💿 Record

Not just looking at the functional aspects of products and services, but looking at the emotional (how does it make me feel?) and social (how does it make me look?) factors as well, has got to be my favourite business tool to date. As more and more research proves how much of our decision-making is guided by our subconscious, looking beyond the functional aspects is a key skill to finding and growing your customer base. Beware, this goes way beyond the marketing and sales trickery of adding the right atmosphere and association, like for instance Coca Cola has been doing successfully for decades on end. No, this is all about baking these elements right into the entire customer experience.

A compelling example is the rise in vinyl record sales that has been going on for the past 10+ years. If you look at the functional aspects of playing music, vinyl records lose to streaming services by a mile. They scratch, are hard to take with you, hold typically only 22 minutes of music per side and never auto-play to a next song when done. Spotify holds almost all music you can imagine, mix-tapes (playlists) are created with one click, you can take them anywhere on your phone and sound quality is generally quite good. Easy choice, right?

The other day, friends explained how they got back into vinyl records, growing their collection, loving the intentionality of taking out a record and making the time to play it. Like a Japanese Tea ceremony, it's not about being thirsty. It's a ritual, a habit that you tie into taking time for yourself and appreciating art.

I once had a wonderful conversation with a dear friend on another role of book- and record collections. If you're old enough, you will remember how peeking at someones record collection or book shelves made you instantly aware of the owners interests and tastes. A joint interest for an artist, a specific record or a book, immediately sparked conversation, an easy gateway into getting to know one another.

To be honest, I largely ignored these non-functional aspects of owning, playing and exposing your music. I jumped on the digital and streaming bandwagon as soon as it gained real world usability. But now that I'm fully converted for almost two decades, I can appreciate the appeal. A mix of "you don't know what you got 'till it's gone" and basic economic theory (the law of diminishing returns, scarcity increasing the value of some non-functional aspects) is probably a driving force behind the re-discovery that is going on.

Spotting 'Spotify walls' on Pinterest is another clue of the gap that is clearly there. A quick search immediately finds tons of products that tie the digital realm to the physical. I love how a flurry of entrepreneural minds spotted the non-functional needs beyond the nostalgia and started building stuff. Every know and then, progress is taking a step back.

🤔 Revisit

Certain topics and challenges remain top of mind. Sometimes intended as one of your favourite problems, sometimes subconsciously and automatically as you're intrinsically interested. My mind, for example, seems to be constantly interested in everything to do with equality, new economic models, taking care for our earth.

It is therefore that I present the Global GPI and GDP per capita graph again. In addition, some topics simply deserve to be repeated. Repetition is one of the best teachers, but in this case I'm sharing some further thoughts after revisiting the data presented.

Reviewing the graph once more, I could not resist thinking that the deviation between GDP and GPI development started more or less right after the moment President Nixon ratified the end of the Bretton-Woods system in 1973. This system was installed after the Second World War and ensured there was a fixed rate between the US dollar and gold. In addition, all international currencies were coupled to the US dollar. This feels as a rather artificial system, keeping each other's (financial) relationships firmly fixed. It does make sense that this could not hold until eternity, but the advantage of the system was that any money created by central banks had physical collateral.

Decoupling of the gold-standard meant the start of the era of money-creation out of thin air. Today, for every new dollar (or euro) a promisory note is issued by the government stating that it will be paid back in the future (i.e. by you, through taxation). Today's system almost entirely banks on next (and next-next) generation's income streams. In the past 50 years, we've pulled forward a lot of future earnings and used it to increase consumption (GDP...).

I'm not necessarily a proponent of going back to a gold-standard, but unrestrained lending on behalf of our (grand)children is also not a sustainable way forward. Some rules and regulations could be in order together with a normalisation of consumption patterns.

🌳 Progress (2)

The usual indicator to measure our wealth is Gross Domestic Product (GDP). It's straightforward but also one-dimensional, in the sense that it's just a financial representation of wealth. Researchers have developed another benchmark called the 'Genuine Progress Indicator' or GPI that also includes qualitative components of well-being, such as social and environmental factors.

​Comparing the development of global GDP and GPI per capita leads to interesting observations. While GDP per capita has shown a steady rise over the years, GPI peaked mid-1970s and has declined somewhat ever since:

The result resonates with my long-standing belief that our everlasting focus on GDP growth is not the way forward. I know, there is a risk of some confirmation bias here! Digging somewhat deeper, it becomes clear that the reason why GPI declines is mainly due to the depletion of earth's resources, pollution and climate change. Even though global poverty levels have been reduced and life expectancy has gone up, financial wealth has come at a far greater cost: the certainty of long-term survival.

All this came to my attention through Jeremy Lent, an author and speaker whose work "investigates the underlying causes of our civilization’s existential crisis and who explores pathways toward a life-affirming future". In his article 'Solving the climate crisis requires the end of capitalism' he sketches a pretty black-and-white picture that combatting climate change requires fundamental changes but that the big elephant in the room is often not addressed by policy makers:

"That elephant is called capitalism, and it is high time to face the fact that, as long as capitalism remains the dominant economic system of our globalized world, the climate crisis won’t be resolved."

Without choosing sides, I do believe that present-day challenges merit taking a critical look at our current capitalist system and its drivers, essentially its overriding objective to maximize profits. Capitalism has brought us many good things and most proponents argue that it's a system that promotes (technological) innovations, which are urgently needed to solve the problems we face. However, research has also shown that quite frequently these innovations end up increasing pollution and depletion of resources. While GDP grows, GPI declines.

"This dynamic, known as the Jevons paradox, was first recognized back in the nineteenth century by economist William Stanley Jevons, who demonstrated how James Watts’ steam engine, which greatly improved the efficiency of coal-powered engines, paradoxically caused a dramatic increase in coal consumption even while it decreased the amount of coal required for any particular application."

The discussion is often obscured by the proposition that any alternative to capitalism is worse than capitalism itself. You may even be called a communist. Therefore, they argue, capitalism and (GDP) growth is the only way out of our problems and we should not consider another system. Of note: in all UN environmental and global warming analyses, there is not one scenario that takes into account a stable or declining GDP. Not one. They considered such scenarios 'implausable'. That's in itself strange too. It seems implausable to me that highly-educated social beings would just ignore one of simplest answers to growing pollution and use of resources: reduce the demand.

As we've argued before, the preferable future is probably a balance, a best of multiple worlds. I'd agree that changing a well-entrenched system will take decades, but that doesn't mean we should not try to clearly define and implement the boundaries of a new system based on "life-affirming values". Many new and promising economic models have already been proposed, such as Kate Raworth’s 'Doughnut economics' that we covered in our second newsletter. It is possible to reduce resource and energy consumption while reducing inequality and improving well-being.

Everyone plays a role in this crisis and has a place on the board. The pieces aren't necessarily black and white, but some are on opposite sides, some in the middle. I feel there are spaces to be filled on this board. Will you join me in trying to fill the gaps and find foundational principles that could create the conditions for long-term flourishing on a regenerated earth?

📈 Never-ending

Here's a man with a clear mission: Brad DeLong. He is an economic historian, writes daily economic blogs since 1999 (before the word 'blog' even existed) and recently completed a book covering the history of the "20th century". He spent more than two decades writing it. While writing, he kept discovering new things and couldn't stop. Larry Summers (the former US Treasury secretary and Harvard president) describes him:

“Brad is the person you want to write with if you want a collaborator doing something that’s bold, potentially important, possibly wrong, and unlikely to satisfy pedantic academic referees”

The book is called "Slouching Towards Utopia" and has been recommended to me by multiple persons. I haven't read it yet but an article in The Atlantic made me even more curious.

First of all, Mr. DeLong defines the 20th century as starting in 1870 and ending around 2010. He notes that it is in this period, for the first time in history, that human beings seem to have managed to create more than enough to sustain themselves. But there is also a tragic part; this era has brought weapons of mass destruction and atrocities on a scale never seen before.

That is fascinating, but what also fascinates me is the author himself and what makes him tick.

“I can start reading a book, and then from it I can spin up in my brain a sub-Turing instantiation of the author’s mind, which I then run on my wetware, [...] I can ask it questions, and it answers. ‘A rich inner life’ is one way to put it. Or perhaps a slight absence of grip on what is the real world and what is not.”

It's a never-ending story on multiple fronts. Inequality and distribution of wealth being one of the most profound. And I feel that we can learn a lot of from his mindset in trying to make the next century a successfull one as well. As DeLong admits:

“We may have solved the problem of production [...], we certainly have not solved the problem of distribution, or of utilizing our extraordinary, immense wealth to make us happy and good people.”

History and human happiness are never-ending stories. Fascinating ones.

😇 Behaviour

We have a tendency to capture and predict economic developments in models driven by formulas. However, the largest part of the equation is often influenced by human behaviour. Take, for example, our challenge in the energy transition. Production of renewable energy is just one part, but where most of our current efforts are put into. Business cases can be made, projects planned. However, changing the demand side of energy has at least a similar dramatic effect to become energy-neutral. Therefore, a change in our behaviour is required.

We were always taught and incentivised to use more electricity during the night. Traditionally, this was the low-demand part of the day, while supply (read: coal/gas-fired power stations) was still running. Renewable energy production is much more dominated by wind and especially sun. Most energy is naturally being generated during the day, which sometimes even leads to the cost of electricity to become negative during the day. It therefore would make sense to wash our clothes or dishes during the day, rather than saving it for the night. Our current day and night tariff structure is outdated and drives a different behaviour.

So, yes, we should invest heavily in changing our production and making our appliances more energy efficient. But, we should equally invest in changing our behaviour. Both to become more efficient and treat energy as a scarce (and expensive) resource as well as to balance demand and supply.

Behaviour has a tendency to have a long-lasting, sticky effect. Your own behaviour is also setting examples. For our children, for people that you inspire. Energy consumption is just one example. In numerous cases, we do not have to sit back and wait for our leaders to act. We can drive the change ourselves, as individuals, as a group. Our behaviour may even be the biggest driving force behind any change, for the better or the worse. Sometimes, this requires to look beyond the immediate impact on your bank balance, the 'smartest' (financially) or the socially most acceptable thing to do.

Have confidence in your actions and the fact that others will inspire you to correct them should you inadvertently take a wrong course. But, please, keep thinking for yourselves and do not just blindly follow what somebody tells you to do is the smartest thing (including what I write to you now!). Therefore, having the right kind of information and the occasional, inspirational steer is paramount to drive in the right direction.

💸 Interventions

Any intervention distorts the 'normal course'. The results of such actions are what is useful to observe and to learn from. We wrote earlier about the usefulness of economic sanctions in the context of the conflict in Ukraine.

"Sanctions seem most effective to take the 'energy' (pun intended) out of a conflict."

They seem to have only partially sorted that effect. Freezing bank accounts and Russian international reserves did not create the intended banking and financial crisis in Russia. Continued sales of energy products (mostly oil and gas) created a stabilizing counterbalance. Therefore, the sanctions did not have a short term effect. Today, we notice that the sanctions seem to be relatively successful in its intended medium to long term effects: ensuring Russia has trouble maintaining its military capacities.

On the other end of the spectrum are subsidies. The Dutch financial times recently featured an interesting article about subsidies on energy, also in the context of the Ukraine conflict. The common denominator in Europe seems to be to compensate for its mistake to become too dependent on Russian energy by subsidizing current energy bills. However, this will undermine the efforts to search for and implement alternatives. Alternatives that are both useful to become more independent as well as to decrease our carbon footprint.

On the effectiveness of subsidies, the article essentially comes to similar conclusions as the effectiveness of sanctions: they could work, but compromises should be minimized and implementation fast.

"Subsidies are only acceptable when they avoid great suffering of vulnerable families and support sectors where otherwise large amounts of jobs would be lost."

Sometimes, interventions are necessary. When doing so, we could take into account the power of the mass and the creativity of human beings to solve and self-correct.

📈 Geography

In this newsletter, we often spotlight the downsides of economic growth. Environmental impact, inequality and human health are often at the other end of the scale where high economic growth is present. Nudged by one of my favourite economy writers, Tyler Cowen, I decided to explore the upsides and causes of economic growth by picking up a copy of 'How the World Became Rich' by Mark Koyama and Jared Rubin. Their opening statement:

"Our focus on economic growth does not mean that we don’t value other aspects of human development. Leisure time, long life, good health, literacy, education, female empowerment, and rights and protections for the vulnerable are all central to having a happy and fair society. That said, we hope to convince you by the end of this book that all of these features are made possible by economic growth."

The writers try to combine the leading research into the factors behind economic growth as a sort of meta-study, exploring the main factors one chapter at a time. Since I'm saving this book for my summer holiday, I only read the first chapter as an appetizer, and I find it fascinating.

Exploring geographical features of the world's countries like temperature, coastline and ruggedness of terrain, they explain how connectivity impacts overall market size for producers, increasing the scope for specialization and division of labor, and therefore being a source of economic growth. They dive into Roman history, and the way its 80.000 km road network affected growth in Europe deep into the middle ages. Only when transport over water (being 20 times cheaper than transport over roads in those days) became the biggest driver for trade, did countries where superior waterways were present, prevail. Countries that invested heavily in water-infrastructure gained an advantage that lasted for centuries.

As the economy of the last few decades encounters new limitations in fragility of supply chains and we shift more towards a service-based economy, I wonder what type of geography we will look back on as the winner. Internet connectivity might be a good candidate.

🙋‍♀️ Priority

The 'central bank of central banks', the BIS (Bank of International Settlements) urges all national central banks to do their utmost to control inflation. That means: increase interest rates, as that is the only tool they have. They believe it is important to raise interest rates to decrease demand and economic activity. You might ask yourself whether high demand is the root cause for the current inflation level. Moreover, central banks are not the only ones influencing financial and economic metrics.

Systems and markets have their tendencies to return to a certain path of equilibria at their own chosen times. Our economies are complex systems, involving many different inputs of which interest is just one. Very likely, there is no one root cause for the current situation, even though we human beings like things to be simple and clear cut.

Low interest rates, for a prolonged time, have certainly had their influence on current inflation levels, but the immediate reason why the rise in inflation is occurring now, seems to be caused by other factors. The most important factors currently seem to be the Ukraine war and the Covid-pandemic aftermath. The first leads to uncertainty and high energy prices; the second has led to supply chain disruptions and demand imbalances, leading to delays and higher prices.

Both problems could be solved. In a way, inflation will help solve the supply chain problems, as higher prices will lower demand (the system correcting itself). The Ukraine war is an entirely different animal and influenced by (geo-)politics. The longer it drags, the longer we will suffer high energy prices.

In my humble opinion, we should call our leaders to action: find a road to peace in Ukraine as soon as possible. Apart from a good chance that this will push inflation down, it will definitely be a solution for avoiding human disaster and lives lost. What would be your priority?

🍂 Seasons

In his weekly newsletter, entrepreneur Nat Eliason recently discussed the concept of working in 'seasons'. He basically noticed how he had developed an undeliberate, natural tendency to work with ups and downs in terms of output and efficiency.

"I rather like this ebb and flow. Six to nine months of focused output, a period of rest, a period of reflection and planning, then another push forward."

The article resonated with me. Though this rhythm does not necessarily have to coincide with the nature's seasons nor an annual cycle, the whole idea that you have periods in which you thrive and others in which you contemplate and re-energize, seems very logical to me. It could be part of man's overall journey in search for purpose. Switching gears and careers, at least occasionally, may not only be logical, but even a necessity, consciously creating some form of imbalance to enable progress.

"It's partially because many people's work is not making progress towards a meaningful goal. And in those cases, it is a shame to spend an unnecessary amount of time on your job at the expense of other more meaningful things."

This type of 'work seasonality' may create irregular income events. Knowing this, it could be useful to work with detailed budgets and define the boundaries within which you can financially operate. Perhaps in itself and eye-opening exercise. You are a business! One that is in search of its infinite game, one worth continuing its play.

📝 Smart

Is the collective smarter than the individual? Is centralised decision-making better than decentralised? Big questions that I've been pondering many times, never quite arriving at satisfying answers. There are many examples that will prove either position.

In a recent Tim Ferriss podcast, Harvard law professor Noah R. Feldman enlightened me on a couple of points, while making the connection to developments in blockchain technology. He made clear that in principle the collective is better at answering factual questions. However, when it comes to making predictions, individuals tend to score better. This is because a collective represents an 'average' human being, which is a mixed bag of biases, beliefs and emotions.

_"... decentralized decision-making organizations, [such as] guilds, some labor unions, [...] can coordinate certain things really well, but there’s certain kinds of decision-making that historically are really hard to make in a decentralized way. So when you’re engaged in a conflict with another entity, when you’re engaged in direct competition with another entity, when you need to coordinate action beyond the initial purposes and evolve your purposes, historically, it’s been really hard for decentralized organizations to pull that off." _

In the blockchain world, there exists a phenomenon called 'smart contract'. They are an ultimate form of decentralisation and ensuring that what you agree, actually gets done. First thing I noticed while listening to this, is that these contracts are in fact not smart at all. They are quite stubbornly and sometimes stupidly executing a set of instructions, as a computer:

"... smart contracts are awesome because of their enforcement capacities. What makes a smart contract better than other kinds of contracts is, [that] it’s as close to self-enforcing as you can get. You don’t need a whole legal system to do the enforcement side of it, and that’s what makes it smart. But the uneditable part means it also has a feature that no real-world contract otherwise ever has pretty much, which is that it’s uneditable, right? You can’t evolve it."

There is value in these types of decentralised contracts, but they would become really of value when you can put the human element back into it: balance and emotion.

💸 Overdue

The word 'inflation' has regained a lot of attention in the past few months. The geopolitical and environmental changes happening at breakneck speed have caused our virtual 'shopping cart' to increase in price like it hasn't in a very, very long time.

While listening to a podcast with Tim Ferriss and Tony Fadell ('father' of the iPod and the Nest thermostat), I was confronted with an alternate view of the problem, that I found extremely interesting:

"When we look at inflation, I really look at it the opposite. De-inflation is stopping. We’ve been de-inflated. We’ve been moving everything offshore. We’ve been going the lowest common workforce, your lowest common monies for paying a workforce, getting rid of healthcare and all this other stuff. We’ve been just pushing the externalities on everyone else, what we’re doing to the climate. Now it’s all coming back to roost."

This action - reaction felt like a totally logical way of looking at it. What if low-income countries were just like us? What would our iPhone cost? What if the actual costs of environmental damage were included in our production? Instead of governments doing the corrections, our new day to day reality is showing us the pain points now. Inflation may not be a problem, but just another corrective mechanism.

💰 Satisfied

During COVID, the term 'Great Resignation' was launched, describing the high levels of resignations faced by a lot of companies. The push to 'remote' and the reduced contact between colleagues caused an increase in people leaving their positions to work elsewhere. A recent report from Gartner predicts this trend will remain even after COVID, leaving turnover approximately 20% higher than before.

The effect, according to Business Insider:

"With positions going unfilled, critical projects have been delayed. Recruiting costs and salaries have shot through the roof. And with job seekers holding the upper hand, employers have been forced to shower them with a wide array of costly perks and benefits to beat out the competition."

Last year, a whopping 33% of Americans left their job, and Gartner predicts this level of fluidity in the job market is here to stay. If that is the case, outcompeting each other with higher salaries and remote working possibilities is essentially a race to the bottom.

The analysis echoes the learnings put forward in Daniel Pink's Drive; money and perks are just the dissatisfiers. Remote working capabilities are just another perk that needs to be met. Growth, autonomy and purpose are what makes people stay.

Looking at it from a systems perspective, with jobs becoming ever less 'sticky', those 3 dimensions will likely only become more important. Which might put 'meaningful' companies at an ever increasing advantage.

🤔 Sanctions

With the war in Ukraine going into its next phase, so too are the set of economic sanctions imposed onto Russia, its leadership and citizens. Will sanctions yield any result? In the short term, they seem to have had limited effect. First, sanctions were unsuccessfully used to dissuade Mr. Putin and his comrades to embark on their Ukraine adventure. Currently, they seem to have little effect stopping them from prolonging a brutal conflict.

Surely, there must be a recipe for using the right type and dose of sanctions in combination with other types of non-violent measures to stop unnecessary bloodshed. At least, I'd like to believe there is.

In the political and cultural magazine The New Statesman, Nicholas Mulder writes about the power of economic sanctions. He compares the current situation in the Russia-Ukraine war with various previous conflicts and finds most similarity with the Italo-Ethiopian war in the mid 1930s. Like in those days, there had been a clear military build-up and there was disagreement about the toughness of the imposed sanctions.

Sanctions seem most effective to take the 'energy' (pun intended) out of a conflict. This is however a gradual process and has the risk of backfiring in unexpected ways. After Ethiopian resistance proved to last longer than expected and with his own forces and resources depleting, Mussolini authorised the use of poison gas to force a breakthrough (and succeeded).

Should sanctions become tougher (quickly) or should we focus on other routes? Mr. Mulder concludes:

"Positive assistance for the victim, not just negative sanctions against the aggressor, should be a top priority for all those concerned about the survival of free nations."

📉 Crash?

With stock markets breaking the upward trend of the last 10+ years in January, there has been a lot of chatter whether this marks the beginning of a market turnaround and perhaps a crash. When you take a moment to take stock (pun intended), you may come to more nuanced views.

A short article in the Economist summarizes the current situation nicely and how it is different from previous years, such as 2008 and 2001, in which company valuations were high and speculations abundant.

"Today banks are less central to the financial system, better capitalised and hold fewer highly risky assets. More risk-taking is done by funds backed by shareholders or long-term savers who, on paper, are better equipped to absorb losses."

Since the previous crises, new regulations moved a lot of the risk-taking out of the banks. Though the endless stream of money-printing and low interest rates (which go hand-in-hand) have pushed company valuations through the roof, associated risks of big losses are mostly held by private investors. The financial system will most likely survive such a shock. The economy may still suffer of course.

Though the tone in the Economist article could easily make you feel depressed about the current situation, I tend to be more optimistic. Yes, there is a lot of speculation and room for big losses. However, this time, chances are much reduced the public will pay the price and be called to bail out banks, increasing moral hazard. That's a net gain.

Meanwhile, as has often been the smartest thing to do, keep vigilant, do the analysis and follow your gut.

🚁 Small

When you're observant of things we take for granted, but at the same time don't feel logical, you can come up with valuable insights. Conquering human biases often leads to competitive advantage. This observation is well illustrated by the movie 'The Big Short' on the housing crisis in the US. While the majority of Americans thought the housing-party would continue forever, some people dug deeper. The movie's lead characters, inspired by seeing out-of-the-ordinary mortgage data, decide to visit several home-owners and lenders to see firsthand what happened 'on the ground'. Seeing foreclosed homes and hearing the insider story from the lending community, they betted heavily on the unavoidable and won.

This story echoed in my mind upon ordering something from the UK last month. A small deck of cards, ordered on December 17th of last year, ended up on my doorstep on the 14th of January after spending weeks in customs and me paying a heavy import fee. The same thing happened when ordering supplies for my son's school for the Christmas festivities. As I unpacked them at the very last minute, I vowed never to order from the UK again.

I immediately realised how these small personal events connected to the bigger Brexit story. The story of how Brexit would hurt the British economy got headlines, but I now realised how the blow was really a million small cuts.

If you're responsible for big, you might benefit from sweating the details of small.

💸 Artificial wealth

In an earlier article about inflation, we left you with a cliffhanger that the definition of 'core CPI', or core Consumer Price Index, may not represent the inflation metric that the average person experiences in daily expenses. We never quite followed up on this topic, but meanwhile inflation itself did its best to grab the spotlight.

Whatever metric you use for inflation, all of them currently are at an elevated level, often reaching a 10- or 20-years high. It is safe to say we're in inflationary territory. More importantly, inflation has currently been around long enough not to be called 'transitory'.

When wage growth keeps up with inflation, there is not much to worry about. It's probably even a positive thing, as it'll make it easier to pay back debt, which amount was fixed in the past. In the US, however, the inflation is currently higher than wage growth, which may cause problems, not in the least in terms of economic activity and consumer demand.

Amidst this potential bleak outlook, there is also positive news. John Authers in his recent newsletter shows that current wage growth is in fact reducing some of the inequality that grew over the past decade. The graph below shows that average wages in the lowest quartile grew at a much faster pace than the ones in the highest income bracket.

Women also seem to benefit this time around:

Inflation feels very artificial to me. This may not be surprising as the whole money system is man-made. In a way, it makes it plainly obvious that the number shown on a bank note is nothing more than just that: a number. Let's not make too much fuss about it.

🔮 Horizon

Companies, especially those listed on a stock exchange, generally complain that the market forces them to be more short-term focused. Quarterly reports, pressure felt to announce something new regularly and public scrutiny all add up to the negative emotions. To encourage more focus on the long-term, the Canadian Public Pension Investment Board, BlackRock Inc. and the consultancy group McKinsey & Co., launched a non-profit group called Focusing Capital on the Long Term (FCLT), five years ago. It "develops actionable research and tools to drive long-term value creation for savers and communities".

An article by John Authers analysed the initial results of their research called 'FCLT Compass'. It attempts to measure how 'long-term' companies and investors really are, how it changes over time and between geographies.

The initial conclusions are that, although the investors have become more short-termist especially during the Covid pandemic, the companies themselves did not listen to the market and turned more long-term. While investors were hoarding cash to the sidelines, companies used more of their cash to invest in R&D and capital projects.

The data yields some other insights. Globally, inequality was decreasing up until the pandemic hit. Monetary policies, large layoffs and other measures led inequality to grow worse. Equity investors became 'jumpy', changing their portfolio more frequently. On top of the list of the most 'short-term' investors are, according to FCLT research, the sovereign wealth funds. A big surprise. This is mostly due to the fact that these funds tend to be heavily invested in private equity funds, which in turn have an average holding period of only two years and four months.

All in all, companies apparently turn to a longer-term horizon when crises are nearby, whereas investors tend to cash in and wait for things to settle. In principle this is not really irrational behaviour, but it also signals that it is not necessarily 'the market' that determines the term of investments. That in itself is probably good news and means that -despite a lot of pressure and scrutiny- a lot of companies do care about their long-term future.

🏢 Venturism

There are some interesting developments in the financial world and I am not talking about inflation (which appears to be here to stay for a while longer). The Economist reported reported recently that the Venture Capital industry is experiencing enormous growth, which could have very positive side-effects.

The Venture Capital industry deploys about 2% of the world’s institutional assets. It has however been able to use this money wisely: currently, seven of the world's ten largest firms were once backed by Venture Capital. Somehow, they have found a good algorithm for investing in the innovations that the world wants (like search engines, electric cars) or needs (like mRNA vaccins).

With more than $450bn of fresh cash being invested in Venture Capital, the sector is being scaled up in an unprecedented way. It is spreading both over a wider range of industries and internationally. This expansion creates tensions and challenges, but also lots of opportunities.

"A larger pool of capital chasing a bigger universe of ideas will boost competition, and is likely to boost innovation, leading to a more dynamic form of capitalism".

The author of the Economist article concludes:

"Venture capital aims to take good ideas and make them bigger and better: it is only right to apply that logic to the industry itself."

I'm all for innovation and believe that especially our financial systems are in dire need of an upgrade. Question is, is this the right path? Will the potential benefits outweigh the ever-increasing wealth transfer to the already rich people as the current capitalist system is designed to do? What is the natural mechanism to restore the imbalance?

🛋 Timeless

Last weekend I had a great conversation on buying stuff that lasts in relation to consumerism and sustainability. If you stop seeing acquisition as a one-time cash-out and start seeing it as something you 'write off' over the years, like businesses do, your perspective changes. In general, buying stuff that lasts, tends to be the economical decision in the long run. 'Buy once, cry once', as one friend tends to say.

I realised that 'lasts' has far reaching implications. Lasting does not just mean 'will remain functioning'. You need to love having it for the same amount of time as well.

This is where I feel artists come into the equation.

I have a white Coupé lamp designed by Joe Colombo in my living, dating back to before I was born. It was designed in 1967 and I still marvel at its beauty and simplicity.

This lamp is not in mint condition, far from it. We used to roll the base across the floor when my sister and I were kids, and the lamp has some bumps from occasional tumbles. Still, I think it's great. As Marie Kondo uses to say: it sparks joy for me. And in spite of its high acquisition price, I can assure you it has been one of the cheapest lamps over its 47-year lifespan.

A product designed with love can do this. And it's not just furniture. If you take a look at the original Apple Macintosh and compare it to its contemporaries, you can probably tell the difference. Design matters.

If this resonates with your thinking, do the following experiment while doing your next purchase: envision the product being 20 or 30 years old. Having some scars and scratches, would you still consider it beautiful? Or is it just the sparkle of 'new' that attracts you?

🏝 Freedom

Historically, Freedom has been one of the concepts that most human beings consider worth fighting for. It is, however, a quite general term and it is not always clear from which dimension you should look at it. Freedom as a society versus as an individual. Physical or emotional.

These dimensions are not mutually exclusive and tend to influence each other. In addition, each human being puts different value to the various types of freedom. This creates conflicts of interest. Amongst people. Amongst societies.

I personally believe it is worth pondering on a personal level what defines freedom for you. Thinking about this, I concluded that freedom is the degree in which you feel free and able to make your own choices at any time.

Let's look at our working lives as an example. Quite a number of people are stuck in their jobs. A subset of those people actually realise this, but often feel a burden to change jobs. One of the major items blocking their free choice of quitting and looking for something else is simply financial. Anxiety whether you'll be able to meet the monthly financial burden, most of which is determined by fixed expenses such as mortgage or rent.

The realisation that covering just the basic needs like food and insurances required less than 25% of my normal income, created an enormous sense of freedom for me. I also realised that society and its systems were not necessarily directing me to this path. Right away, I went against the stream and started repaying the mortgage and reducing monthly subscriptions, even though some of those measures are rationally and financially not the best choice.

Freedom and getting in control of your own destiny is however -in my humble opinion- priceless.

🍂 Fall

Facebook used to be a great idea. Connecting people, enabling communication, what's not to love? Combine that with a fast growing environment and you can see how flocks of coders and designers were attracted to the sprawling young company, laying the base for the empire it is today.

But the times, they are changing. Facebook is constantly in the crosshairs of public opinion and lawmakers, for what I think are good reasons. As growth became at odds with inspiring goals, the goals crumbled in favour of trying to sustain growth.

The mother company rebranded itself as 'Meta' last week, in an effort that many dismiss as an attempt to dissociate its activities with a toxic brandname. I considered the name change suggestions TNW proposed much more appropriate; 'Nothing Suspicious Going On Here' or 'Koobecaf' felt like worthy suggestions. But alas.

A soothing thought: progress will happen anyway. Companies can change over time, doing new things, reinventing itself. But this route is not the most obvious one, as the characteristics of companies often prevent re-invention. Big or small, companies tend to stick to their behaviour, even to the point of creating something completely unsustainable.

No, the route most often travelled is that of natural decay. Like Facebook taking the place of MySpace (remember?), Zuck's empire will one day make place for something new. The tiny buds, the fresh young green leaves of tomorrow are our safest bet.

💶 Essential

Just before the holidays, I really enjoyed reading 'De Fundamenten', written by Ramsey Nasr. It is a set of essays about The Netherlands during the first lockdown episodes last year, a philosophical view of life in this day and age and a war-cry for turning a number of things around.

Like every crisis, Covid pinpoints sore spots on all kinds of fronts. Interpersonal and societal issues have become more pronounced. I think Nasr did a great job eloquently painting a number of them, even though I did not agree with some of his viewpoints. Like sandpaper, they did help me to sharpen my own thinking on the matters.

One highlight of the book for me is a quote from the former president of Uruguay, José Mujica:

“When you buy something, you’re not paying money for it. You’re paying with the hours of life you had to spend earning that money.”

The notion of money as an intermediary instead of a goal in and of itself is something I remain fascinated by. I was once asked what I would do with my life should I have a big Payday, and followed up with the question if there wasn't a faster and less risky way to accomplish just that. My initial reaction was a blank stare...

Researching Mujica a bit, I stumbled on a gathering of life lessons someone posted on Medium inspired by his actions and words. While president, he donated 90% of his salary to charities and preferred his 2-bedroom house over the presidential palace. The sobriety he advocates is mostly aimed at having more time and energy. To live and to do more of what you really love doing.

🥋 Hidden wars

The last decade, barring a few exceptions, has not seen countries waging war against each other to increase power or annex valuable resources. Looking beyond guns, tanks and airplanes invading another country, one recognizes immediately wars are being fought out between different nations across the globe; IT-systems being hacked, social media influence, and discriminatory immigration rules.

Perhaps the biggest one is the trade war. Governments around the globe are involved, sometimes colluding together, to basically promote the wealth of its own people above that of another country.

A good recent example with potentially far-reaching implications centers around the semiconductor industry. In our current days and age, semiconductors are crucial. However, not all countries have easy access to them. China -as shown in the chart below- is currently spending more on importing semiconductors than it does on oil.

The US and its usual allies have taken the opportunity to show their force, blocking technology companies like ASML from selling to China and disallowing trade of certain products.

With less opportunity to export and more than a million engineers graduating each year, it's a just a matter of time before China will completely be self-sufficient. By then, they have stimulated innovation such that their products will be dominant. Meanwhile, China's eyes are again focused on Taiwan, home of the largest semiconductor production company in the world TSMC, creating political and military tension in the region.

I've never really understood why we would engage in such economic (and political) warfare. Why we believe we deserve better than our neighbours or far-away brothers and sisters is beyond me. Are we not stuck on the wrong side of the prisoner's dilemma?

Free international trade could in the long-term increase both welfare and wellbeing (why is one written with just one 'l'?) for everyone, as long as we find a solution for its environmental impact. As the old Chinese saying goes: "if you can't beat them, join them".

🩳😎 Shortage

A seemingly odd thing is happening in the labour markets worldwide. The Economist reports that in countries like the US, Germany, and Switzerland labour shortages seem to be higher than before the Covid-19 crisis. At the same time, unemployment is still much higher than before the crisis. To illustrate, the article presents the graph below showing the number of job openings in the US, reaching all-time highs. In Australia vacancies are apparently 40% above the pre-crisis levels.

A high number of job openings does not necessarily mean a shortage of labour. It does however seem to point towards a mismatch between demand and supply. This could have inflationary effects. The biggest mismatch seems to be in hospitality and tourism industry. This is explained by the closed borders as a measure to keep the pandemic under control, which has also interrupted the flow of immigrants who generally do not shy away from taking on low-wage jobs.

The author suggests that governments design their policies around three P’s: payments, passports and patience. The first two essentially boil down to financially support those who work and to (re-)open borders. The last one speaks for itself. The author asserts:

"Faced with change on such a scale, people may take longer to find new careers."

'People' are right; let's take our time, be content with what we have and not panic too soon about certain graphs or numbers being out of whack.

🪙 Currency

It's been a few wild few weeks for cryptocurrency. Most likely bowing to outside pressure, Elon Musk reversed his decision to accept Bitcoin as payment for buying a Tesla, citing the enormous environmental impact the current mechanism has (he knew this well before, of course...) and even floated the idea of selling some of its holdings. As of today, Bitcoin is consuming 0.66% of all worldwide electricity, surpassing the Netherlands in power usage.

While I share the environmental concerns, I think the basic premise of crypto-currencies does look promising. In a leader for their special report on the future of banking, The Economist provided an overview on the developments in government-based cryptocurrencies (Govcoins). Crypto could make finance accessible for the 1.7 billion people worldwide that currently lack bank accounts, which would mean great progress for a vast number of people.

Since Bitcoin is hardcoded to be limited in the number in circulation, it is also praised for hedging against inflation. This does have its downsides, since inflation is also a tool for making our economy function properly. The trade-off for individual wealth preservation might well be our collective economic well-being. Based on the current worldwide state of affairs, it's up to us to decide which way we'd like our balancing bike to swing.

🌍 Sky is the limit

In the financial world, a 'hockey stick' chart is usually a sign you're entering territory where you ought to be on the lookout. Chances are prices have risen too high and too fast. Forecasts may be too rosy. Underlying assumptions may be positively skewed. Think bitcoin prices, internet bubbles, Tesla shares. There might be a great deal of speculation involved and this often has a negative connotation.

Not all fast-increasing prices are bad. The chart below shows the price of carbon per ton CO2 equivalent. It has tripled over the last year and this is good news for the climate. Firms in the EU are required to hold a number of carbon permits equivalent to their pollution.

This price increase has been the result of several factors. First of all, the supply of the carbon permits is limited. Secondly, the EU has recently raised the bar on emissions targets (meaning: less emissions by 2030). Lastly, professional investors and large (pension) funds have entered the carbon trading market in 2021 and taken large positions, betting on higher future prices. The little coloured bars at the bottom of the chart are an indication of trading volume and clearly show this.

At these carbon prices, carbon capture technologies and carbon-free alternative production technologies are starting to become 'in-the-money', meaning they are actually economically more attractive. Without the potentially distorting measures of subsidies. Which is exactly what the policy intended to achieve. A system where we put a price on a 'freely' available natural resource seems to work in our current economic system setup. Could this work for other natural resources, such as (sea-)water, fertile grounds, air as well?

📐 Definition Matters

Is Consumer Price Index (CPI) or its reduced version 'Core CPI' still the best index to look at when making decisions about the interest rate, pricing bonds, or setting wage increases?

As often with complex questions: it depends. As long as your average annual spending matches the composition of the CPI index, it is probably the right index. This is where the trouble starts. It's an average and depending on where you live, what expenditures you face and which income you generate, you may very well look at (and realise) very different inflation rates.

Take for instance the housing market. Changes in real estate prices are not part of CPI. Still, many people buy their homes and face a housing market that has seen average annual price increases of 5-10% over the past decade.

There have been various efforts to try to capture 'real' inflation. Shadowstats is the most famous but also carries the smell of being anti-everything that originates from a government-controlled body. However, given the reasoning that it all depends on perspective (analogous to the observer-observed theorem in physics), any concoction of an all-comprising figure will likely have its flaws.

With average spending per capita not keeping pace with the amount of money being created by central banks, logic has it that a correction is waiting to happen. It's doubtful this will be (evenly) spread amongst everyone and therefore create inflation noticeable in everyone's wallet.

Many people do not wait for that moment and try to take matters into their own hand. It's one of the driving forces of so-called Defi (decentralized finance) initiatives. Bitcoin is an example of such an initiative. Its value has increased 600x in 8 years.

🎈Inflation

The topic of inflation receives a lot of attention lately. Whilst I do not intend to solve this issue in a 5-minute-read newsletter, I do like to focus on one popular belief that does not seem to hold.

Especially, in Western societies that deal with an ageing population, the common belief is that a declining share of working people will lead to inflation as they supposedly have an improved bargaining position. In addition, elderly people spend more than they save, which is supportive of inflation. An often-cited book on this topic is 'The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival' by Charles Goodhart and Manoj Pradhan.

However, data from Japan may undermine this theory. Declines in the Japanese workforce have been matched by declines in pay:

Data from the US shows net investments relative to GDP keeps pace with labour force growth and has therefore been declining over the past 40 years. The basic point is that up till now ageing has been associated with lower inflation, contrary to popular belief:

Does this mean we're safe from inflation despite Central Banks creating money out of thin air like never before? To my mind, in a globalized world, it is paramount to take a much wider perspective. Just have a look at the young, fast-growing and spending populations like those from India and South-East Asia. The definition of inflation is a topic to research as well. Cliffhanger: the core CPI that is shown on the vertical axis in the graph may not be the inflation you and I are experiencing every day.

◼️🦢Predictions

By the end of November, my inbox fills up with memos and reports on what the next year will bring. The reports are always upbeat and full of potential chances and new key trends. Hardly ever do the writers of these reports reflect on their previous year's predictions. Obviously, when looking back to 2020, most (if not all) predictions were wrong.

This time, things may be (slightly) better. Certainly when you believe in old wisdom and superstition. Indeed, 21 is the number of luck. It comes back in regulations, gambling and taking chances. In many countries, 21 is the minimum age at which you're allowed to do many 'adult' things such as ordering alcohol or entering a casino. Once in the casino, you can play a number of card games in which the number plays a vital role like blackjack. When rolling the dice, you'll notice that the sum of all the spots on a standard die adds up to 21.

We'll see what '21 brings. Socially and healthwise, it almost cannot get worse than this year. Economically and financially, it seems to really depend on the speed at which we're able to make Covid a thing of the past. All 'experts' seem to agree that solid economic growth will return to all countries. Whether you benefit from this, seems to depend on which industry sector you're active or invest in. Maybe you're lucky!

⚖️ Top 10%

Mr Market is always right. At least, that's what's commonly said. But what if Mr Market is essentially only a limited number of people?

According to economic data from the Federal Reserve Bank of St. Louis we could argue this is the case. For the past 30 years, more than 80% of the US equity market has been in the hands of only 10% of the market players. The top 1% now even owns over 50% of the US market.

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This chart has several implications. Any movement in the price of US equities is mostly appropriated by a few investors. Another implication is that relatively few players can exert influence over the price. Perhaps they're even able to influence market policies set by authorities given their buying and selling power.

There's another side as well. Some of the very large investors are mutual funds, which are often investing the money of insurance and pension funds. Indirectly, a lot more people could therefore have an influence.

It is worth pondering whether we believe this is a sustainable market system. I do not readily have an alternative. At a minimum, I remain cautious whenever someone refers to the market as the main guide. It represents an important opinion, but this doesn't discharge us from conducting our own due diligence.

💰🌳 Big Business

One of the few upsides to Brexit might be the fact that the United Kingdom will be able to define their own agricultural policies. The Economist writes about its future as the UK wil be leaving the Common Agricultural Policy (CAP) this January 1st, after 47 years.

They explain how the policy has been subsidizing intensive farming methods, at considerable cost to the taxpayers, causing a lot of ecological damage. The originally intended goals behind the CAP, boosting food production, has not been making sense for decades.

Switching existing subsidies to behaviour that is beneficial for ecology and the beauty of the countryside (Britain is quite unique in considering the beauty of its farmed land as evidenced in tons of British poetry) can now be designed without EU interference. Smaller subsidies on these types of desired behaviour have shown to work beautifully with the farming community so far.

The same issue of the Economist reports on the rapid deforestation in Brazil, which makes the discussion on subsidizing Brazil for conserving rain forest all the more interesting. I must admit that originally, I felt some reluctance towards this idea ("They should do the right thing because it's the right thing" and "Why should they get free money just for having the rainforest"). An analogy with oil helped me see things more gently. The Middle East has been paid handsomely for supplying us with energy for decades. Now that cleaning Carbon Dioxide is key to our survival, why shouldn't we pay Brazil handsomely to do part of it for us?

🧗‍♂️ Growth 2.0

The Saturday edition of Dutch newspaper 'de Volkskant' featured an interview with Vaclav Smil. Known for his fact-based descriptions and analyses of world's big challenges, he's regarded as one of the current greatest thinkers.

In the interview, he stresses the importance of education. He notices that many people do not know 'the basics of reality'; knowledge to better understand how the world functions as an interconnected set of systems.

The main point of the interview is that he takes issue with the strive for endless growth. He reluctantly concedes that more regulation is needed. It makes me think of the doughnut economy model about which we wrote in our second episode. All in all, he's not very positive.

I personally believe more regulation to contain growth is not necessarily the answer, but investing in (the right kind of) education is. We may possibly need to rethink our current education.

This brings me to a TED talk by Rolf Winters, in which he shares ideas to 'prepare our kids for the 21st century'. Mr. Winters and his partner are the producers of the film 'Down to Earth' in which they have tried to capture the knowledge of earth's wisdom keepers.

In this short video, he notices that:

"...we're hanging on to our own vested interests, but these are not the interests of our children."

He makes the case for changing education to focus on teaching to ask the right questions, not give the right answers. To achieve this, children need to be taught how to connect with nature, oneself, others, the bigger picture and their dreams. In his view, the mission of a school is:

"How to nurture the innate abilities and gifts of pupils for them to become the sustainable beings they were born to be and to bring forth the change-makers the world so desperately needs."

Thus it's back to growth, meaning: development. I'm positive we're able to make this switch.

🤝 Trust

If we look at large-scale cooperation as one of humanity's most distinguishing feats, the principle of trust is a big factor. Trust sets the filter I apply listening to your stories, influences my willingness to cooperate, and my appetite for taking a risk with you. Steven M.R. Covey (son of the Steven Covey that wrote 'the 7 habits of highly effective people') even compares 'high trust' to 'oil', 'low trust' to 'sand' in your machinery. His book 'The speed of trust' on how to measure and improve trust in your organisation is easily my most recommended book ever on leadership.

Last week, Freakonomics' Stephen Dubner re-posted a 2016 podcast on the effect of societal trust on health and wealth. In the podcast, David Halpern, the head of the U.K.’s Behavioral Insights Team states:

"This [trust] is a more powerful predictor of future national growth rates than, for example, levels of human capital or skills in the population."

Even though we've argued against economic growth as the best indicator of human success, the gains caused by this dynamic are undeniable.

Hearing how racial diversity negatively impacts basic trust (a historic impulse we unfortunately still have in our DNA), an interesting balance arises. Countries that are less racially diverse generally score higher on societal trust, but lower on creativity (which is highly influenced by diversity) and vice versa.

Recalling how the arrival of Dutch and German immigrants initially caused tensions in the US, the solution also emerges. Those same biases cause us to over-estimate bad behaviour in 'others' (meaning, the people we do not know), making 'getting to know each other' the best way to solve this issue. That's why sports teams, the military and universities have proven to increase societal trust. Organising social gatherings and bonding opportunities may therefore be your best-performing investment on a grand scale.

📀 Virtual money

Many will have noticed that financial markets are setting new records and keep their lanes in what is now the longest bull-run in recorded history. There is much debate whether we're now in another bubble. Apart from the traditional investment opportunities, cryptocurrency Bitcoin is back on the radar screen as well. After a quick surge in value and attention in 2017, this virtual exchange medium seemed to be on its way to the trash bin.

Last year, however, there was a significant influx of funds into Bitcoins from professional fund managers as well as corporates. Given the relative scarcity, Bitcoin value quickly reached new heights and recently set a new record at $42,000.

In the recent article 'Bitcoin, Gold or Fiat', Gavekal Research, an independent provider of global investment research, compares Bitcoin to gold and fiat currency (dollars, euros, etc.). They explore whether Bitcoin or other cryptocurrencies can actually serve as an exchange medium and are here to stay. Markets and society use the title 'money' for a generally accepted and trusted medium of exchange.

Globally, we're not using one type of money. We have carved up the world in different currency zones, leaving inhabitants of each zone with no choice but to use a certain type of fiat currency. This introduces hurdles and costs to switch between currencies. Virtual currencies like Bitcoin allow for free movement globally at the same cost for everyone.

The article compares Bitcoin, gold and fiat currency on the main success factors of an exchange medium: trust, fungibility (it should not matter which actual Bitcoin, gold coin or dollar bill you use, they are interchangeable), divisibility, ability to store and transport, transaction costs and stability. Bitcoin scores in fact almost as high as fiat currency except for trust and stability. Bitcoin value has been extremely volatile, which is in fact a good reason why certain investors have turned towards it.

Virtual money like Bitcoin creates a lot of debate, but may in fact have a future. The technologies behind these cryptocurrencies like Blockchain have even more value in store than just being used as an exchange medium. That in itself may cause blockchain technology and perhaps even virtual currencies to become an integral part of our lives.

💰Golden Age

In 2020, valuations of especially IT and technology companies increased to unimaginable heights. Companies like Apple, Amazon and Microsoft surpassed the one (and even two) trillion dollar mark. Unimaginable? Well, actually, no.

Consider this chart that was published by Jeff Desjardins in 2017:

I knew the Dutch East India Company was valuable in their time, but did not realize it was worth the same as the 20 largest modern day's companies. Note that the comparison was made in 2017. Taking current day valuations, it is 'just' as large as the 5 biggest companies.

There are some striking similarities. The Dutch East India Company was a young company when it reached its valuation heights. It started operations in 1602 and was worth $7.9 trillion after only 35 years. First of all, it was granted the monopoly for trading spices with Asia. Secondly, the company's growth and strong, speculative interest to join in its successes coincided with the tulip mania reaching its peak.

Though current day big-tech companies have not been granted any monopolies, they do occupy very strong market positions through which they can influence pricing in their own interest. In addition, with interest rates reaching new lows, more and more people flock to the stock market to find a new destiny for their money.

One thing is different. Europe has lost its position on the World's stage when it comes to producing valuable companies. That's not necessarily a problem, certainly not when we're able to bring the world together and remove some economic boundaries. Internet was meant to do just that.

🎰 Speculation

The topic of most financial news today is whether the stock market is overvalued. One analysis after the other tells most of the times a balanced story in which the end-conclusion is: we don't know.

In its recent letter to investors, fund manager Saga Partners, stood out from the crowd by stating:

"However, the human mind—which is what the market reflects—is wired in a way that makes bubbles and crashes an inevitability from time-to-time."

It resonated with me as it points to different themes we've covered across several episodes of our newsletter: herd behaviour, echo chambers and the impact of stress and uncertainty on the ability to think independently. Might the answer be that simple?

Take for instance the graph below in which the investment bank Goldman Sachs tracks a basket of non-profitable US-listed technology companies. Their share performance have almost quadrupled in 2020.

This graph does not necessarily prove that (part of) the market is overvalued. We may speculate what's happening here, which is exactly what a lot of people do. Whilst doing so, many suffer from 'fear of missing out' or 'FOMO'. I leave the interpretation for everyone self to make. I'd only like to suggest to think independently.

💰 Effective Tax

Dutch newspaper 'de Volkskrant' featured an article about an interesting application of Artificial Intelligence (AI). Researcher Stephan Zheng and his team, employed by US company Salesforce, created a model to determine a taxation scheme optimizing for total wealth. The model is based on the behaviour of a small economy of 4 people and a taxating government. The result was striking. Compared to current US taxation schemes, the model produced a system that performed better in terms of productivity and income equality.

Interestingly, the model optimizes the taxation scheme to a combination of progressive taxation and work incentivation, or

"...a striking symbiosis between capitalism and socialism." [translated from Dutch]

Their results showed rich people paying highest taxes, but tax rates being lowest for those working the most: the middle class. According to the scientists, this creates most wealth for the 'entire' economy.

It is too early to draw conclusions and derive policies from these models. The researchers acknowledge much more work needs to be done and the models should be extended for systems involving millions of people, effects on the environment, international trade and social wellbeing. Also, optimizing for wealth might not be the right goal.

Yet, use of AI outside its normal fields shows its merits. It drives researchers and economists to go beyond their normal avenues. That in itself has value and it opens a discussion about the variables -our values- to optimize for.

🤑 Responsible wealth

According to research done by Stockholm Environment Institute and Oxfam Novib, the world's wealthiest 10% accounted for 49% of the world's CO2 emissions in 2015. This is more or less unchanged from the situation in 1990. The 'Bigfoot' among them is the top 1%; they account for 15% of the emissions.

Though one might use this research as another whip to bully the rich, I like to see this as good news. This relatively small group is easily identifiable. We can make a targeted effort to convince this group to significantly reduce their footprint.

Economic activity does not necessarily have to be reduced. Rather than introducing another form of wealth tax, changing behaviours and investing in new technologies can be made attractive. Next to immediate emission reductions, this could cause a snowball-effect as many wealthy individuals are an mimicked by others.

This could turn out to be a triple-edged sword: reduced emissions, rise in investments, increased well-being. China, which always seems to be growth-minded, recently announced it aims to cut CO2 emissions to zero (net) by 2060!

🐧💨 Momentum

The financial markets and in particular the stock markets may be complex and puzzling. It leads many people to conclude that it is an area they do not understand and is to be left to the quantitative whizzkids. However, even experienced and studied financials are puzzled by certain phenomena taking place in the financial world.

“We don’t know why it exists, and it shouldn’t exist.”

This was the response of emeritus Professor Paul Marsh to a question about so-called 'momentum' in the equity markets. More specifically, he was asked why momentum was more profound in developed financial markets or sectors, which are considered to be more efficient.

Momentum in equity markets is the tendency of winning stocks to keep winning, and losing stocks to keep losing. Smart investors have created dynamic strategies to make use of this effect, even adding to this positive feedback loop. It turns out this momentum strategy generally outperforms the market over the long term. It does so more reliably than 'value strategies', which consistently invests in companies that are undervalued.

Paul Marsh, together with his former London Business School colleagues Elroy Dimson and Mike Staunton have published the 'Global Investment Returns Yearbook' annually since 2000. They have observed and explained many effects over the years, but this one remains a mystery. They may have to turn to their social and psychology colleagues (or one could argue: the real world). Dynamics like crowd herding, groupthink and peer pressure could be in play here. In developed markets, there are more large institutions driven by their own incentives rather than what the market determines.

A fascinating example how 'developed' is not always synonymous with 'better' or 'more advanced'. I'm sure professors Marsh, Dimson and Staunton have places available for social whizzkids to solve this puzzle.

💸 Patron

In general, artists have never been amongst the best paid people on this planet. You get a skewed image if you focus on the top 0.01% of painters, actors, writers and musicians, but these exceptions cannot hide the fact that the majority of people in the arts struggle to make a living with their craft.

It fascinates me how this contrasts with the way we consider all of our art forms to be uniquely human and invaluable to our well-being. We have gotten solace and comfort from art in our darkest moments and much of what we consider our historic achievements is art.

With modern incarnations of Patrons (like patreon.com) as an example of technology solving this problem, I was therefore quite enthusiastic about the dawn of the NFT. An NFT (Non Fungible Token) is a way to buy digital art based on Blockchain technology, albeit without the formal legal and economic ownership of the piece.

The NFT space has exploded recently, with many investors buying NFT's of everything from digital artwork and writing to videos of NBA action shots. Last week, a collage of work by Beeple was sold at Christies for US$ 69 Mio (not a typo).

My enthusiasm of NFT's took a turn for the worse after being confronted with Seth Godin's view and then reading this more in-depth article. While quite extreme in its conclusion, I have yet to find the fundamental flaw in the reasoning behind it. If NFT's are a modern incarnation of a pyramid scheme, it's not about to end because of a lack of buyers, but because of a clash with our moral and environmental values.

💵 Valuable lessons

The subject of the ever-increasing global debt and its implications for financial markets, economy and government policies seems to almost clog the internet and daily newspapers.

Sometimes simple logic can help to make sense in this jungle of market analyses and opinions. Warren Buffet, who at least in the past decades has proven he was able to make sensible decisions, states:

“The [US] debt isn’t going to be repaid; it’s going to be refunded.”

His main reasoning is that when governments can keep on printing money to pay their own debt, it’s highly unlikely they will ever default. Now, this assumes of course that governments determine what central banks do. That's certainly what we have been observing as well, but officially this is not the case.

Mr. Buffet tries to take the long view and suggests:

"Now is not a time to panic. Now is a time to learn and prosper from what is transpiring in the global economy."

To be continued, we're sure.

🍩 Recovery Dimension

Balancing the barrage of V- and W-shaped economic recovery predictions, Freakonomics' Steve Levitt interviews economist Kate Raworth on her 2017 book Doughnut Economics.

She assesses that G.D.P. growth as an indicator of how well a country is doing, is fundamentally flawed. Past a certain point, there is no fundamental relationship between G.D.P. and human well-being.

Trying to come up with an economic diagram explaining her viewpoint, she came up with a circle inside of another circle, basically a doughnut.

"No one should be in the hole in the middle where they're falling short on the essentials of life without food, or water, health care, housing, education, political voice. But at the same time, don’t overshoot the outer crust of the doughnut. There, we put so much pressure on our planet we begin to push her out of balance, and we cause climate breakdown. So, it’s a balance. Meet the needs of all people within the means of the planet."

Levitt continues interviewing policy makers and economists, challenging them on the basic premise that economic structures that are structurally dependent on endless growth can be dangerous. Something we can attest to from our knowledge of fundamental physics: all systems with just a positive growth factor are essentially unstable.

🏙 Rotten Apple?

Voicing an alternative sound to the stories Big Cities are bleeding people and talent, Union Square Ventures' Fred Wilson shares his opinion on the future of New York.

He believes a city like New York will never 'go out of business', implicating the question is merely how New York will turn around.

"It won’t be the same NYC that existed pre-pandemic. But that is a good thing. NYC has sucked for the last decade or more."

Fred believes lower rents will enable a different set of people to live there, even enabling artists to live in NYC once again.

Economic productivity in cities has always been measurably higher than in rural areas because of the increased interaction between people. Next to that, a growing population attracting diverse services (such as schools, restaurants, theatre) has created a virtuous economic cycle for as long as big cities have been around. It remains to be seen if the pandemic provides just a rejuvenating shock to the system or if a permanent change to the underlying growth factors of big cities are in play.