I wrote about cryptocurrency a lot, late in the last decade.
I finally decided it was trash.
There’s no there, there. I can find no blockchain applications superior to what you can do in other ways. Bitcoin and Ethereum claim they’re better than other coins, but the market remains crooked and opaque.
All this came crowding in this week when FTX collapsed. FTX was the creation of a 20-something (now 30) named Sam Bankman-Fried, whom my son now calls Bank Man Fried, as in French fries.
Dictators can do many things.
They can hold territory. They can terrorize people, even kill them. They can force our bodies into lives of drudgery and poverty.
What they can’t do is whip people into creativity.
Xi Jinping is betting he can. By controlling what people see and hear, by whipping up patriotic fervor, he thinks he can make China a dominant economy. Many western analysts agree.
He’s wrong. They’re wrong.
This has nothing to do with western investment. It lies in the nature of the 21st century economy. Because money no longer comes out of the ground. It rains down from the clouds. Technology provides added value. That trend is accelerating.
The biggest threat to America’s cultural and economic dominance is our winner take all system.
We have succeeded because we nurture talent. Talent is what dominates the world economy in a cloud-based world. Talent must be nurtured if it’s to turn potential into reality. There is no limit to how much talent a cloud-based economy can absorb.
Talent needs comfort. Talent needs to focus on itself. Talent needs freedom.
Anyone who studies talent in any sphere will tell you this. So will all talented people. They will say that their parents let them dream, that their schools nurtured their potential, that their first bosses mentored them. They will talk a lot about patience.
You don’t know where talent will come from, or when it will form. You can’t just focus on those who display talent at a young age. Some take time to find their talent. Matt Turner, who will play in goal for the U.S. team in next month’s World Cup, wasn’t drafted after college. In soccer mad countries like Brazil, he wouldn’t have gotten a chance.
This is America’s secret sauce.
What’s most distinguishing about the 2022 economy is how capital is taking the hit.
We all know about the bear market in stocks, down over 20% from their peak. Bond investors are also down over 15%. Real estate is rolling over. This is where capital gets its money.
Meanwhile, ordinary Americans are doing OK. It’s true that inflation is outpacing wage gains, but there are wage gains. Jobs remain plentiful. Last year’s stimulus was mainly aimed at firming incomes. More relief is coming from the Inflation Reduction Act.
This has created pure fury on Wall Street. I follow financial Twitter for my job, and the anger is palpable. Investors are predicting the imminent downfall of the whole economy. They’re demanding that the poor pay the penalty for their mistakes with money. They really can’t get their heads around the current situation.
Markets will turn when they’re convinced the Federal Reserve is easing up in its war against inflation.
This could come at any time. Home prices are starting to fall. Industrial input prices have been falling for months. The strong dollar means we’re exporting inflation and importing deflation. Technology continues to cut costs, including labor costs.
Once the tide has turned, TV will be all over rising stock prices. The Cloud Czars will rise first, along with consumer stocks. Even banks might finally get a bid.
But the real gains will come in bonds.
That’s a problem. Because bond markets are far less liquid than stock markets. It costs big money to research bond markets, even in a cursory manner. It’s difficult to execute a purchase, even of a government bond. Most investors don’t understand bond markets. Others fear the fact that bonds have been falling in value right along with stocks.
But here’s what happens when money costs money but then starts costing less money.
Once you understand this you can understand the 21st century economy and Federal Reserve policy. If you can’t, rich people will lead you to believe things against your interest, like government debt is your mortgage or a trade deficit is money we owe other countries.
What follows is a simplistic explanation. A longer one can be found here.
The amount of money in circulation should approximate what’s needed to sustain economic activity. In a normal time, you can see how much you need by its price and what’s happening to prices in the economy.
When there’s not enough money, as was true in the Great Depression, the Great Recession and under COVID, economic activity grinds to a halt. People don’t buy stuff thus people can’t sell stuff. In the first two events, there was too much stuff for the money available. In the latest case, there wasn’t enough money to buy the stuff.
Even 50 years on, we don’t understand Moore’s Law.
Moore’s Law accelerates the pace of change in every direction. It’s not just about silicon. It’s not just about technology. It’s about what is enabled.
Two things that are enabled by technology are deflation and change. The first is a subset of the second. Technology lets consumers and businesses adjust to change rapidly. This is true not just because technology is improving, but because its adoption keeps increasing.
Moving technology from a desktop to a smartphone is a step change in its adoption. Smartphones let us compare prices inside a store. They let us route around traffic jams. They bring the office to the job site. You can find whatever you need to know, from anywhere, using a smartphone.
A world of instant answers means a world of instant adjustment. Demand can adjust faster than supply, but supply can adjust too. We all went into lockdown together, we all came out of it together, we all demanded products together, then we demanded services together. There was a lag, but by and large the economy has kept up.
Some changes are permanent. We don’t need offices the way we did. You can appear on TV from your living room, kitchen, or bedroom. What I’ve seen, as a business reporter, is that the economy can now react ahead of policymakers. Even the Federal Reserve, which can adjust policy every month or even within a month, can no longer keep up.
Malcolm Gladwell pulled the latest edition of his Revisionist History podcast, called Confessions of a CEO, after an outcry over his attitude toward working from home.
He’s against it.
I have worked from home for nearly 40 years. My wife has done it full-time since the pandemic started. That doesn’t mean I don’t understand where he’s coming from.
There are many jobs you can’t do from home. Factory jobs. Food jobs. Lab jobs. If you’re the one taking care of the cloud, you must go to the data center.
But for what the 20th century called “office work,” it’s stupid. We have laptops. We have phones. Who cares where they are? If you must bring people together, for team-building or making decisions, you have an obligation to make it fun, and make it rare. If you want people to come into your store, make sure you deliver personal service and a buying experience they can’t get online.
Today is the calm before an economic storm.
The Federal Reserve is hiking interest rates to slow inflation. Many commodity prices are already coming down. But if it hikes too fast, economic activity will slow and that will be a recession.
To Nouriel Roubini (right), the economist known as “Dr. Doom,” a recession at this time could quickly become a depression, because public debt remains at historically high levels. If you owe $43 trillion at 1%, it costs $430 billion to carry it for a year. At 3%, it’s $1.3 trillion. Your budget just got broken. That’s his reasoning.
But debt owed to yourself isn’t real. We can print that $1.3 trillion. The risk then is that the dollar falls off a cliff. That’s not happening. If anything, the dollar is too strong. We’re importing deflation. Every western nation, and China, has massive debts.
It’s why the doomsayers were wrong in 2009, and again in 2020. It’s why we couldn’t fight the Trump tax cuts. They didn’t create inflation. They didn’t sink the dollar.
I have missed the last two weeks because we finally took a vacation, one we had been promising ourselves for 3 years.
Nothing was going to stop us. Not this time.
You probably feel the same way. That’s the problem. We’ve all been feeling the same way for years now.
In a normal economy, we feel differently. We’re of different ages, with different incomes, different interests, and different lifestyles. Usually, it balances out.
Not these last two years.
First, we were all in lockdown.
Then we all learned about Zoom.
We all saved together, and last year we started demanding things together. The same things at the same time. This brought big raises and labor shortages, especially in scut jobs. Supply chains couldn’t adjust because demand exploded, and China wasn’t ready for it. (They’re still not completely ready.)
Then came the war. We cut off Russia, OPEC took advantage, and Texas knew it had a good thing, so U.S. supplies didn’t jump either.
The result has been a hit of double-digit inflation, the same kind I lived with through the 1970s. Markets are reacting just as they did then. When money costs money, you need an immediate return to pay it back. Equity grows scarce as investors rush for safety. The stock market was crap in the 1970s.
We’ve been whipsawed, and it’s natural to feel upset about that. Our spending patterns changed faster than the economy could. Stock market analysts were months behind these changes. Policymakers were even further behind. They still are. That’s why the national mood is sour. We’re headed for a crash, and it seems there’s nothing we can do about it.
But there is something we can do about it. Our collective common sense will get us through if we just believe in it and act as though our neighbors aren’t all idiots. They’re not. Most aren’t, anyway. That’s why democracy works.
Thanks to Moore’s Law, the speed of adapting to change will increase, too. We have the technology to beat inflation now. If tech companies want to abandon the coasts and find cheaper labor that just means fatter returns sooner.
You want your money in the long term trends, those I identified three years ago. The end of oil. The Machine Internet. DNA as a programming language.
The problem is that, since we’re early in this new boom, the winners are hard to identify. Winners that look obvious, like Tesla and Enphase, are still overpriced. Look first to the Cloud Czars that will lead the Machine Internet forward. As to DNA, I’d buy an ETF like iShares Biotechnology (IBB) or the S&P SPDR Biotech ETF (XBI) until we know more.
Bear markets end. If you can wait three years, and if you’re investing instead of speculating you should be able to, you’ll mostly be whole and have a clearer idea of what will rise further, especially if you invest in real companies with real earnings. Now is a time to be thankful for diversification and cash.
This too shall pass. In a year or two, we won’t all be thinking the same things, doing the same things. I may be retired. You may be getting started on a family. Our interests and economic patterns will be different. That’s when we’ll find out what the “new normal” really means.
Unless Putin goes nuclear, in which case it doesn’t matter what you’re in because we’re all dead anyway.
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