset strategy. The low-cost provider wins. With digital assets, that means the combining lowest carbon footprint with scale and the ability to connect to the electrical grid.
Inequality is not an appropriate measure of economic performance or wealth creation.
Inequality is a relative and comparative statistic. It shows how wealth is distributed, which is not that meaningful, and certainly should not be the basis of economic policy. Essentially, inequality is a comparative metric and not an absolute one. That is, if everyone does better but a few people do much better, inequality increases, and this is seen as something bad even though everyone is better off. It is used to create misleading policies that focus on redistributing wealth that is created versus policy that should be focused on enabling greater and more distributed wealth creation – not wealth capture. Policy should focus on how to best create wealth for more people. The absolute degree of wealth creation is beside the point relative to other people. Creating opportunity for the most people is what matters.
As an example, overall wealth has increased over the last 30 years for every population group, but for the highest group, it has increased more substantially. But, why is that a problem? Instead, it is a natural and unavoidable outcome of the free market.
Here’s the analogy: if you want to hold a lottery, the prize has to be disproportionately large to have the most participants to raise the most capital. The simple goal is that net outflows (prizes) are smaller than the net inflows (contributions or purchased tickets). This is very similar to business opportunities and wealth creation.
As an economy, we want as many contributors to wealth creation – entrepreneurs and new businesses driving economic growth – as possible. The only way to do this is to enable market participants to have the greatest possible reward without restrictions. Most businesses will fail (much like most lottery tickets lose). But, because we have increased the number of willing participants, we also increase the opportunity to create the most wealth – the most businesses, jobs, and economic growth, as well as increasing the tax base from both businesses and individuals. So wealth creation, even if it is concentrated mostly in a handful of people, benefits the overall economy and society much more effectively than any attempt to limit that upside or redistribute it through politically popular but inefficient and demotivating policy.
The world economy is struggling to escape the Covid-19 economic shock. During the worst of this pandemic, the world’s developed economies provided an enormous fiscal stimulus on a scale not seen since the second world war.
Now, however, the US is proposing to more than double its already generous fiscal stimulus. Is this a good idea or excessively risky?
Go Big, But Where?
For its proponents, the idea of “going big” is designed to be a transformative political moment. But too much appears allocated inefficiently, and it may simply be irresponsible.
An easy money era produced only anemic growth. But the scale and direction of additional stimulus look more like irresponsible fiscal policy leading to significant overheating and the waste of resources. While there is a strong case for a more aggressive approach to fiscal policy, that policy still needs to be grounded in economic realities and reasonable priorities. These are not.
The last few weeks highlighted the need to bring a new understanding of, and strategy for, investment risk. Volatility is increasing and occurring over a significantly compressed timeframe – for individual stocks and the overall market. Recent trading activity in GameStop, AMC, and a few other stocks demand an investment strategy focusing on Risk Adjusted Return.
The new power of retail investors is here to stay, and that will shake up traditional portfolio managers because they are increasingly losing control of the trading process.
A Trading Floor in My Pocket.
Trading apps on platforms like Robinhood and social media chat rooms found on Reddit are game changers, fueling an unprecedented level of interest and activity (social media information is easily accessible and trading activity has very little friction – few, if any fees, and immediate). These two factors are irreversibly changing the market.
In the past year, U.S. brokers added at least 10 million new retail trading accounts, and a shift to zero trading commissions late in 2019 unlocked a wave of activity that dwarfed even the wild days of the dot-com bubble. Beginning in early 2020, and coinciding with coronavirus lockdowns, trading activity started to surge and has not subsided, even as the economy has gradually reopened. Average daily trading at the biggest retail brokers hit a record of 6.6 million a day in December 2020. In January 2021, it reached 8.1 million. On January 27, 2021, equity volume was triple the average day in 2019.
Retail investing has been a small fish trading in the large hedge fund and institutional pond. But that’s changing. Before the pandemic, retail trading made up about 15% of equity volume; now, it’s consistently making up more than 20%. The game changer is when that activity is concentrated on just a few stocks, a much more likely event among retail investors (driven by social media platforms), and it makes a substantial difference. In the case of GameStop and several other highly shorted stocks, it can cause startling price movements in a very short time.
Our political system is binary, and both sides are more extreme than reasonable. There seems little patience for the “reasonable middle” where ideas can be nuanced, refined, and complexity of public policy understood. Instead, our leaders are superficial and guide policy with slogans, not thought. People like AOC and Sanders are caricatures, influential yet ignorant and superficial, forming policies while clueless about what it takes to realistically solve even their most critical issues.
They have great ideas on how to distribute wealth but no ideas on how wealth is actually created. Their perspective is to take existing wealth and distribute it to others instead of developing an engine to help more people create wealth. An example of this kind of dysfunctional policy can be found in resource rich African nations. Instead of building industries using the abundant natural resources present as inputs generating real businesses, those resources are simply gathered and distributed – either to efficient businesses in other countries or among governmental cronies to their Swiss bank accounts. Either way, this attitude is disastrous for an economy ultimately. Wealth is created, and policies should free up the ability to create wealth within appropriate legal restrictions.
Sometimes, things can change simply because we want things to change. People can feel differently and that can spark a cascade of cause and effect. For instance, sometimes a recession can start simply because people feel as if there is a recession. So, it becomes a downward spiral, and our actions start matching our thoughts and words, and suddenly we have caused recessionary activity. Then we enter a downward spiral that makes reality from our thoughts.
Some of the things that Pres. Biden has done right away were maneuvers to undo what seemed like harmful policies and actions. But also, it was intended to have us think differently. Right away, he did things to try to reconnect us with the rest of the world. For example, the United States is back in the Paris Accord, he is not going to build the wall, he is going to reconnect us with the WHO, and many other things. But right away, he is sending a message that the United States will become part of the world and that is likely to undo the fragmented and rudderless direction and create cascade of positive actions that lead in the same direction – one toward openness and connectivity. I sense we are going to reconnect a little bit more with China, reconnect more generally with the world through global trade and cooperation on climate change, and many other important topics. It’s suddenly uplifting for people to focus their energy, and thoughts lead to words lead to actions.
We are rapidly approaching a zero-interest rate world. Interest rates are being driven to zero (or below zero in many cases) as a first-line tool for central banks to generate economic activity in the face of the dramatic negative impact of the pandemic, as well as existing and lingering economic fallout. This toolbox will be empty soon, and the only remaining weapon will be fiscal policy. Among other things, fiscal policy and domestic financial markets will have an overwhelming influence on global currencies. Capital flows will dramatically impact currency volatility as capital moves to more attractive countries with more liquid and robust asset markets.
Defining and the problem precisely is the only way to solve anything, and, undoubtedly, the single greatest challenge to achieving anything. Otherwise, it is a waste of time and resources (which describes most public policy). All too often decision-makers waste time, resources, and make matters worse because they simply do not understand the actual problem they’re trying to solve. Very few problems are well-defined, and few people take the time and effort to understand what it is they are trying to solve. Motivation, energy, and focus on an outcome are inefficient, misguided, and dysfunctional. Good intentions do not effectively define any problem, and typically lead to very bad outcomes. Wanting to solve a big problem is fine, but not defining it accurately is inefficient at best, and most likely disastrous. It will never lead to a solution.
Productivity, expansion, and entrepreneurship were enabled through the adoption of new technology. Undeniably, the net economic benefit was substantial. But lives were disrupted, jobs were lost, and what would be seen with a historical perspective as an obvious beneficial choice, was anything but obvious to those so immediately and negatively impacted. Technological advancements produce net benefits for society. But for every advancement, there is a cost. Leadership and subsequent public policy must address this shortfall. As in the past, the solution has been training and education leading to economic inclusion and prosperous lives. and subsequent public policy must address this shortfall. As in the past, the solution has been training and education leading to economic inclusion and prosperous lives. History has taught us the net benefit of technological advancement, the turmoil it brings, and the solution required.
The US economy is facing a transitory, but critical, credit emergency beyond the Fed’s normal scope. A new federal credit facility is needed to ensure that sound businesses and households have ready access to cash to get through this crisis. Global business needs a giant bridge loan to get through a tough few months, and governments may need to intervene to make it happen – led by the Fed. The credit markets need substantial additional liquidity, taxes need to be cut to get cash to companies, and banks need to lend and show patience