22 Dec Why This Christmas Feels Different
There’s a reason why Mariah Carey’s “All I want for Christmas” song is so popular. It has one of those “ear-worm” worthy melodies with its infinitely repeatable lyrics. When CHFI decided to start playing holiday season music early this year, I rolled my eyes and blamed it on capitalists wanting to stoke our lagging desire for holiday shopping. But it turns out, this year, I want to hear the old-time classics and dream of a simpler future ahead.
The other song that’s stuck on repeat in my mind, is Meatloaf’s ‘Paradise by the Dashboard Light.’ It’s known for describing a young man agreeing to love a woman forever to induce her into sleeping with him. The minute its over, he regrets the decision and this angst gives rise to an unforgettable chorus, “So now I’m praying for the end of time, to hurry up and arrive. Cause if I have to spend another minute with you, I don’t think that I can really survive….Praying for the end of time, so I can end my time with you!”
Most of the people I know are resilient. We’ve had ample opportunity to develop these muscles during the pandemic. We’ve become acclimatized to growing uncertainty defined by supply chain disruptions, geopolitical instability and the true implications of climate change. We’re waking up to the realization that something is broken and the need for fundamental change is pervasive. It’s an impending sense of doom with its underlying assumption that very dark days are ahead. It appears we’re all growing tired of this latest stage of late capitalism.
History Doesn’t Echo, It Rhymes
I’ve experienced a few major economic downturns in my career. The first was the dot com collapse with the bankruptcy of Enron, which traded contracts for electricity and natural gas and then other products like access to high-speed telecommunications networks. Enron was exceptionally good at bookkeeping. When you don’t make or produce anything, the only thing that matters is what’s in the ledger. Their executives were proficient at “adding value on paper to simulate income.” Fraudulent accounting induced many people to invest at the peak when Enron was the 7th most valuable public company. The investor losses added up to $ 74 billion and over $ 5 trillion of shareholder value evaporated when that bubble burst in 2001.
The Great Recession coincided with fall from grace of Bernie Madoff, the perpetrator of one the largest Ponzi schemes in U.S. history that bilked investors of $ 65 billion (book value). As a respected and connected financier, Madoff convinced thousands of people to invest by guaranteeing consistently outsized returns. At the end of 2008, he was brought down by a “bank-run” when more investors wanted to withdraw money than the funds available permitted. A year later, Madoff was sentenced to 150 years in prison where he died earlier this year. As of 2020, the US Department of Justice had recovered about $ 3.3 billion in assets conned by Madoff.
This year, it was the cratering of Tech Stocks and collapse of the crypto exchange, FTX, which eerily appears to be a monster mash-up of Enron and Bernie Madoff. As a values-based business practitioner, I’ve never seen the utility of the business model for crypto-currency. Warren Buffet’s skepticism was sufficient warning. Not to mention, the energy consumption in a warming world with resource shortages. But the biggest reason I steered clear is the baked-in concept of prospering at the expense of others, which is my definition of a Ponzi Scheme.
Bankman-Fried will go to trial, he’ll be presented as a 30 year old stooge who trusted other people to manage “fiscal responsibilities”. It’ll be chalked up as another set-back for Web 3.0. But that’s not the end of the story. Sam Bankman-Fried had powerful enablers and received $ 2 billion in VC funding to grow the business. The underlying assumption of crypto and its get rich quick scheme is that it requires deep-pocketed institutional investors with a way to trade back and forth with hard currency.
There were Super Bowl Ads, multi-year stadium naming rights, celebrity endorsers and legislative sponsorship. To foster widespread adoption, he needed help to build up the legitimacy of the asset class and positioning it as a part of a savvy investment strategy. Give crypto a credibility makeover and make it appealing for Wall Street, private-equity funds and pension-wealth managers to add real money into the system and drive up the price. The goal was regulatory access to trade virtual tokens for FDIC-backed securities in pension plans and 401(k)s. As exists with any Ponzi Scheme, you want to find a target-rich environment of unsophisticated investors who will hear Tom Brady ask, “Are you in?” and trust it’s the sign they need to get in.
Casino Capitalism Takes Hold
The ultimate capitalist fantasy is money replicating itself without requiring any inputs of value or need to do anything. One’s existence entirely serves the pursuit of growing profits. The last fifty years have been good ones for refining this process of money-creating-money, aka financialization. As populations have gotten older and richer with a focus on savings for retirement, developed economies experienced the cheapest, most abundant capital supplies in the history of humanity, aka Peak Capital.
Casino Capitalism refers to the unregulated excesses associated with the boom and bust cycles of large speculative ventures, such as Enron. It fostered the perfect conditions for a growing sector of our economy to derive profits by charging “rent” for use of assets or lending it through financial vehicles like student loans, car loans, mortgages and credit cards. In an environment flush with capital resources and a lack of productive investment opportunities, means financial transactions have less and less to do with the real economy.
Excessive financialization inevitably leads to the virtualization of economic activities and the emergence of speculative asset bubbles. In 2021, the finance, insurance, real estate, rental and leasing industries contributed 21% to U.S. annual GDP, as compared to 10% in 1970. Financialization has pervaded non-traditional trading sectors such as rental housing and food supply chains. Corporate earnings calls show that when their costs go up, it’s used as an opportunity to extract more profit from customers.
Value Intermediary is the business model that’s come to define many tech start-ups. It starts with building a technology interface with you being paid to act as a go-between producers or value and the consumers of it. You don’t produce or make anything and act as the conduit for transactions. Profits happen by liberating a portion of the value for facilitating the exchange. We see this approach replicated in every industry, from transportation to creative arts. Keep the “con” going until you can cash out. The con in this case, is operating opaquely to prevent informed investment decisions. It looks like obscuring real timelines for profitability or a lack of transparency around how consumer data is used and shared with third-parties.
Here Comes the Squeeze
Markets are plunging, as the result of decades-old macroeconomic assumptions coming to an end. After many years of near-zero interest rates, the investor rule book is being dramatically rewritten. Diminished opportunities for value-based investing and historically low interest rates have pushed institutional investors to chase risk and pour money into the promise of high-growth tech stocks. As cost of funding has increased, the market has shifted focus from growth to profitability.
As interest rates rise, value is pull forward and immediate profits are prioritized. With an interest rate of 1%, $ 91 deposited in the bank will be worth $ 100 in 10 years’ time. That means today, $ 100 in 10 years time is worth $ 91. But when the interest rate rises to 5%, it only takes $ 61 to generate $ 100 in a decade. So $ 100 in 10 years’ time is worth just $ 61 today.
A reckoning is happening as the markets decide whether more exotic and less liquid assets hovered up during the low-yield years are now worth what investors paid for them. Scarcer, more expensive debt makes such deals harder to finance and higher interest rates eat into prospective returns. As investors are adjusting to this new reality, growth stocks have tumbled. At a 1% interest rate, a firm with stable profits, projected indefinitely, will recover one tenth of its earnings in the first 10 years. At 5%, around two-fifths of its profits will come in the first 10 years.
Private-equity portfolios, a growing percentage of pension funds, will face sharp write-downs as valuations are slowly recalculated. The fund managers are naturally reluctant to mark down assets, as high fees are based on the value of their portfolios. With rising returns for risk-free investments, private asset owners will need to offer higher returns to remain attractive to investors. Unfortunately, many institutional investors are invested too deeply to unwind their positions in the near term.
Capitalism is arguably facing its worst crisis in its 200-year history. It’s managed to keep going this long because the developed world’s central banks have been pumping trillions of dollars into the global economy so it continues to function. As most of us learned in school, printing money is inherently inflationary. It creates over-heated expansionary asset bubbles and threatens economic stability. The four largest central banks including Japan, U.S., U.K. and the Eurozone have expanded their ledgers by $11.3 trillion since the beginning of the pandemic and projects that the final tally will be double that amount.
National debts are outpacing economic growth and we’re headed for a global debt crisis. At the end of 2021, the world’s debt teetered at 350% of global GDP, a jump of 28% as result of pandemic-related support. A staggering 40% of US dollars currently in circulation were created between 2020 and 2021. The era of low interest rates and low inflation is over. That means with aging populations and escalating health care cost, they’re likely not returning. We’re experiencing a fundamental shift from a world of relative stability…to one defined by greater uncertainty.
Reasons To Be Optimistic
Are there reasons to be hopeful? Emphatically yes. In my experience, people feel gaslighted with the underlying truth of late capitalism. More people are realizing that more material betterment and profit maximization aren’t the most important source of meaning in our lives. Our one true reality has a spiritual dimension and our well-being is contingent on the people in our lives. We are humans and we have an inherent sense of justice and fair play.
We know what feels right and we generally know what makes sense for us. The majority of use don’t want to keep the con going until we can cash out. For many of us, the most important things in life don’t have a price tag. Our sacred ideas and human rights won’t be traded away so an inherently unfair system can continue to exist.
It’s always a relief when a blister pops because it can’t get any bigger. It’s never any fun being the one who ends up paying for a wild party. The bill usually includes damages or cleaning fees and the one who ends up paying, often didn’t enjoy the party. The reckoning that is coming is long overdue and now the bill is presented for all the speculative gambling of the past. This one’s going to hurt. Not because we all profited equally from the excesses of the past but because we’ll all be paying for it. At least we’ll be in good company with the other adults who know the truth and have lots of practice cleaning up messes.
Returning to Mariah Carey’s iconic holiday classic, “All I want for Christmas…” I see it as an opportunity to grateful for the present good in my life. Every time I hear this song, it reminds me what’s really important. It’s a chance to reflect on the things that money can’t buy. For me, that’s the people in my life. They’re often the source of my greatest joy, my deepest frustrations but they’re all family. This year, I’m grateful for another holiday with my Mom. Because one day I won’t and there won’t be enough money in the world to buy me more time.
Happy Holidays and best wishes for a healthy, peaceful and abundant year ahead.