The Inevitable

, South Korea

I am sitting at Incheon Airport Seoul, exhausted but excited to be hitting the road again and checking into the pulse of change across the globe. My next stop is London. In the coming 2 months I might well be in London, Venice, South of Italy, Athens, Kiev, Montenegro, and San Francisco. We shall see. I have packed my bags for all eventualities.

I was thinking this week that most people feel a certain inevitability to life. In Japan, that was most extreme I thought, and many foreigners came to hate the word “shogannai” which is loosely translated as ‘what can you do?” There, the local Japanese seem very accepting of things both out of their control and (frustratingly for foreigners) things that seem within their control to change! Harmony is given a lot of priority in their society and I have a lot of respect for that. Certainly, as an approach to life ‘shogannai’ might be more harmonious than the current approach of the ‘progressive left’ which seems to be always angry about something and looking for a fight.

But somehow I don’t think accepting absolutely everything is true wisdom, and its certainly not what many sages and philosophers have told us. In its simplest for there is the famous serenity prayer: “God give me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.”

Some of the rhetoric coming out of the tech world, especially in Silicon Valley, has this feeling of inevitability that I find somewhat disturbing at times.  When I saw that Kevin Kelly’s latest book was called The Inevitable, I rolled my eyes and thought “Here we go again. Silicon Valley and the techno-elite dictating to us on how the world will be. One has to get with the (their) program or else be cast as a luddite or live forever on a universal basic income” In fact, this is not how he wrote the book at all, andI highly recommend it. But some people do regard the general attitude of Silicon Valley in that light.

I am currently quite enjoying Gerd Leonhard’s book “Technology vs. Humanity.” One of his arguments is that at this really immensely important juncture of the human race, there are a lot of things we need to decide carefully. I concur, they should not all be dictated from above. Perhaps this is the result of the last couple of hundred yeas of conditioning, that scientists and experts know better.  Remember it was Francis Bacon’s vision to have a ‘scientific priesthood.’ And just like in the spiritual realm, where we now agree we should have to go through a middle man, but have our own experience, in the development o science and technology, we shouldn’t just abdicate all responsibility to our self-appointed betters.

I have a lot of friends who are transhumanists, but Gerd (who’s articles we have published here), makes many important points:

“Increased human happiness and global, collective ourishing will not result from becoming more like a machine, even if that could actually provide some kind of superpower (which it won’t, anytime soon). Rather, I argue that we should challenge the core premises of transhumanism (such as the idea of going beyond our biological limitations) instead of accepting them as inevitable.”

Later in the book he goes on to say:

“What would happen if technology continued to encourage us to give up even more control because it is so convenient, efficient, and magical? Not to mention 95% faster! What if we have seen only the tip of the iceberg on abdication, if we are at level ve on a scale of 0–100? Might we eventually, as author Stephen Talbott suggests in e New Atlantis, “abdicate consciousness,” allow machines to act as the ultimate arbitrator of values and morals?82 If, as Talbott argues, “technologies powerfully invite us to forget ourselves,” what will happen when we apply exponentially more powerful technologies?

Its an important time to stand up and be heard. And I – and other writers – at the Emerging Future will likely be exploring these themes for some time.

Virtual Reality and the Tech Nostradamus

I always find is fascinating to read about what previous science fiction writers have written or said. I enjoyed reading about Neal Stephenson this week,  known as a ‘tech nostradamus’.

“In an interview, Stephenson told Vanity Fair that he was just “making shit up.” But the Metaverse isn’t the only element of Snow Crash that has earned him a reputation as a tech Nostradamus. He’s credited with predicting everything from our addiction to portable technology to the digitization of, well, everything, and you can thank him, not James Cameron, for bringing the Hindu concept of “avatar” into the everyday language. Google Earth designer Avi Bar-Zeev has said he was inspired by Stephenson’s ideas, and even tried to get the author to visit his office when he was working on Keyhole, an app suite that later served as a basis for Google’s mapping technology. “He wasn’t interested in visiting Keyhole, or didn’t have time. My best guess is that he was somewhat tired of hearing us engineering geeks rave about Snow Crash as a grand vision for the future. That may have something to do with Snow Crashbeing a dystopian vision.”

http://www.vanityfair.com/news/2017/06/neal-stephenson-metaverse-snow-crash-silicon-valley-virtual-reality

Brexit one year on?

So a year has passed since the infamous British referendum on the EU. As readers will probably know, we were quite vocal in warning that the pundits and financial markets had overlooked the strong probability of a “Leave” result.

Although I didnt talk about it much, my personal stance on the EU itself was that it needed fundamental reform. First, it needed democratisation.  Its original mandate was NOT to become a United States of Europe even though this has been the goal of many policymakers and large influential corporations.As power has been  centralised and amassed in Brussels the powers of Westminster have diminished. This might not be so bad if the EU was a real democracy. But its not. Non elected bureaucrats initiate laws. Second, there is far too much bureaucracy and red tape. Third, the economic system and the Euro is not working. And we will see this all unravel the next time we have a recession. There is no space to go into all of this here.

I would have been happy with a fundamentally reformed EU or a well-executed Brexit. And I didnt believe the cohort of international institutions, economists, the government and the politicians that a well executed Brexit wasn’t possible.

Unfortunately, thus far we have neither!  I have said that a Brexit executed by the very people who were against it would not – perhaps could not – be well executed. If a CEO passionately argued to his investors and board against a course of action (and even lied on occasion in order to make his point) would you trust him to to execute on that strategy?

The recent election (as we wrote last week) was action fought over social issues and it almost seemed that May did an act of self-sabotage. A conspiracy theorist might say that it was her job to mess things up so badly that the British people could be brought around to either a soft Brexit or no Brexit at all. This would not be the first time a referendum in the EU was ignored by politicians!

Anyway, it is what it is. In fact, some commentators that were for a Brexit actually think that the new path might be good especially if its close to the Norway solution (see last week’s note).

Over the last 12 months since the vote, this was the score card by financial markets:

And Deutsche bank put together the asset price moves.

 

As you can see stocks and other such assets actually did quite well but a lot of the damage was taken in the currency. Funnily enough – and quite predictably – as the currency fell in the days after the vote, there was a surge in Chinese interest in purchasing London property.  However, UK assets in USD terms have obviously not done so well.

What about financial assets going forwards? Our base case has been that Brexit – well executed or not – would see turbulence in decision making. Some kind of financial ramifications would be seen. We warned investors that future opportunities to purchase UK assets would appear. Both the UK pound AND the underlying assets were likely to fall further. Well, this not only seems to be the case, but we now might see the Theresa May government collapse with insufficient support to form a government. This might happen imminently , but if not she quite possibly wont last long. And the banks, corporates, politicians and media are all adding pressure again on the British public. This last week we heard of 2 Japanese banks relocating out of London.

It seems that there is a good chance the Jeremy Corbyn will be the next UK Prime Minister. Listening to him quote an inspirational Shelley quote at this year’s Glastonbury one year after the referendum, and seeing the young crowd whipped up, one cannot but help think that a serious movement is in full swing.  Its encouraging that more pope are interested in politics. I just hope that they don’t just mindlessly get whipped up and do their research. Jeremy Corbyn seems a very authentic man and his message contains much compassion, but an excessively collectivist stance and a further centralisation of government power will not be good for civil liberties or the economy.  Either way investors should be short term cautious on the UK. It almost seems inevitable. Longer term, I am still very optimistic and we will go through those reasons again. Both the UK and USA are in the midst of transformations, and transformations can be ugly.

The Transformation of the West:  Maker Belt

At the other end of the next financial crisis many of the constructive trends that are important will become more important. I think that the creation of the Maker Belt, that is the rejuvenation of the US Rust Belt is a phenomenon we should not overlook. And I am convinced that there are investment and other opportunities there.  Why buy over-extended San Francisco real estate now when you can pick up real estate or land so cheaply elsewhere? And if you are an entrepreneur do you really need to be where you are if costs are high? We published an article this week on the subject:

Maker Belt: Future of US Manufacturing

Again, the US will have a major economic crisis and a crisis of confidence will deepen, but I would not write off the USA. I still think it will continue to be the predominant global power.

Global Financial Markets

A lot of smart people are now concerned we are at the very end of this economic and financial cycle. There are observers out there that think that the Federal Reserve is racing to raise rates sin order to be in a position to cut rates significantly in time for the next recession! Clearly there is no real buffer.

Jeff Gundlach is a market commentator worth listening to as he successfully runs an enormous bond fund and is regarded as one of the ‘bond kings.’

He think that the

“The U.S. Treasury yield curve flattening could become a concern for economic growth when two-year and three-year Treasury note yields are about the same, and the price per barrel of WTI crude oil falls into the $30-dollar range, said Jeffrey Gundlach, chief executive at DoubleLine Capital, on Wednesday.

The slope of the yield curve has been flattening in recent days, with short-term rates rising faster than longer-bond yields. This typically happens when monetary policy is tightened. Last week, the Federal Reserve raised its benchmark interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy. The Fed also announced plans to start gradually paring its bond holdings later this year.

“There’s no hard data that you could point to that signals recession,” Gundlach said in a telephone interview.

But that does not mean economic growth is exploding, he said. “Lower CPI (Consumer Price Index) in the next couple of months will be a cold bucket of water for the Fed tightening dreams,” Gundlach said. “Commodities are super weak, with the dollar down year-to-date, no less.”

http://www.reuters.com/article/us-funds-doubleline-idUSKBN19C2I8

 

 

The last time we had such a narrow spread between 2 and 3 year yields was when the Fed announced operation Twist and then QE3 in late 2012 so it does highlight the dangers.

He has also said in his recent month webinar that he is quite concerned about the low level of volatility. Many hedge funds are clearly investing in such a way assuming that markets won’t have a shift

“It’s a trade that’s made a lot of money and its very, very crowded, which suggests to me the days of low volatility are numbered, probably won’t see it continue through year end.”

You can see the whole presentation here:

https://www.scribd.com/document/351199796/Gundlach-Pres-June-2017#from_embed

 

Central Banks to be the next casualty?

One market commentator this last week thinks that finally the people will wake up to the fact that central banks have been one of the core reasons for not only distorting financial markets but also aggravating wealth disparities:

“While politics in the West reels from a decade of economic crisis and stagnation, asset prices continue to surge on the back of continued rapid growth in G3 QE. In an age of “radical uncertainty” how long will it be before angry citizens tire of blaming an impotent political system for their ills and turn on the main culprits for their poverty – unelected and virtually unaccountable central bankers? I expect central bank independence will be (and should be) the next casualty of the current political turmoil.”

This would not surprise us. In fact, the lack of such analysis has surprised us in recent years.

Where Did all the IPOs go?

Andreessen Horowitz, the venture capitalist, put together an article on the massive reduction in IPOs in the US and its worth reading:

“About two decades ago, we used to have 300 IPOs per year. Since then, that average has fallen by more than half, which means publicly listed stocks in the U.S. declined by 50% from 1996 to 2016. Even more troubling however is that (1) other developed countries experienced a 50% increase in listed companies over the same time period; and that (2) the type of IPO candidates have changed as well: “Small-cap IPOs” (< $50M revenue) have declined significantly over this same 20-year period. Besides fewer jobs, companies not going public and staying private longer to “quasi-IPO” in the private markets means all the spoils of new company creation are only going to private market investors. Public market investors, who rely on the growth to diversify risk, fund retirement obligations and so on, are being left out.”

Where Have All the IPOs Gone?

Clearly one of the answers is the surge in ICOs which we have been monitoring. One member of our Institute is a cofounder of a bank that has done an ICO and another member is undergoing an ICO now. We are even considering this as a fund raising path ourselves. The New York Times just wrote about the frothiness today:

“A new crop of technology entrepreneurs is forgoing the usual routes to raising money. The entrepreneurs are not pitching venture capitalists, selling stock in an initial public offering or using crowdfunding sites like Kickstarter.

Instead, before they even have a working product, they are creating their own digital currencies and selling so-called coins on the web, sometimes raising tens of millions of dollars in a matter of minutes.

The pitch is that once the products are up and running, the currencies — with names like BAT, Mysterium and Siacoin — will be redeemable for services like data storage or anonymous internet access, and could appreciate in value in the meantime.

Known as initial coin offerings, this latest twist in online fund-raising has made it easier than ever for entrepreneurs to raise large sums of money without dealing with the hassles of regulators, investor protections or accountants.

 Since the beginning of the year, 65 projects have raised $522 million in these offerings, according to Smith & Crown, a research firm focused on the new industry.
 It is a frothy, sprawling and completely unregulated way of funding start-ups, leaving even veteran technology watchers scratching their heads.

“It’s kind of like when you are a little kid and you know you are getting away with something,” said Chris Burniske, an industry analyst at ARK Invest. “It’s not going to last forever, but it’s fun in the interim. The space is giddy right now.”

Last month, a small team of computer engineers in Lithuania raised $14 million in 45 minutes by selling a coin, known as Mysterium, that is intended to give access to an encrypted online data service that is still being built.

The next day, a group of coders in the Bay Area pulled in $35 million in under 30 seconds of online fund-raising. The coders were offering Basic Attention Tokens, which will one day work on a new kind of ad-free web browser.

Then this week, a team in Switzerland raised around $100 million for a coin that will be used on an online chat program that has not yet been released, known as Status.”

https://mobile.nytimes.com/2017/06/23/business/dealbook/coin-digital-currency.html?referer=https://t.co/mXc0x7TmIZ

I agree with Fred Wilson, the well respected VC, that its a ripe for some form of clear out in the future, but long term this is still the future:

“I have been a big booster of Bitcoin, blockchain, crypto tokens, and the like on this blog for the past six years. I am a big long term believer in this sector. USV is investing in this sector. We are investors in token funds and I believe we will start directly buying tokens soon. So we are bullish on crypto.

However, there are many things going on in the sector right now that are head shakers to us. We have been investing in startups and emerging tech sectors for over thirty years. We have seen this movie before . We know how it plays out and we know that all is not up and to the right forever.

When people are afraid, be greedy. And when people are greedy, be afraid. We are much closer to the latter scenario in crypto right now and while I am not afraid for my investments and USV’s investments in this sector, I am afraid for the sector and those who are being the most greedy right now. I am cautioning our portfolio companies to tread carefully and we are treading carefully. And I would advise all of you to do the same.”

Buyer Beware

OK its time for me to press GO and hop on a plane. I continue to be both worried and excited by what the future has to bring. My personal journey over the next few months will bring me in touch with many visionaries around the world and I hope to tap in to their insights and that of the collective consciousness in order to give you glimpses of where things are heading. Have a great week.

Next Publication:

Our intention is to publish each Friday and we are full focused on making this happen. If there is a particularly heavy schedule we would rather endeavour to maintain the quality and publish 1-2 days late.

 

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