Written Dec 18, 2021
The financial markets are broken, most people at least suspect that by now. The seeds of their demise were sown long ago when Nixon opened the door to unlimited money printing in 1971 when he replaced gold-backed dollar with oil-”backed” dollar (the Petrodollar system). Since every country needed oil and the U.S. Dollar was the only medium of purchase, Nixon, with that move, positioned America to be an “exporter” of U.S. dollars (often via U.S. Treasuries). Wall Street was the center of mechanics for it, and D.C. was the center of policies for it. De-industrialization and financialization became predestined. A decade later, Reagan furthered that destiny by encouraging outsourcing of manufacturing and a debt culture that lent money into existence en-masse through an explosion of credit instruments (remember, a debt-based fiat currency means money is debt — it is “borrowed into existence”). Those were the “greed is good” years, if you recall. Clinton followed up in the 1990s with financial deregulation (notably by repealing the Glass Steagall Act) that brought about full-fledged financialization, — the requirement of every monetary transaction be intermediated by the financial “industry” (banks, brokerages, insurance companies, real estate firms). This “industry”, with its entrenched monopolistic power, was able to create and peddle ever more opaque and toxic financial “products” to unwary institutional and sovereign investors all over the world, culminating in the 2008 global credit crisis. It was then that the seeds finally sprouted in full force, — when three consecutive Federal Reserve chairpersons relentlessly printed money in ever larger quantities as policy response to the 2008 crisis. The result is financial markets completely decoupled from the physical economy today, and distorted beyond recognition.
The bond market is broken because by the Federal Reserve’s Zero Interest Rate Policy since 2008, interest rates no longer function as the key signal for financial risk, helping investors distinguish safe vs risky investments (i.e. zero rate encourages mal-investments with no regards for risk). Bonds themselves no longer function as a counterweight to stocks in a balanced portfolio because at zero rate, bonds cease to be an alternative to cash. Worse, their value goes down at the slightest upward move in interest rate (when already zero-bound, interest rate can only go up at the slightest hint of inflation). So all the pension and other conservative funds marketed as “balanced” in fact are not.
The stock market is broken because the artificial near-zero interest rate encouraged corporate CEOs to borrow money at virtually no cost-of-capital and buy back their own companies’ stocks thus inflating the stock prices (and the stock market in aggregate) and boost their own bonus payouts. They have been doing this for over a decade, to the point that in aggregate, the stock market valuation has become grossly disproportionate to the GDP. (The incessant rise of the stock market since 2008 simply mirrors the money printed by the Fed in that time period, and bears no relationship to the national economic growth. In other words, the stock market is completely decoupled from the physical economy, despite mainstream media narratives otherwise.)
In these broken financial markets, money simply chases momentum (buy every market dip in expectation of the Fed printing still more money out of thin air). Capital is playing the sick financial markets like video games in a casino, rather than being allocated efficiently to the most productive areas of the real economy. Bizarre events (such as breakdown in the REPO market wherein overnight lending rates surged a ridiculous 277% only to be stabilized by yet more emergency money printing by the Fed before daybreak) become typical. This is indicative of a wobbly system operating at the edge of order, ready to plunge into chaos.
As if this scenario is not bad enough, the Biden administration saw the wisdom of helicopter-dropping $6T of stimulus money (borrowed from the Fed, which printed it out of thin air) into the hands of the populace. This created an upsurge of demand expressed in online shopping, which the physical logistics system could not fulfill, resulting in rapid price inflation. This is blamed on Covid-induced global supply chain disruption but in truth when you create $6T of purchasing power without producing like amount of goods and services, price inflation is the predictable result of supply-demand imbalance, with or without Covid-related complications. This inflation, now running double digits (worse than the low-ball government figures) hurts the poor most and is already causing social unrest (mass looting in multiple cities). For the rich, investing class, the same inflation exacerbates TINA (There Is No Alternative) and FOMO (Fear Of Missing Out). Viewing “cash as trash” since it loses purchasing power by the day, investors continue to plow money into a bubbly stock market already at nose-bleed altitude. You don’t need to be a financial genius to know that will end badly.
But the “smartest money” (insider selling has been at all-time high for quite some time now) has already exited the casino and is now playing in the sandbox of private equity (i.e. non public traded) deals, particularly in the crypto-space. As well, young retail investors are almost exclusively trading in the crypto-space (“I don’t need your stinkin’ job cuz I already made my million trading Bitcoin”), with the exception of Robin Hood episodes where they manipulated the prices of traditional stocks to punish their hated Wall Street rather than to make money.
To be sure, there are those who just chase momentum in the crypto space as trades, not investment. But there are savvy institutional investors who invest in the crypto space because they see blockchain as the long hair needed to turn Financial Technology (FinTech) into Samson with super strength. And Samson will be the one tearing down the Temple of Dagon that is the financial “industry” today that holds everyone in bondage.
FinTech has been around for decades, evolving from humdrum bank back-office computing to digital payment services like PayPal and Square, robo financial advisers, crowd funding, and the use of sophisticated AI-assisted trading algorithms today. But it is the use of blockchain-enabled “smart contracts” that will transform FinTech from being the enabler to the disrupter and eventual the killer of the financial “industry”. The buzzword associated with blockchain-enabled smart contracts today is “DeFi” (Decentralized Finance), which implies breaking up a centralized financial “industry” into independent segments. I personally think the implication of smart contracts goes far beyond that. Smart contracts will ultimately de-financialize, i.e. dis-intermediate and allow peer-to-peer transacting without going through the financial “industry”. The principle is the same as e-commerce allowing a buyer to transact directly with a manufacturer without going through layers of middlemen, each taking a cut. FinTech 2.0 is in the making as smart contracts rise in importance as a feature of Web 3.0.
Act one Scene one of “Killing of the Giant” will be funding medium size and small businesses, and individual proprietors, — all of whom are ignored by a Giant too busy making loans to large corporations buying back their own stocks. Giants have a way of getting entrenched, slow, cumbersome, and staid. They are not nimble and don’t experiment. Their bureaucracies have grown so large that they are opaque and mysterious to themselves, never mind their customers. Fintech using smart contracts will be exactly the opposite.
But wait, wasn’t this Jack Ma’s dream with his Ant Group? How did that work out? Didn’t the Ant Group get squished by the CCP like an ant? Won’t FinTech 2.0 suffer the same fate here? No, because our plutocracy works differently than China’s (rest assured both are plutocracies, — forget the democracy vs communism meme). China’s plutocracy is autocracy, where the government has absolute control over industries. The CCP wasn’t going to let FinTech disrupt or usurp its state-owned banking system. America’s plutocracy is corporatocracy, where industries (Big Oil, Big Pharma, Big Banks, etc.) control the government. No doubt Big Banks will try to influence the government to kill off FinTech 2.0 (by regulations or otherwise), but don’t forget Big Tech is behind FinTech 2.0. Big Tech is only too happy to disrupt or usurp Big Banks. Do you know why the major stock indices keep rising even though more companies are now on the decline? Because six companies account for more than half of the stock market’s total value and they alone prop up the market. Which six, you ask? Apple, Microsoft, Amazon, Alphabet, Facebook and Tesla. How about that? They are all part of Big Tech, just to give you a feel of Big Tech’s power (second only to Big Pharma in lobbying). Big Banks will soon be in the rear view mirror, joining Big Oil, Big Steel, etc. The future belongs to Big Tech, baby!
2021 is coming to an end in less than a month. If last year was depressing because of Covid imposed isolation, this year has been confusing and frustrating because of consequences of policy responses to Covid. Chief among these is rampant inflation which deals the final blow to the bottom of an already extreme wealth divide. 2022 promises to be an even more tumultuous year with this final blow manifesting itself in escalated social unrest. But even in this dismal end-stage of a Fourth Turning with predictable turmoil, green shoots will form — only known to their planters and noticed by the observant. My word to the wise is to look past the dismal and pay attention to the green shoots. I venture to guess that digital assets (including NFTs, of course) will gain in numbers and their transaction, along with cyber-security thereof, will gain in momentum. In other words, “Token-nomics”, characterized by smart contracts and programmable money, will visibly create a parallel capital structure outside of the current financial “industry”. Some say the music industry will be the strongest “user case” in that smart contracts will quickly allow “starved” artists to be appropriately compensated at long last. If true, then a patronage platform like Patreon will no longer be needed.
As well, mindful of the Big Tech philosophy of “move fast and break things”, look for things breaking! Look for ICOs picking up as well. These may prove to be sign posts of FinTech coming of age in 2022. And where will the epicenter be? San Francisco, of course!
