Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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March 12, 2021

Capitalism is an Operating System – Upgrades Are Risky

Ideological Narratives 

Much in the media this week has illustrated the excesses of the much-maligned bubble tendencies of the capitalist casino we inhabit. Examples cited include the c.$700bn raised by SPACs; the $130bn recovery in the market value of Tesla in three trading days; the renewed volatility in GameStop shares; the launch of a FOMO ETF (yes, seriously); and my favourite, the sale by Christies of a non-fungible token (NFT) of a work of art, with no physical presence, for $69m by an artist, Beeple, who until this year had never achieved more than $100 for a piece of his work, someone of whom I had never heard. These are sure signs that the end is nigh for the wretched capitalist system that continually plagues our comfortable world with inexplicable and risky events. Meanwhile, on planet Twitter, in the land of Hodl, where the Bitcoin anarcho-cryptonuts reside, this is just fuel for the fire. Their world view is based on the inevitable “democratisation” of everything establishment, centralised and elitist. They are hell bent on the destruction of the powerful patronising establishment. These events are vindications of the free-wheeling nirvana they see as inevitable. Of course the central event highlighting these different world views is the $2tn Biden stimulus package enacted by Congress this week. One side sees the Biden package as a fix for the ideology’s endemic faults, the other sees it as a sure sign of its ultimate victory over oppressive big government. Both sides miss the point.



Capitalism is not an ideology; it is an operating system. Like language and the sum of human knowledge, capitalism is not a belief but an emergent phenomenon that has evolved over time, playing a significant part in our extraordinary progress. Over time each has evolved different versions and applications. We have many different languages and idioms, and we have established places of higher learning, erudite publications, and we have Google and Twitter. Each operating system has evolved along a journey of decentralisation, increased transparency and wider accessibility, not by design but by default. As with all evolving, complex adaptive systems, some of the variants of our operating systems delivered upgrades that have been adopted; most though fail. However, operating systems tend to evolve towards an open-source model because these prove to be more effective and adaptive.

Early Upgrades


The capitalist operating system has had many upgrades over the last few hundred years. A critically successful application was money. This enabled a powerful disruption called the division of labour and the specialisation of trade, made famous by Adam Smith in The Wealth of Nations. This application, often in the form of gold or silver coins, avoided barter’s tricky problems. It became generally accepted as a medium of exchange and allowed greater scale in production, and was a powerful engine for wealth creation. (See Adam Smith’s pin factory for details). However, coins had security issues, which were solved in later upgrades from gold and silversmiths in assaying services and deposit notes, or paper money.

Security Patches 


Greater scale in production afforded by specialisation and exchange demanded more capital and involved greater risk. The capitalist operating system had another upgrade, and applications such as joint-stock companies and insurance evolved from the social networks, called coffee houses, in London and Amsterdam. The cost of capital reduced for entrepreneurs and increased the risk-adjusted returns for investors. But what this idealised version of economic history glosses over is the short-term, often destructive operating system upgrade costs.

Scottish Export Success 


Another, more infamous, Scottish economist, John Law, introduced an application upgrade to money. Helpfully to his countrymen, Law introduced his concept of fiat currency in France, defrauding an entire nation, the collapse of which paved the way for the French Revolution. Meanwhile, London encountered the first known SPAC mania with ventures such as the South Sea Company and The New Darien Scheme, which inflicted devastating losses on unlucky speculators. However, despite these major crises, joint-stock companies and fiat currency remain cornerstones of our current version of the capitalist operating system. Financial innovation is risky and is often dangerous, but it is necessary.

Smartest People in the Prison


Former Enron CFO Andy Fastow tells how he was awarded the coveted “CFO of the Year” by CFO Magazine in 2000 and indicted four years later and ultimately sentenced to six years in prison, all for the same citation: the innovative use of off-balance-sheet financing vehicles, known as SPVs. He described what he did as “legal fraud”, innovation via the exploitation of legally permissible but ultimately morally unacceptable loopholes. This use of corporate structures that conceal a company’s true indebtedness is a classic example of financial innovation that lowers the cost of capital. Fastow is fascinating to listen to about how Enron and others pushed the system to the edge of legality and the role of lawyers and auditors in this process. Enron collapsed, and Arthur Andersen soon followed. However, off-balance-sheet financing remains in use today, most notably by the US Treasury, the UK Exchequer.

Weapons of Mass Adoption


Similarly, the years preceding the 2008 global financial crisis were characterised by the rapid growth in innovative financial derivatives such as collateral debt obligations. There was a perception, epitomised by Federal Reserve Chairman, Alan Greenspan that the cutting and dicing of risk in this way gave the banks a newfound ability to control their future and thus justified the lightest touch regulatory regime, and crucially more highly leveraged balance sheets. It was at this time, after 15 years in financial markets, that I first encountered professional risk management when the bank I worked for appointed a Chief Risk Officer. It was comforting for us on the front line that our employer was monitoring our VAR (Value At Risk) and applying serious resources to model the impact of asset volatility on our business. Preparation for the EU Markets In Financial Instruments Directive (MiFID) was in full swing. What could possibly go wrong? The reality was that the models failed to identify the inter-related nature of the risks being undertaken. No one really knew where the risks ultimately resided until it was too late. One weekend in September 2008, we awoke to the reality that the banking system was insolvent. More than a decade later, the world is still wrestling with the consequences of the socialisation of the banks’ losses from that period. However, complex financial derivatives survived and are now more widely available and cheaper to trade than ever.

Android or iOS? 


Financial innovation is a risky prerequisite to any meaningful upgrade to the capitalist operating system. In this context, current events in financial markets may make a bit more sense. In the late 90’s early 2000’s media commentators said that Amazon was a bubble because it was worth more than the entire world book and CD market combined. Ironically this week, the same line of commentary tells us how inevitable it is that Amazon’s first no-checkout store in the UK is opening up, while John Lewis (where the British establishment shops) is teetering on the edge of survival. Ironically, the new Amazon store’s popularity is such there are queues around the block just to get in, just another outbreak of popular delusion and mania?

ETF Use Case 


The narrative-based world views of the establishment and the disestablishment offer different interpretations of the capitalist operating system’s underlying fundamental force. Capital seeks the least restricted path to the highest possible risk-adjusted returns. Along the way, it tries new paths that present themselves. ETFs were first established as a niche product to hedge portfolio insurance products in the wake of the 1987 stock market crash. They only came into their own as a retail product, some 15 years later, after the dotcom crash permanently scarred the reputation of active fund management. Not dissimilarly, Bitcoin was born out of concerns for trust in the financial system post the great financial crisis. The white paper defining the blockchain protocol was published to establish a proof of concept, twelve years later, it now would appear to be following a similar path to adoption as ETFs. It could yet fail or change course. Indeed, its ultimate application may well be in terms of blockchain-enabled NFTs transforming the creator economy. Beeple is already one of the world’s most successful ever living artists, a few months ago he was unheard of, as were NFTs.

Capitalism Version [X] 


Capital forces its way into innovative financial applications, a pattern that has historically been associated with heightened financial risk and fraud. The current iteration of the world’s financial structure and plumbing, in place since the early 1970s, is under pressure. Money is digitising, and the regulatory authorities risk being left behind in the current upgrade cycle. The uncertainties are many and varied but have profound implications for what we regard as money, the structure of our capital markets, and the banking and financial services sector. Capitalism is searching for a better version, an upgrade. As with any complex adaptive system, it is impossible to predict the outcome. However, history suggests the upgrade package will eventually be more open, more transparent, more widely accessible, but that the adjustment will contain heightened levels of uncertainty and be subject to the oppositional established forces of counter-reformation. Yet the underlying evolutionary forces at work are far more powerful and enduring than the popular narratives describe on the surface.





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