“It is well-known what a middleman is: he is a man who bamboozles one party and plunders the other.” – Benjamin Disraeli
One of the most mind blowing essays I’ve read in the past couple years was Markets Are Eating The World, by Taylor Pearson. He posits that the structure of the economy is based on transaction costs.
When transaction costs are high, we see large corporations and a propensity for consumers to want to own things. When transaction costs are low, smaller firms excel and consumers prefer to rent. [Pictured below]
“Computers and aggregators reduced triangulation costs through digitization and proliferation of smart phones. They brought down transfer costs through cheaper matchmaking.The result was that in industries touched by the internet, we saw an industry structure of large aggregators and a long tail of small business which were able to use the aggregators to reach previously unreachable, niche segments of the market. There aren’t many cities where a high-end cat furniture retail store makes economic sense, [but] on Google or Amazon, it does.”
Pearson’s message relates perfectly to what we are seeing in the capital markets today. The Robinhood and GME saga, the impossible scale of passive funds, people getting deplatformed left and right, it’s all part of the same story: the gatekeepers have gotten too big, and people want out.
Who Watches the Watchmen?
It falls into my bucket of “things are so efficient, they are not efficient.” Robinhood, TD, Schwab, Virtu and Citadel drove down transaction costs in markets so drastically that they became FREE to your average retail trader.
That’s incredible, but there are also side effects. There really is no such thing as a free lunch (besides diversification) and right now we’re seeing the bill come due through harmful changes in market structure.
Market gurus love to glorify active management fees getting crunched, but when you ask them about the misallocation of capital from the growth in passive investment firms like Vanguard, Blackrock, and State Street, they go radio silent.
They can’t articulate that the inflation in financial assets from passive investment far surpasses any benefit that the retail investor ever got from closing the bid/ask spread to under a penny.
To keep up with the performance of passive (who hold 0.1 percent cash) the retail investor would have to be 100 percent passive or take giant swings at a concentrated book of stocks. Sound familiar?
And it’s only getting worse.
There are about five activist short-sellers left to call out fraudulent companies and one of the best, Andrew Left, just tapped out and said he’d never short again.
One of my other favorite market phenomena is when a Cathie Wood’s Ark ETF puts $200k into a $400 million market cap company and moves the market cap by $100 million dollars.
A pinnacle of efficiency, these modern markets.
The End of the Computing Era
We are at the stage where the populace is waking up to the reality of a world dominated by mega-aggregators of scale (AMZN, FB, Vanguard, BLK). And yes, these corporations have driven down costs for consumers, but they’ve broken the system in the process.
People can sense that the system is unjust, but they don’t know where to point their fingers just yet. The anger in the air is palpable as the group of people who society left behind becomes larger and larger.
The centralized power of the Fed has punished savers for a decade and allowed megacorporations to tap the debt markets which are ironically subsidized by middle-class, unfunded pensions.
There are no shortage of hot takes about what the Reddit / Robinhood / GameStop story “really means.” Is it just another classic symptom of an overheated market? Is it just the latest misguided witch hunt against short sellers? Is it some weird form of internet inspired nihilism designed to stick it to the elite?
One thing that I’ve learned over the years is that when enough emotion is involved, all rationality leaves the conversation.
And right now, that emotion is paving a one way road out of a system governed by centralized giants that no longer serves them. I almost can’t believe I’m saying this, but Bitcoin might just fix this.
Here’s Pearson again describing what he calls “the blockchain era.”
“A few individuals– heads of central banks, leaders of state, corporate CEOs, and leaders of large financial entities can move markets and politics globally with even whispers of significant change. This sort of centralizing in the name of efficiency can sometimes lead to long feedback loops with potentially dramatic consequences. [On the flip-side] Public blockchains may allow aggregation without the aggregators.”
The Dramatic Consequences
I’m not even taking huge leaps here. The connections are being made all over social media. People don’t feel like ANY of the institutions that make up modern life, from their brokerages to their governments, are serving them.
And guess what? Ethereum just hit an all-time high today. 1.3 million people downloaded the Coinbase app in January, which is more than E-Trade, TD Ameritrade, Charles Schwab, Fidelity and SoFi… combined.
The longer the Fed backs the bond market and unprofitable zombie companies, the faster they seem to be expediting the movement of capital from the legacy financial world into digital assets.
The paradox is that the best thing the centralized powers could do for themselves right now is raise rates and make the hurdle rate for investment higher.
I doubt they have the political will to do so, but that might not be the worst thing. People are looking for an outlet, and for now it looks like people are finding it in crypto.
– Tyler Neville, Senior Editor
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