Separating The Signal From The Noise: Vol. 1
As a new investment fund focused on the disruptive technology of tomorrow, we hope to share our world-view and mental frameworks in which we derive our theses. We welcome change and progress, but also strive to understand truths that remain constant and are timeless.
Apart from sharing insights from our individual investments, we will also post our analysis of the economy, finance and philosophy.
“All there is to thinking is seeing something noticeable, which makes you see something you weren’t noticing, which makes you see something that isn’t even visible”- Leo Strauss
To understand any complex system, be it in the natural sciences or social, one must first study the worldview of the originators, or the select few who construct the paradigms we all live in. Be it for better or worse, power always has an elusive attribute of shifting away from the many, into the hands of the few.
It would appear this is an “unintended consequence” or side effect of any functioning system. However, if one studies the consistent and timeless prosperity (wealth inequality) the originators enjoy, it would appear these are not consequences, but rather a built in feature of the system.
In the case of the United States, the prevailing worldview of several presidential administrators has been shaped by the Straussian school of thought. In essence, the now prolific but once overlooked philosopher, Leo Strauss, originated the notion that the existence of societies falls into two categories: The Ancient & The Modern.
The most well renowned characters of the ancients are names you have probably heard of, Aristotle, Plato, Socrates etc. The zeitgeist of that society focused on questioning the basic fundamentals, such as the purpose of man, the nature of god & truth, and our place in the universe.
An unintended and stark consequence of this consciousness was endless wars. These can be dangerous questions for the masses to ask when it encompasses religion (crusades) and politics, subjects which humans are naturally passionate towards, and is an inevitable source of conflict.
So how does one create a system, devoid of these inevitable conflicts? The “modern” have created a system which solved the problem quite simply, but very effectively.
Just stop asking the questions.
Straussian philosophy asserts that modern society has propagated certain “noble lies”, which draw attention away and separate us from troublesome existential questions.
In the interest of not being counterproductive and offensive, I will not get into what these noble lies are that exist in society, but rather present the framework to set the scene for an analysis of the economy.
It will be made clear that ignoring the questions of the ancient’s, present a new set of problems, equally as devastating.
True innovation and growth has stalled for over a decade, with plentiful narratives and promises of the “future” being just around the corner.
It is the abandonment of asking existential and fundamental questions, which has resulted in a global economy which is more adept in creating asset bubbles, instead of new paradigms and optimistic dreams.
Volume 2: Economics
“Gold is the money of kings, silver is the money of gentlemen, but debt is the money of slaves”-Norm Franz
Ever since the end of the Bretton Woods agreement in 1971, debt has become the origin of all money in modern society. It originates from a central bank in the form of fiat currency, which is then propagated into the commercial economy through banks who lend it out at interest, and into governments through the treasury.
If one closely examines what debt really is, it can be seen as a “chance”, given to an entrepreneur or business to grow, innovate and produce a return. The cost of this chance being the interest rate attached to it.
What happens in a world where we are giving too many chances to people, not attaching any cost to it (zero interest rates)? Will they still grow, innovate and produce returns? If you look at Europe, Japan and several other areas around the world which adopted zero and even negative interest rates, the answer is a resounding NO.
Here is a very simple diagram of how capital flows in an economy, or at least what is taught in schools, with a slight twist. (As always, ignore the handwriting)
The Flow of Capital
If you examine #3 closely, you will notice something quite strange. The significant number of green dollar signs represents the size of the “chance”, or debt (money) given to corporations, with a modest two red dollar signs, representing the cost.
On the other hand, the reverse appears to be true in terms money or “chances” given to the general population, representing loans to small businesses. On average, since the financial crisis, roughly 70% of all small business loans get rejected, even though the average amount of money one applies for is significantly low (less than $250,000).
This adverse outcome was in part aggravated by the consolidation of the banking system, where large commercial banks bought over the local community banks who used to provide loans to the small businesses. New business formation is at an all time low.
Going back to the previous question, when there is significant amounts of money lent to big corporations around the world at no cost, what has been the result?
A corporate debt bubble. To simplify this phenomenon, let us just call it a “bunch of chances” given to large businesses, with no real growth, productivity or innovation (ignore the exceptions such as fringe software companies, they are few and far between).
To support this claim, just look at the amount of chances that were given ($ debt), and what was the result. Over the past 20 years, $185 trillion was printed and lent out in the global economy, only to produce $46 trillion dollars worth of GDP.
Central Banks vs. Deflation
As mentioned above, the excessive debt taken on by big corporations across the globe have caused asset bubbles both in terms of debt, and equity (stock market). How is it that a population which on average, does not have $400 in case of an emergency, has one of the most robust and liquid stock markets on earth?
Using a reductionist approach, it boils down to two equal and opposite forces at play in our economy today. Inflation for the rich, and deflation for the middle class and poor. The following is illustrated in the diagram below.
Central banks around the world are battling deflation, trying to rapidly increase consumer spending. They way in which interest rates were cut to zero in the USA, and negative in the EU, signal that:
#1. The businesses do not have productive ways of deploying their money other than inflating their stock prices to benefit themselves and investors.
#2. Money is not reaching the majority of consumers, but being stuck in overvalued investment vehicles, or in offshore tax havens. (Ex. The stock market is just 10% off record highs today, while 22 million Americans are unemployed.)
The same people (us) who cheer for technology and disruptive innovation, are the same who get undercut by the deflationary and downward pressure put on prices, as seen in the wage level growth, or lack thereof. Automation, AI, ML and the majority SaaS companies have ushered in a new dimension of cost cutting, unprecedented in history. The very flow of capital from banks to VC’s and corporations is causing deflation, in a reflexive loop (shown below).
The caveat here being, at the “Venture Capital/PE” box above, the perpetual inflation stays in their industry, but it exports deflation (tech) to consumers, which causes further reflexive inflation to their industry (marked up valuations and funds), so on and so forth.
In a tech-deflationary environment, the middle class in the “developed” world bears the cost, while developing countries (outsourcing) and investors (globalists) reap the benefits. This trend will continue to rise exponentially in the near future, as the cost of producing goods has decreased significantly, and ineffective distribution of wealth to the masses will prevent consumer driven inflation (the necessary amount).
Dollar Liquidity Crisis
Conventional wisdom would assert that despite the technological deflation mentioned above, the excessive printing of money by central banks, mainly in the United States, would cause uncontrollable inflation. Or at least, that is what Econ 101 taught me. However, there is a massive dollar shortage in the world right now, with over $15 trillion of dollar denominated debt being issued outside the USA in the last decade itself.
What does this mean? As long as the US dollar is the world reserve currency, any meaningful amount of money which a bank will lend a foreign nation must be in dollars, as inflation is prevalent in many developing countries. If the loans were made in let’s say, Venezuelan Bolivars…well…you know where I am going this.
The US dollar will continue to strengthen against foreign currencies, despite the Fed running the printing press 24/7. The debtor nations have decided to take on more debt, just to pay the interest (in dollars), as their currencies are being significantly devalued against the dollar.
Just recently this trend has been playing out in Lebanon, where there are ongoing protests due to the Lebanese pound experiencing a devaluation against the dollar, and food prices soaring.
So we can continue to print money domestically, without fearing inflation in our currency, what could be wrong with that? Look no further than the diagram above, which rinses and repeats in a reflexive feedback loop.
End of Vol. 1
Disclaimer: We are strong believers in the power of free market capitalism, but believe we must work towards a more equitable and fair system for all.