Exponential Investor – formerly known as UK Uncensored
In today’s issue…
- Putin’s right-hand man tells us how it really is
- The shifting winds of global politics
- A new weird theory on bitcoin
In last weekend’s Lunch with the FT, there was an extraordinary quote.
The kind that hooks you into reading the whole piece (and it didn’t disappoint).
“An overdose of freedom is lethal to a state. Anything that is medicine can be poison. It is all about the dosage.”
The man was Vladislav Surkov, who it seems was an architect of the Russia we know today – a deliberately mis-spelt demockracy – where elections are held but the result is pre-ordained, where a controlled opposition exists but only to provide a critical, but not too critical, outlet for dissenters.
The article, an interview and exposé in the traditional FT Lunch style, opens with this none-too-subtle analogy:
“There are two options,” says Vladislav Surkov. “The first is Anglo-Saxon. I give you the menu, you can choose what you want. The second option is Russian. There is no choice. The chef chooses for you, because he knows better what you want.” Surkov smiles. “I suggest the Russian option.”
Get the message?
Now I don’t very often talk about the nature of government and the role of politics in investment.
But to me we are at a broad inflection point, where capitalism as it exists in some places today is under heavy fire. The current form of capitalism in the West is, fairly enough, coming under criticism.
I do not mind this. Capitalism is not one thing, it takes many forms. The current form is… improvable, I would say.
For around 50 years now, we have been living in an increasingly cut-throat, profit-driven form of capitalism.
Like all things though, life moves in cycles, and this particular cycle started with Milton Friedman’s idea that companies should be focused on one thing above all: profits.
This was his theory of profit maximisation, from around 1970.
Now though, the pendulum has swung rather far, which has caused the response that we now see everywhere.
Occupy Wall Street, Brexit, Trump, Corbyn.
The environmental, social and governance (ESG) movement reflects a growing desire to see companies doing good not just seeking profit at all costs.
People have grown weary of the scandals, the fraudsters, the corruption and the cronyism, the billionaires growing richer during Covid-19, and the growing inequality too.
I have written before about stakeholder capitalism, which is the Japanese concept.
In stakeholder capitalism, a company doesn’t just consider its shareholders when making decisions, it thinks about employees, customers, lenders, locals, suppliers, the state, local society, and shareholders too.
In my mind I have this idea of a company which prefers to save rather than spend on growth, because it knows that its employees and their families rely on it and so survival and stability is preferable to an attempt to grow and compete. It’s just a different mindset.
The reason this all matters is that recently, two quite big shifts have taken place in political consensus.
The first is a social awakening about the social and environmental costs of doing business. Like it or not, ESG is making a powerful difference, and it’s not a gimmick either. It’s the investment industry’s way of reflecting the changes in consumer behaviour and politicians are also responding to changes in voter sentiment about the climate.
Is Boris Johnson spouting his green agenda from a place of expertise, of deep environmental concern, or of ambitious pragmatism? No – he thinks it will win him votes.
Same with the minimum corporation tax agreement reached by the G7 recently.
To me, the Friedman doctrine of putting shareholders and profits before any other consideration feels like it has reached its high point, and that we will start swinging back towards stakeholder capitalism.
Things like equality, fair wages, sustainability will all be considered key tenets of doing business, while regulators and consumers will slowly force change from above and below.
The other change is in terms of the role of government.
Friedman prompted the Thatcher/Reagan era of free-market capitalism, laissez-faire economics.
Keep out of it – they reckoned.
Now though, the financial crisis taught us what untethered capitalism can look like – greedy, ugly and desperately destructive.
The austerity that was enacted didn’t achieve the desired goal.
Coronavirus has been the first crisis since we learned that, and governments have responded to this economic hit differently, turning not to austerity, but to incredible spending, and interference.
Governments will spend money to green the economy. They will spend money to save the landlords who aren’t getting their rent. They’ll spend money to save everyone in the hospitality and travel industries.
Spending, not saving, is the order of the day, in the UK, the US, the EU and many other places too.
This does have implications for investors.
ESG and inflation are themes which are being driven by changes in trends which move very slowly. Think in decades, not months.
They are not “transitory”. Neither will grow or go up in a straight line (in fact, we might have seen the biggest inflation surprises for a while).
The political winds have shifted, driven as they always are by the will of the voter, and investors would do well to notice the change, I think.
12 Years a Bull?
I have a new thought on this year’s hot topic – bitcoin. It’s kind of a straw man argument (just the kind of annoying ignorant thing I railed against last week!), so I apologise for that.
The theory is this:
It’s just bull market confirmation bias, and its price rises might be one of those things that people have come to just weirdly accept because it’s been true for over a decade.
Like, there’s this weird kind of acceptance that bitcoin is on an ever-increasing logarithmic cycle, that every bear market is followed by an even greater bull market.
That the only option is that it will be higher in five years or 15 than it is today.
Oddly, in many circles this is an accepted fact.
You might have seen some charts so suggestive they belong on a certain page of a certain newspaper.
They’re based on something called the stock to flow model, where dwindling supply automatically means higher prices.
Indeed, I have kind of bought bitcoin on that basis! In April of last year when it fell back to $5,000 per coin, I bought a bit because even if it didn’t bounce in the short run, at least I knew it would be higher at some point in the future.
That’s a fascinating thing for me to have unquestioningly accepted.
I no longer do, even though I now know much more about bitcoin and understand far better what it can offer and achieve.
It literally cannot be possible.
Why do people shrug their shoulders and think yeah, suppose so, then?
Because it’s been setting higher highs and higher lows for a decade now, gaining adopters and fans at every stage.
And rightly so – I mean – it’s a truly incredibly and very, very timely creation, with loads going for it and now a whole brilliant, diverse, exciting ecosystem following in its wake.
One small part of me wonders whether it isn’t just the epitome of this unstoppable bull market we’ve had for the last 12 years – leading to a pristine example of pattern recognition and confirmation bias.
My conclusion from these thoughts is not it’s going to zero, or it’s a fraud, or anything like that (although I briefly entertained the concept, and it could happen I guess).
But I think it has gained a critical mass and in a world that will increasingly want scarce assets and stores of value it is likely to be a key one. Bitcoin and blockchain technology have no future.
But at some stage, it’s going to have to reach a point where there aren’t a long line of future buyers just waiting to be converted, and it becomes an evenly traded asset like any other – whose god-given destiny isn’t to rise higher and higher, on a four-year halvening cycle ad infinitum until everyone alive is a fiat millionaire.
So it sounds silly to say – but my conclusion is that bitcoin might not just go up and up forever.
However, in trying, it might land on the clouds…
All the best,
Co-editor, Exponential Investor