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Front running is illegal – but not for everyone
Are we watching Reddit disestablishmentarianism?
- Silver’s bigger than Gamestop – can the “short” be broken?
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
When Trading Is Free, You’re The Product
February 3, 2021
The McAlvany Weekly Commentary covering monetary, economic and geopolitical news events.
David: It’s the big guy who’s already figured out how to use this system opportunistically to his benefit. And I don’t necessarily point a finger at the big guy who is smart enough to figure out how broken the system was and how to use it or leverage it, but now you’ve got the little guy figuring out that he can leverage it too and make a bunch of money really fast. My challenge and I think great fear is that I don’t think this is going to end well for either of them.
Now, here are Kevin Orrick and David McAlvany.
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
While I was in Denver on the 16th Street Mall this last few days. And got a chance to see, 16th Street Mall, of course, is right in the heart of downtown Denver near Rockies Stadium and the clock tower where my daughter got married. That’s what I was there for. My daughter got married. Yeah. It was amazing. The night before, I was hungry for some Indian food, just I was ready for some curry. I went out and the restaurants, of course, because of COVID, there’s hardly anybody on the 16th Street Mall, hardly anybody in the restaurants. And I was thinking, how in the world is this guy staying open? – this man who owned this restaurant, very expensive real estate.
And as I was sitting there, I started to realize it’s not about the people sitting inside, these guys, these bike couriers with these gigantic backpacks were showing up, lined up, they had their masks on, they had their helmets on, and they were waiting to pick up food and deliver it, people were still going out, but they were ordering in, and these bike couriers were delivering, but I want to get to one of the key things that I heard Dave, because I think it characterizes what’s going on right now.
David: So I was just wondering, on the delivery side, what do they call someone … if you’re bike courier delivering Indian food? What are you if you’re delivering Chinese food?
Kevin: Well, I don’t know. I do know this. I do know that these guys all had a dream or at least some of them had a dream of not having to carry food for forever. One of the bike couriers came in and he asked the owner of the restaurant, he said, have you been buying stocks? Have you been doing…? Because this is the heat of the battle right now with GameStop and all this other stuff. You could tell this was a guy who had never purchased stocks before as far as the bike courier goes and he asked the owner of the restaurant, he said, “Do you think we’re going to get rich?”
And I was telling my son the story. I called him on the phone. And I said, “This is really amazing to see these bike couriers talking about the stock market.” And my son, who’s 30 years old, he reminded me of something we all should know, when the shoeshine boy is giving you stock picks, you’re at the top of the market. And in a way, I’m not saying that the bike couriers are shoeshine boys, but it was interesting to sit there and watch how business and life has changed over the last year, but especially over the last two weeks.
David: Yeah. I mean, I think history students will read with fascination about the capital flows of the early 21st century. You had credit expanded, money supply stretched to gargantuan proportions, you had Wall Street, which became more and more casino-like, investing became trading, trading was transformed from quarterly timeframes and long-term holds to monthly timeframes and short-term holds, then to daily profit and loss statements, and then even a focus on trading in the nanosecond.
Kevin: It’s hard to live like that when you’re thinking continually about whether the price is going to go up in the next nanosecond.
David: I mean, imagine needing to have your trading facility co-located with an exchange so that you have a fraction of a second advantage over the other high-frequency traders. We’re not investors anymore. We’re traders, and we’re, in essence, try to pack a decade’s return into a day. We’ve trained ourselves to almost expect that, expect instant gratification, harness speculation in order to shrink time, deliver abundance. In many respects, like Amazon delivers packages, it’s free of charge and it’s the next day.
Kevin: Well, do you remember? Okay, I told you the story when I was throwing darts at a carnival one time, and the guy said the darts are free. Well, the first few were, but I think I should always learn to be suspicious when I’m told something is free.
David: Well, so we deal with expectations. If we’ve trained ourselves for instant gratification, what happens when expectations are disappointed? You’ve got Wall Street firms that tell you trading is free and, like any other technology portal, they’re merely monetizing client relationships and literally making up the loss of transaction fees on volume.
Kevin: Oh yeah, we lose on every sale, but we make it up on volume.
David: But literally it’s selling the volume of transactions, selling the volumes and the transaction flows to Knight Capital, to Citadel, who then front-run your market orders and make fractions of pennies on billions of shares.
Kevin: Say that again, they’re front-running. I thought that was illegal.
David: This is a new structure to the market. And it’s all disclosed, you can look at the documentation, whether it’s a TD Ameritrade or a Charles Schwab or a Robinhood, they get paid for the order flow. And as long as you disclose what the order flow is, you’re fine. So Robinhood makes about a $100 million a quarter, that’s real money, by the way, on selling its transaction volumes to Citadel, and they sell some of the transaction volumes to other people too. So, but they in turn, Citadel in turn processes their trades, I mean, I’m sorry, your trades and their trades. You figure out how the sequence goes. In this case, it’s pretty nice. It’s pretty nice to have the Treasury Secretary in your back pocket, $800,000 per speech is apparently what gets the job done.
Kevin: So if it’s free, you’re the product. Okay. Remember that, if it’s free, you’re the product.
David: Yeah. And we tend to be critical of the system when things appear obviously unfair. So there’s a number of instances this last week where it seemed like the rules changed in the middle of play and foul was cried. And we support the system. This is the unfortunate side. We support the system that was constructed to be unfair as long as we can save a little here and there. So you’ve got Amazon shipping that cuts out your local business. They can’t possibly compete with Amazon’s razor thin margins. Same with Robinhood, they gave you free trading and they make money by monetizing people on its portal, like Facebook or any other digital platform. You referenced a quote from Becker Polverini. July, 2017, our friend Becker said repeatedly, “If you’re getting something for free, chances are you are the product.”
Kevin: That’s true.
David: So, I mean, in this case, you’ve got Reddit traders using the Robinhood platform that are grist for the Citadel mill. And that’s how the machine was built. The machine is not built for consumer or speculator protection.
Kevin: But you said the word machine. Now, this is important. The machine can also be the swamp. I was reading that Janet Yellen made a very large speaker’s fee for Citadel just recently.
David: Citadel. That’s what I was talking about, 800 grand.
Kevin: 800 grand for speech?
David: Yeah. I’m trying to think, how many words were in that speech? Did she type it out? Was it handwritten? Was it a note cards? Will those sell like baseball cards someday? I mean, if the speech itself was worth 800, I wonder what the collector’s value… Never mind.
Kevin: It’s a large amount of money.
David: If you corrupt the money, you corrupt the culture. And there are a few other steps in the process. Go back to our friend Richard Duncan, highlighting some of these themes in his book, The Corruption of Capital. So to fill in the gaps between corrupt money and corrupt culture, you’re talking about the deformation of capitalism, which starts with the deformation of capital and at its root is the deformation of money, the value of the money and value, as we discussed last week, the different appraisal or approach to the markets is ultimately displaced by momentum trading, short-term trend following. And no one’s interested. No one’s interested in taking the time to reflect on fundamentals or real value when, with the same time, you can bluff and you can buffalo and you can bet your way to millions or billions.
Kevin: Well, I had asked you earlier, how do you live your life when you’re thinking in nanoseconds, when you’re always trying to figure out whether you’re making or losing money? I talked about the emotional drain, and I think a lot of people right now, they’re walking over to their computers and immediately checking, or their phones, checking to see if they’re making money.
David: There was a mistake that I made a number of years ago, and certain of my mistakes I could hang on a wall of shame, whether it’s losing on this investment or that investment.
Kevin: The library of mistakes, right? Yeah.
David: My own personal. So I used to trade options, and the money was good, but frankly, the impact on my thinking was too high a price to pay. So the mistake was not that I lost money. It was that never before or since have I cared so much about the next 10 seconds. And it’s short-term trading that necessarily shrinks your time horizon. The problem is, what works in the short run does not necessarily work in the long run.
Kevin: Well, think about you’re racing. When we were learning triathlon, this was 2015, 2016, going to these little triathlons, the Olympic lengths, that type of thing. I would wear myself out instantly on the swim, and there still was the bike and there was the run because I would sprint on the swim thinking I had to get off really quick. Well, life’s not a sprint. Life’s a marathon.
David: I did some training a few years ago with a friend of mine, a mutual fund manager in Kansas City. And he’s an avid Ironman Triathlete. He probably does four or five full distance races a year, 140.6, very competitive, probably top four or five percent in the country in his age group. And we went for a training run and I ran faster than he did. Well, no surprise, he runs around 40, I run a 70.3. I’ve been training for half the distance and you can run the pace faster when the race ends sooner. And so if you shrink that back from a 140 to a 70 to a sprint triathlon, which is done very quickly, you can push pedal to the metal and go as an all-out, just as the word would explain it, and sprint the entire thing. You cannot sprint for 140 miles and life is not meant to be a sprint.
And I would say that anything that causes you to think in terms of life as a sprint is ultimately going to be debilitating. Life is lived not as a singular unending sprint, but more like an ultra marathon. Pace is critical, your energy inputs are key, rest is important for you to go the distance. And if I go back and look at my own personal timeline, the legacy project and writing the book, The Intentional Legacy, came after that period of short-termism related to option trading. And what it allowed me to do, and it was really an important process. I don’t think we’ve ever talked about this, but it allowed me to re-extend my own timeframes and infuse meaning into the present with its impact and importance for the future.
Kevin: Don’t you have to think in a way of canceling out the noise? I mean, we all know the markets are rigged to a degree, but let’s face it. The reason we’re still out there and investing is we feel there’s some degree of normalcy, even if it is rigged.
David: Yeah. And I think if you are … the legacy stuff and short-termism, you might not care about that. You’d put that in the category of mumbo-jumbo. Here are the realities from this week. We know the financial markets are, to a degree, rigged, yet we believe there is enough normalcy and enough healthy activity to be able to engage and find value. What we’re doing and what has been done for hundreds of thousands of years, this is basically how free markets operate. You’re partnering capital with ideas and the energy of others to create something of greater value in the world.
Kevin: Okay. So speculation. There is a place for speculation. That’s how we grow and advance, but I mean, in a way, right now, speculation occurring in nanoseconds, you can flame out pretty quick.
David: Yeah. There is a degree of speculation in any investment. If you’re talking about the steam engine or the railway or the telegraph or the turntable or radio broadcasting or television, as things march through time, digital communication, they require capital, they require risk appetite, they require the willingness for savers to take a chance on an idea and allow that capital to be used creatively for innovation and change. It is, in one sense, a speculation. There’s nothing wrong with speculation. And because comment from, or purpose serve, the motivating factor may be the glory of the wind or riches or the aspiration of financial freedom.
Kevin: Okay. But let’s look at the last week. Something that for thousands of years has purchased 365 loaves of bread, an ounce gold, even though gold wasn’t the focus of the speculation, silver has become the focus of the speculation. Now, are we supposed to think of silver now as GameStop or something on that level?
David: Well, I think this is one of the fundamental reasons, I think gold and silver have a foundational role in a portfolio. They’re not speculations like the steam engine or the cell phone or the internet. In that sense, precious metals are not transformative. They don’t represent transformation or change. They are simply foundational to long-term financial stability. They are the basis of a sound financial reserve, be that for a family or for an entire financial system.
Kevin: Okay. But we’ve changed the markets. In fact, I don’t even know that we can call them the markets. The big boys, the central banks, and to a degree hedge funds, and to a degree some of the manipulators that have a lot of money to play around with, with the futures markets, they’ve changed the markets from what we call price discovery, where things are priced correctly, to where things are priced the way they want them to be. And it seems like that’s being threatened right now.
David: When central banks need to establish or maintain confidence, these monetary assets, specifically gold and silver, they’re integral to legitimacy and trust, they’re a foundational reference point for why you should trust this system. Later in the cycle, when confidence in central banks is taken for granted, those foundational assets are cast aside as limiting factors to growth and expansion. And that’s the cycle we saw the Bank of England do that in the late ’90s, they basically were dumping…
Kevin: We took advantage of the Bank of England, dumping gold. We bought their sovereigns.
David: From 270 down to 252, that is per ounce for gold, the British and Gordon Brown figured, we just don’t need it, it’s not doing anything for us. So they cast aside that as a limiting factor to growth and expansion. You’re talking about a cycle of trust building and confidence construction followed by trust breaking and confidence destruction.
Kevin: And it almost always leads to bad timing. Gordon Brown, talk about selling gold at the wrong time.
David: Well, at the end of the cycle, you’ve got the half-life of the currency, which begins to shrink. And the average investor in that context, very characteristically, gambles more and more, money being worth less and less. I think the rationale, or the instinct, if you want to put it in those terms, is why not try for the only road to financial liberation, high stakes gambling, speculation. That becomes the defining factor in capital allocation, not merely a factor against. There’s nothing wrong with speculation, but it needs to be done on a scale that isn’t totalizing in terms of your total portfolio.
Kevin: So GameStop has a certain size and they can play that game. They are trying to, the they that right now is just mad at the system and they want to make money. They’re sick. They’re sick of the big boys controlling things. So these guys are coming in. It’s almost like a moral need to come in and break the system. Are they biting off a whole lot more than they can chew on a silver market that’s much larger than GameStop?
David: Well, I mean, just for simple contrast – the answer is yes – but for simple contrast, you deal with the company like GameStop that had a valuation in the millions compared to a market, which has a total value of between 1.4 and $1.6 trillion. The silver market is small relative to gold, but it’s still a lot bigger than an individual company, which happens to have a large short position on it.
Kevin: Well, and the mindset of the person who’s buying silver right now for that GameStop reason is not a true value investor.
David: No. And additionally, there’s this idea that this is the biggest short in the world in the silver market. And I think there’s the legend of the JP Morgan’s short has been there for about 20 years. So you get silver peaking around $50 an ounce at 2011, 2012, that timeframe. And we were to expect a $1,000 silver, $300 silver in that timeframe.
Kevin: People get excited.
David: Because it was going to be the greatest short squeeze in the world. And this is something that those of us who are in the industry have only heard a hundred million times.
Kevin: We feel like we’re pouring water on an awful lot of calls when they come in.
David: Which is unfortunate because we’re very enthused. I’m very bullish on silver, I think silver will outperform gold. I think silver and platinum have a great place in a portfolio.
Kevin: But from a value standpoint, not a speculation standpoint.
David: And when a high speculation crowd starts to move towards the metals, this week, the Reddit crowd to silver, I’m not excited, because what you’re really talking about is hot money in an investment. And hot money is defined by a lack of commitment. It’s defined by short-termism.
Kevin: Even banks will characterize on their books what’s hot money, knowing that it may leave just as soon as they pay a little bit less on their CDs.
David: That’s right, deposits that are only there for a little bit of extra yield, not for any relationship or any of the other sticky widgets that they may hand out in the…
Kevin: That’s a one-night stand. That’s what it is.
David: And they categorize it as a business risk. Banks categorize hot money as a business risk, why? The damage done by the outflows around the corner keep my enthusiasm in check, even as we see inflows provide some immediate benefits.
Kevin: Look at Monday and Tuesday, this week.
David: Fairly healthy business, particularly Monday. A little continuation of that on Tuesday, but silver is up 10% on Monday, down 10% on Tuesday, in rough terms. It’s hot money that no more understands the value of a reserve asset than a desperate paramour mistaking the comfort of a hot rock for love.
Kevin: Okay. Okay. But saying that, one of the things that I hope the listeners walk away from this commentary is value investing, quality investing, longer term, don’t count your chickens every single moment of the day, but make sure that you’re buying the right chickens.
David: Well, the trend is towards quantity, the trend is towards capital flows. And what that suggests is that quality has been set aside. And when you’re willing to ignore quality and just focus on making it up on volume, I think, frankly, it’s a late cycle environment, the market cycle, the business cycle, the financial cycle, call it a credit cycle, that’s where you begin to say, how much further do we go? Again, I like the idea that Duncan brings to the table, that part of this corruption of capitalism is the redefinition of money. As we moved towards creditism, we did away with capitalism and what we knew more freely as the free markets. And that’s a big deal. That’s a very big deal.
Kevin: Well, the free markets aren’t the free markets, Robinhood-free. The free markets are free in pricing is what you’re saying.
David: Free in pricing, which obviously, is to some degree compromised. You’ve got the Fed spending $120 billion a month buying down interest rates and setting prices in the world of fixed income.
Kevin: I’m angry. You are too. We’ve been angry for years because of what you just now said. So it’s not just us. It’s the little guy. The little guy is looking at the big guy and he’s going, “You know what? If we can band together, we can break you.”
David: But this isn’t about a particular stock trade. It’s about a corrupt monetary system, which has set so many larger things in motion that when you start to pick apart the difference between left and right politics, and this issue of extreme, nasty bipartisanship, you actually find at the root the same issue, because again, when you corrupt money, you ultimately corrupt culture. And again, it may seem like there’s a lot of steps in between. There’s really not. It’s deformation of capitalism capital and at the root is money. So when you start playing games with the value of money, as we did in 1971, you start changing the dynamics in the marketplace, you start changing the social contract. And when people first discover that the contract’s been changed and it’s not to their advantage, they are angry.
So I appreciate the expression of anger amongst the Reddit crowd, the folks who are trading stocks and feeling like David fighting Goliath, but the issues are bigger. It’s not just about a hedge fund and a balance sheet, and who’s going to break the bank for them. The issue is bigger. And what a lot of these folks don’t understand is that they are a sign and symptom of a maladjusted monetary system.
Kevin: That’s right. It’s much bigger problem, but this is something that gives me hope, Dave, there are a lot of people who’ve never even thought about buying silver, who instead of going in and buying just some sort of paper speculation, they’re actually calling and buying the real deal. Now, here’s the difference. They’re not going to be nanosecond trading because they’re going to have the silver delivered to them, they’re going to hold onto it. And as that system collapses, you’re talking about the top of a system, as that system collapses, there are going to be, I’m hoping, there’s going to be a number of people who are sitting on ounces, real ounces of silver when everybody else’s speculation had just completely crumbled.
David: Well, and again, we look at metals as a reserve asset. And so when you look at them as a reserve asset, you’re basically saying, this is the capital of the old capitalism. And out of capital comes the opportunity for investment. And from investment comes economic growth and prosperity. Okay. So at the root, what we’re arguing for is a return to something that has proven itself to work. Now, the fact that that system has been corrupted, that’s a problem.
Kevin: But your kids are still buying silver ounces. They’re taking what they earn and they’re buying silver ounces, real ones.
Kevin: Real ones.
David: Yes. By this time, I mean, nothing is new if I tell you about Robinhood and the speculations in nearly defunct companies or penny stocks going from 80 cents to $200, you’ve figured out that there’s some investors out there who’re sleuth and determine who makes the short candidate list, who they think are going extinct. And then in this last week, we’ve also seen the other force, where a reversal of those trades can be effected if enough pain can be created as a classic short squeeze. And this goes way back. This is not just from last week. This goes back decades, even centuries. The information today feeds through faster. It feeds through chat boards and the trades flow through to the exchanges and reversals and trend and change in fortunes result. There’s no problem here.
I mean, short squeezes are old school. What is changing is that the old established powers are looking at an existential crisis as a result of new technologies and capital flows, which are not as easy to direct and manage. And if their power is not flexed and the new players, or hoi polloi, if that’s not tamed, then the established order on Wall Street may not remain.
Kevin: Well. And you were talking about how short squeezes are not new, they’re just not coordinated quite like this. I think Soros, you brought up the Bank of England earlier, at least brought up Gordon Brown and the Bank of England, but a few years before Gordon Brown, there was a devaluation of the pound and you had a very strong player who forced that devaluation. And he made what? Several billion dollars doing it.
David: Whenever you’re in London, go to Threadneedle Street, Bank of England is referred to as the Old Lady of Threadneedle Street.
Kevin: She didn’t have a good day that day.
David: There’s so much in play today that has to do with power. Hosni Mubarak spent 30 years as a dictator in Egypt. Then one day a man in a Tunisian marketplace, despairing of the consequences of inflation sets himself on fire. And he had no idea what he would trigger, but he uncovered the latent social discontent throughout the Middle East. And it was a flashpoint. The critical thing about that is technology allowed people to organize and overwhelm the Mubarak regime. This is a regime that was entrenched for 30 years and they were out in a day, see the power of technology rocking the status quo. And last week had the feel of the Arab Spring, only it was on the New York Stock Exchange in the middle of winter.
Kevin: Okay. But that’s a dictator. You can overthrow a dictator when you’ve got enough people that are mad, but what about, see, there’s an awful lot of people right now, including in China, they’re talking about, well, we could just create our own new alternative currency system. Now you’re threatening the biggest monopoly in the world.
David: And this is why conflicts are becoming more and more apparent. The power and technology theme extends to China. You had Jack Ma who had frankly become too powerful.
Kevin: He went on vacation, didn’t he? An extended vacation.
David: An extended vacation. I don’t think that means reeducation camp quite yet, but Alibaba has over 1.3 billion users. They account for half of all mobile payments in China. But Alibaba is not the concern for the Chinese government. It’s Alipay, which converts mobile phones into digital payment devices that tends to tip the power scale. This is really, I think, important for anyone interested in cryptocurrencies. You should watch this carefully and learn because regardless of how you feel about digital currency, monopoly is not something voluntarily given up once established.
Kevin: That’s a huge monopoly.
David: Alipay came onto the radar of the People’s Bank of China, and Jack Ma, as you said, took a long vacation. Ant Group was readying a massive initial public offering, IPO, and Jack went away. And now, the PBOC sheds light on what was going on behind the scenes. They’re working on a new anti-monopoly rule. This will impact the Ant Group, Alibaba’s payment arm. And we’re talking about a payment service which circumvents the domestic currency, implicitly stripping the monetary authority of power. So the ability to manage monetary policy more effectively, that goes away. The control, the production, the distribution of yuan or RMB, that goes away. Now tack on the ambitions of a surveillance state with the opportunity to develop and oversee their own digital currency, a digital ledger that keeps a permanent record of every yuan transaction. And now you’ve got something that’s very, very interesting.
Kevin: Oh, by the way, and this is on a side note, but you can’t outthink sometimes the government controls. And have you seen interest rates in China? What are they doing?
David: By tightening credit pretty dramatically at separate note, but yeah, overnight lending rates in China have moved considerably higher as the PBOC seeks to reign in credit excess. And I won’t go into that today, but highlights, I mean, this is incredibly important. Doug Noland covers that very well in this last week’s Credit Bubble Bulletin. And I would definitely spend some time looking through that. The increase in those rates is very important for financial stability there in China.
Kevin: Well, and Ken Rogoff, we got the book last year, The Curse of Cash, which he lays out the fact that, yeah, we’re going to go cashless, but he’s also said, go ahead and think that you have independent monetary systems like Bitcoin, it’ll just be co-opted by the people who controll the monopoly.
David: You understand last year is 2016.
Kevin: Was it really?
Kevin: Oh my gosh.
David: No, but anyways, what he did write last year was for Project Syndicate. And so thank you, Mr. Rogoff, for reminding the world what the nature of power entails. The long history of currency, he says, tells us that what the private sector innovates, the state eventually regulates and appropriates.
Kevin: Get used to it.
David: Yeah. So digital currency and digitalization are a new expression of power and not one that the central bank community will allow to unset or upset the established powers.
Kevin: Well, look at Europe right now. Look at Europe.
David: Christine Lagarde is aggressively promoting the idea of a euro digital currency. And the ECB is seeing both the danger of the private iterations and the opportunity of launching their own, which they control. The PBOC likewise, People’s Bank of China. There’s the danger of the private sector innovation, which in all likelihood develops into the most ambitious and novel threat to the US dollar that is a digital reserve currency, good for the Chinese and good for the world as a reserve asset.
Kevin: Okay. But cryptocurrencies, I think I even heard that Paris Hilton started her own cryptocurrency. So can’t we all just compete for the next world currency?
David: Well, and I think that’s the real point here is that what the private sector innovates. I love this. The long history of currency tells us what the private sector innovates, the state eventually regulates and appropriates, a fancy word for steals, takes away. The benefit you thought you were going to capitalize becomes not yours, but theirs. That’s the nature of appropriation, right? So Jack Ma’s on the cusp of a mobile payments functionality operating as a de facto currency with Alipay through his Ant Group. Financial Times discusses this at length last month.
Kevin: And then there’s Facebook.
David: Right, Facebook tried to launch Libra. They failed. They’re back to try again a second iteration, diem. And what this is is tech company ascensionism in the area of transactions, in the area of mobile payments and eventually currency creation and distribution, which upsets the established monetary monopolies. So whether it’s Alipay or the Zuck Buck, you have a captive audience, those who are using your platform, Facebook in the one hand or again, Alibaba on the other, you have a captive audience in those social media and consumer platforms. Something that the cryptocurrencies so far have lacked, which again is the breadth of adoption and market penetration.
Kevin: Dave, I have clients in technology, and the way we even think of money, you were talking about making your mobile phone, Ma making the mobile phone the payment device, we’re almost to the point where you don’t even need the mobile phone. You’ve got this internet of things that are coming up when your refrigerator talks to your microwave, which talks to your car. And transactions, the thought going forward is that transactions are going to change in the world as the transaction device. And so, you just wonder what politics and power do when they can monitor, you talked about surveillance, and record. I mean, part of blockchain technology is that every single instant is recorded in forever. Okay. That may sound fine, but what would your life look like if every single incident was always captured in a permanent data blockchain?
David: I’m still trying to figure out how you square permanent record with anonymity and freedom, specifically agency.
Kevin: Didn’t you give that up last year with the mask and with distancing? I thought you gave all that up. You mean you’re still singing that song?
David: At something I dream of and long for. Benoit Coeuré, bright guy, spent eight years at the ECB, Executive Board at the ECB. Now he’s at the Bank of International Settlements, I guess the central bank to the central bankers. I think he gets to the heart of the matter when he’s commenting on Libra, it’s about politics and power. These are his words, “Dependence on non-European global players creates a risk that the European payment market will not be fit to support our single market and single currency, making it more susceptible to external disruptions, such as cyber attacks, and that service providers with global market power will not necessarily act in the best interest of European stakeholders. Strategic autonomy in payments is part and parcel of the European agenda to assert the euro’s international role.”
And again, this is, you could say that if it were someone else in China saying the same thing, it would be, yes, the central bank digital currency is intended to fulfill that role for the ECB, they want to lead the way, Chinese want to lead the way. Recently, Benoit Coeuré said the same thing. He commented that it’s about a balance of power between governments and big tech in who controls currency. And I would say a struggle rather than a balance of power. That’s where I would probably disagree with him.
Kevin: Okay. But didn’t we get a hint of that last week when Yellen was speaking right before she was put into the Treasury, she was basically saying there needs to be some sort of ban or control on cryptocurrency.
David: Well, you already have it in real time in India, you’ve got Reuters, India, here in recent weeks, introduced a lot of banned private cryptocurrencies, such as Bitcoin, and develop an official digital currency issued by the Royal Bank of India. You go back to 2019 and you had a government panel impose a similar ban, they were suggesting or proposed rather with a 10 year jail term and fines for anyone dealing in cryptocurrencies. Now here, recently, India Supreme Court overturned that ban and is currently allowing banks to transact in cryptocurrencies. So for now, the struggle is over adequate regulation.
But again, we come back to that quote, tomorrow, quite predictably, it’s not regulation, it’s appropriation as central banks scramble for a new kind of market share, it’s digital reserve dominance driven by commerce and transactional volume. Okay, so big tech. And that’s a really key point because we come back to flows just like we began our conversation today, talking about the change in flows and how the real winners are the ones who are closest to the flow, Citadel, in this case, just buy the order flow and capture the benefit of proximity. Well, proximity, I put that in quotes, but this is again, big tech has proven a challenge to existing power.
And you may actually not like big tech, but look at the power struggle that is emerging. Big tech has proven a challenge to existing power, whether it’s Twitter or Facebook through the Arab Spring, Google, Amazon’s AWS cloud services, all of these things are creating heartburn for politicians around the globe, usable as tools, if you’re battering your enemy with them, but you also recognize the danger they represent in the wrong hands. Now you throw in to these tech giants, the creation and distribution of money, and what you have with the People’s Bank of China and Jack Ma, those actions become prototypical.
Kevin: It becomes really scary when the same people that you had mentioned, Facebook, Google, Amazon, aren’t just controlling and creating information flow, we’ve talked about news, fake news, what have you, over the last couple of months, but they’re also creating and distributing money. I mean, in a system, that’s just about it, you control the power if you control the information and you control the money.
David: And I guess what I’m curious to see is how this develops from here, because when it comes to information, there’s all kinds of governments who are willing to create the equivalent of a public-private partnership with these tech giants. With money, I’m not so sure the monopoly is given up so quickly or so easily. I don’t know that a partnership is quite as attractive. Imagine a world where all your activities are logged, where they’re analyzed, where they’re remembered, forever. And you move towards the dream of a consumer utopia where that’s realized. And I was trying to think of the name of the kids’ movie, where everybody’s rolling around on these magnetic wheelchairs. They kind of hover across the ground and nobody’s used their muscles in so long that they actually don’t even have connective tissue…
Kevin: Oh, I remember that movie, it was about a robot. I can’t remember…
David: But I mean, connective tissue is no longer necessary in the evolutionary process because we don’t get up and do things, but we exist as the perfect consumers. So, again, your version of a dream of consumer utopia, that’s realized. Now look at what’s happened this year, COVID has given us a rather interesting look into the future. More sedentary lives. I mean, not for me, this last year was the year…
Kevin: It was your Ironman year, yeah.
David: Less social interactions, except through digital interfaces, more online consumption from grocery shopping to buy and click Amazon Prime. Again, as mundane as you might think a discussion of currency is, it’s like blood flow in the body. You can take it for granted, and never think about all that happens because of the velocity of white and red cells, but when something goes wrong, then you have medical interventions.
So digital currency velocity is a 21st century prize.
Kevin: Who owns it, owns world.
David: The struggle to control financial flows, not just in the financial markets. And that’s where we see some struggle this last week, who controls the financial flows? Who’s closest to them? Is it Citadel? Is it the little guy? Is it a hedge fund? But it’s not just the financial markets. We’re talking about every consumer sphere. And this is huge, $21 trillion in annual flows in the United States, if we’re talking about US GDP, roughly 15 trillion in China, 149 trillion globally. And if you can capture the flows, Wall Street has already demonstrated the power of investment capital flows and keeping proximity to those flows. The struggle for big tech is to dominate the access points and maintain as much of a monopoly on consumer capital flows as possible.
Kevin: And we have no say in that. I was just looking at the book this morning from one of our guests that we had last year called Unelected Power. Yeah, we don’t elect these people.
David: Oh, this is a guy who was at the Bank of England for years and years. If you have not listened to that commentary, I would go back to it because unelected power at our central banks is now, ironically, beginning to compete with unelected power from the titans of tech.
Kevin: Yeah, his name was Paul Tucker, central banker and a friend of Paul Volcker’s. We talked to him actually just a week or two after Paul Volcker passed. Remember that?
David: Yeah. Well, so watching the events of last week on Wall Street, you might see the frame-up of David fighting Goliath, lots of little Davids fighting the system, or whatever. And maybe it’s the establishment being overturned by some Reddit version of disestablishmentarianism. I think it’s different. This power struggle is for control of volumes and flows. Value is something that’s already been set aside. Capital, stocks, stocks in a more generic term, not equities, but value is out, volume and flows are in. And you’re basically displacing the importance of capital after that capital has already been corrupted.
So the activity in the options market, it’s not the little guy beating the big guy, the individual investor beating the hedge fund. It’s the little guy displaying desperate discontent with a system that has been rigged for a long time. And you have to go back 30, 40 years to see the destruction of capital, not the creation, but the destruction of capital. It’s the big guy who’s already figured out how to use this system opportunistically to his benefit. And I don’t necessarily point a finger at the big guy who was smart enough to figure out how broken the system was and how to use it or leverage it, but now you’ve got the little guy figuring out that he can leverage it too and make a bunch of money really fast. My challenge and I think great fear is that I don’t think this is going to end well for either of them.
Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com, M-C-A-L-V-A-N-Y.com. And you can call us at 800-525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.