HyperNormalTimes

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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April 11, 2021

“How’s the money?”… “what the hell is money?”

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?” David Foster Wallace, in 2005 Commencement Address to Kenyon College 

This parable could refer to many things about the narratives we adopt to navigate our complex world. We all go about our lives holding onto narratives. The parable highlights that it is often the things we take most for granted that we question the least. We develop narratives until they stop working for us and evolve into a better or more acceptable explanation of what is going on. Often it takes a crisis or other milestone event to catalyse a change of narrative.

This week the death of the Duke of Edinburgh was a sad blow for his family. It was also sad news for the people on the remote Pacific island of Tanna. Due to a strange twist of cargo cult fate, this community believes the Duke is a god. The Duke, known locally as Man Belong to Mrs Queen, is responsible for everything good in the world since he visited them in 1974. An amusing anecdote, maybe, but many of us are often no better at questioning the things we experience around us in our everyday lives, particularly when it comes to money.

In financial markets, the trend in interest rates and inflation have been downwards for forty years. Not many people can remember rising interest rates and proper inflation. Particularly in the last twenty years, we cannot remember what it is like not to have central banks watching our back. In 1998, the much-heralded hedge fund, Long Term Capital Management, lost over $4bn in an emerging markets credit crisis. The Federal Reserve and the investment banks orchestrated a bailout. (It was the first time the Fed had explicitly used monetary policy to avert a financial market crisis. The start of a more frequent and amplified refrain). LTCM’s positions were unwound in a controlled way, the Fed lowered interest rates and boosted short term liquidity, disaster was averted, and things recovered. Contrast this to a couple of weeks ago, when a “family office” called Archegos blew a hole in $20bn in one day and, nothing happened. Markets slowed down momentarily like cars looking at the car crash scene on the other side of the motorway but then moved on. We are awash with liquidity, leverage and not much regulatory scrutiny.

To this environment will be spawned this week a new listed entity. Coinbase is a cryptocurrency exchange and is just ten years old. The company is expected to attract a valuation of around $100bn, has 56m verified users and did $1bn of revenue in the last 90 days, which is more than it did in the whole of 2020,  reminiscent of the Google IPO, nearly 20 years ago. We all knew the internet was amazing and the Google search engine transformational, but none of us realised how amazingly profitable it was until it revealed its financials. The “move fast and break things” crowd is finally making a proper assault on money. The crypto-genie is not going back into its bottle. Whether Coinbase is the Netscape or the Google of the blockchain revolution, the asset class has marked its arrival.

In 1976 Freidrich von Hayek wrote a book called The Denationalisation of Money. He introduced the idea of competitive note issuance, which he saw as preferable to a government monopoly. He, like Milton Friedman, could see a way to control the ruinous levels of inflation experienced in the 1970s. (His solution was far more radical than the Monetarist, whom Hayek always believed was waywardly statist). A few years later, Hayek was quoted, “I don’t believe we shall ever have good money again before we take the thing out of the hands of the government. That is, we can’t take it violently out of the hands of the government, all we can do is by some sly roundabout way introduce something that they can’t stop”. He was widely derided by fellow economists, political thinkers and the media. Hayek wrote his theories before the personal computer, the internet and any conception of a cryptographically verified digital asset. But when I hear the old fish asking the younger ones, how’s the water, I think of him.

Jeremy

Ealing

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