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In the Blind Spot (Fintech, Miss Ukraine, Davos)

Screenshot 2023-01-14 at 08.22.26

This edition of the Blind Spot Wrap was compiled by Izabella Kaminska.

Business, Finance, Econ etc:

  • BlackRock is downsizing after sharp declines last year in equity and bond markets.
  • Egyptian pound hits the rocks after it agrees to move to a flexible currency regime as part of a $3bn IMF deal:
  • The BoE completed the sales of the gilts it temporarily bought to manage the Truss flipout, and Bloomberg calculates it made £3.5bn from the countercyclical exercise.
  • More Amazon closures.
  • The WSJ reports on the departure of a number of top executives from EV start-up Rivian.
  • Microsoft eyes $10bn bet on ChatGPT.
  • Have reports of incoming recession been greatly exaggerated? The UK has avoided, recession in 2022, Germany has grown 1.9 per cent and US inflation is falling.

    I’ve always said that in the long run the combination of higher interest rates and moderate inflation —  especially if the financial system can handle the transition without breaking down — might be exactly the thing we need to boost growth by jolting the economy out of its zero-sum tendencies. This is becasue higher interest rates force capital to focus on “sure bet” businesses that can deliver profits today rather than tomorrow. This is especially the case if moderate inflation becomes sustained and anticipated — something that is, as Nouriel Roubini says, likely to be the case due to the multitude of inflationary factors coming our way from the green transition to ongoing geopolitical risk.

    The challenge now will be making sure the stimulative effects of high interest rates on productivity outweigh the drag from higher interest payments on our massive debt load.

  • Team Transitory is moving the goalposts on its definitions.

    What team transitory fails to understand is that team inflationary’s argument wasn’t necessarily pejorative. It was descriptive. i.e. inflation was going to become entrenched. Whether recession was the outcome of this fact or not is irrelevant. Lots of us, notably me, argued that in the long run if higher interest rates prompted a shift away from zero-sum ventures to help stimulate productivity, the short-term pain of a period of sustained inflation would be worth it in the long run. Also, as I’ve said repeatedly, on a long enough time frame all inflations are transitory.

    A more pointed critique would be to note that lockdown, rather than being bad for the economy, served an “accelerationist” function by speeding up the worst of loose monetary policy and free cash to its natural end point: the eventual and inevitable return of inflation and productivity. That would mean it may have been worth it after all. But! We haven’t achieved escape velocity just yet and many challenges remain before that argument can be seriously deployed.

  • The number of companies issuing negative EPS guidance is above the five-year average of 57 but equal to the 10-year average of 65.

Fintech Fiasco:

  • Revolut is close to finalising 2021 accounts as fintech seeks U.K. licence.
  • Goldman Sachs says the new fintech unit incurred $3bn in losses since 2020.

    Should we be surprised that Goldman’s digital bank Marcus is loss-making and is being pared back? Nope. Here’s some context as to why. About seven-eight years ago a fintech investment and advisory firm made a serious effort to try to poach me from the FT. One of the main reasons I declined the offer is because, having thought long and hard about it, I saw very little profitability in the sector over the long term if interest rates stayed low.

    Some fintechs have since defied my expectations. FX transfer specialist Wise is one example. The company achieved escape velocity and became profitable a few years ago. My critique had been that Wise wasn’t offering the market anything technologically new. What I missed with Wise is that sometimes you don’t need to offer anything new to the market as long as your customers think you are. And that perception can be achieved with clever marketing and the development of a brand cult.

    Wise’s success was never down to a fundamentally superior service in terms of prices or value. Nor was it down to a more sustainable or profitable business model. It was down to the fact that the company was prepared to throw a huge chunk of start-up capital at acquiring customers with clever marketing and messaging. In that sense, Wise bought its customers by offering them cheaper services than competitors could offer for a temporary period. And thanks to brand loyalty, those customers have stuck with it. Some might say, the model was more akin to an M&A exercise — just replace company with “customer” in the acquisition bit. Think of it as: “If we raise enough capital to throw at customer acquisition (mostly by undercutting the competition) we can just buy our way into the market regardless of whether our services are fundamentally doing anything new.”

    In the end Wise succeeded because the company cultivated a customerbase which valued the user experience of its platform — even if Wise itself didn’t always deliver the bargain basement rates they were promising. The model itself (taking a commission on FX exchange) was also tried, tested and guaranteed — centered around largerly occasional customer interactions. Wise is now one of a handful of fintechs doing any hiring at all.

    But Wise’s success is not the standard story for fintechs. This is especially the case when it comes to challenger banks. The standard story for them, on the contrary, is that they thought customer-centric solutions and better branding would be enough to steal customers from rivals, but failed to appreciate how adverse selection would impact them.

    This was down to two factors. In the first instance, getting customers to move banks remains hard despite all the regulatory efforts to ease data portability. People are strange like that. Second, those customers you tend to win over are often the sort who are disgruntled with their pre-existing banks because they’re not getting access to services or low rates for good reason. Unlike in FX, where it’s all just a question of deal flow, in banking customer quality matters. Wooing over lower credit-quality customers or those who can’t be banked elsewhere bears risk in the long term and is thus costly. The same applies to wooing those who just come over for a single perk, and then are either off again, or do very little business on your platform.

    A flavour of the challenges facing fintechs this year: German Neobank Ruuky is filing for bankruptcy; higher interests have temporarily come to the rescue of the material uncertainties that were haunting Monzo but customer credit deterioration remains a risk; similar pressures are facing Klarna; funding is drying up for the sector as a whole as investors look beyond customer acquisition; fraud levels are rising and there are growing concerns about default risk.

    For now Starling Bank seems to be the breakout success story in the space due to its clever decision to focus on the SME sector. The proof in the pudding, however, will only come when we know for sure the SME sector can put up with higher interest rates. Of course, if the economy can escape recession, we might still find ourselves laughing all the way to the bank. If not, things could change swiftly.

Crypto Chaos:

  • American Banker reports that crypto lender Silvergate got a de facto backdoor FDIC bailout late last year.
  • JPMorganChase CEO Jamie Dimon is raising the alarm about a plan that will allow leading stablecoin issuer Circle to lend its reserves to the Fed in exchange for collateral Treasury bonds interest.
  • ChatGPT has some ideas about who Satoshi might be.
  • Coinbase to slash a fifth of its workforce.
  • The Winklevoss have issues with DCG.
  • Junseth and Izzy run through the DCG, GBTC, Grayscale story.
  • We’ve all seen Miss El Salvador wearing a Bitcoin outfit to the Miss Universe 2023 pageant.
    But have you seen Miss Ukraine as warrior archangel Michael?

    Compare and contrast with Miss Russia’s attempt to channel Russia’s traditionalist imperialist past:

Geopolitical Pivots (The, You’re Either in Power or You’re in Jail Edition):

  • Ingushetia, located north of Georgia and in between Chechnya and North Ossetia, has apparently declared independence from Russia.
  • Austria is moving further to the right because of its energy crisis.
  • Almost half of all Poles worry that the next election’s results will be falsified
  • Peru’s anti-government protests are spreading with clashes in Cusco.
  • Peruvian forces also stand accused of ‘Massacre’ of 17 protesters opposed to government takeover. 
  • Peru’s gateway airport to Machu Picchu was closed as protests grow.

    Aljazeera reports: “Protesters in Puno are among Castillo’s staunchest supporters and are angry at his replacement by Boluarte, who was appointed by Congress in early December following Castillo’s removal and arrest.” The demonstrators have been calling for Boluarte’s resignation as well as early elections and the release of Castillo, who is serving 18 months in pre-trial detention on charges of “conspiracy” and “rebellion”, which he denies.

WW3 Watch:

  • What’s Ukraine hiding in the ‘underground cities’ of Bakhmut and Soledar?

    Despite our modern high-tech times, there’s been so much trench warfare during the Ukraine/Russia war that comparisons of the conflict with WW1 abound. 

    The latest developments revolving around Russia’s capture of Ukraine’s Soledar salt mines can’t help but bring to mind France’s famous battle of Arras of 1917, when (as Wikipedia reminds us) “the British forces controlling Arras decided to re-use the underground quarries to aid a planned offensive against the Germans, whose trenches ran through what are now the eastern suburbs of the town. The quarries were to be linked up so that they could be used both as shelters from the incessant German shelling and as a means of conveying troops to the front in secrecy and safety.”

    Some 500 miners from the New Zealand Tunnelling Company, including Māori and Pacific Islanders were brought in to dig 20 kilometres of additional tunnels.

    There remains a lot of speculation and conspiracy about this sort of undergound advantage on the internet too – IK

  • These are the estimated NATO weapons replacement timelines, according to a table from unknown source:

Commodity Corner:

Oh Gawd, Davos Again Already?

  • George Soros has funnelled $21bn into left-leaning politics since 2000.
  • Powell reiterates Fed is not going to become a ‘climate policymaker’.
  • Deliveroo announces reusbale packaging partnership with Returnr.
  • France has banned disposable packaging in food outlets.

    Can we be sure that forcing hundreds of thousands of restaurants and food outlets to run hundreds more dishwasher cycles per week is really good for the environment? Given the ban applies to entirely recyclable material, I’m not so sure. In 2020, just before the pandemic started, I had the chance to visit a recycling plant in the south of England. I was shocked by the efficiency. Collectively recycling all the country’s reusable cutlery in one centralised location, on the whole, seems fairly efficient, especially when those plants also feature waste-to-energy facilities for any remaining excess that can’t be recycled.

    The other key point is that with China having closed its door to our recycling, Europe now produces more recycled material than it has domestic demand for. That’s a trend that’s not going away any time soon, meaning using it for everyday restaurant needs isn’t entirely inefficient when you consider dishwashers aren’t zero energy either.

  • WEF founder and chairman tells the WSJ.

    This year’s Davos elitefest hosts actor Idris Elba in the top dogooder spot and features keynote addresses from German Chancellor Olaf Scholz Klaus Schwab and President of the European Commission Ursula Von Der Leyen. Also on the agenda, a conversation with Henry Kissinger, a crypto panel with Ripple’s Brad Garlinghouse (yes, really) and a discussion about the dangers of disinformation with former CNN anchor Brian Stelter.

    Despite finding himself at the centre of all sorts of bug-eating conspiracy theories, what few appreciate about forum founder, Klaus Schwab, is that — in contrast to the woke brigade — he is not an advocate of cancel culture. This is because mediating differences among all stakeholders is an essential component of Schwab’s stakeholder capitalism vision.

    As a result, WEF has in the last five years platformed everyone from Vladimir Putin to Xi Jinping, Donald Trump, Justin Trudeau and Jair Bolsonaro. In fact, when I asked Adrian Monck, WEF’s head of public and social engagement whether he could imagine Putin ever being invited back again, he said “never say never”. On the other hand, when I asked if Alex Jones might ever be invited, the answer was a firm no. Which is a shame, because a WEF panel with Alex Jones, David Icke and Robert Kennedy Jr would probably break the internet.

    My Leaked Lunch podcast with Adrian Monck recorded in August is available here.

Media Matters:

  • Polish media republish rival’s government critical story in solidarity over regulator’s legal action.
  • Michael Shellenberg interviews a former top CIA analyst who condemns FBI for its censorship and misinformation.
  • Autistic journalists interview Macron.
  • Matt Taibbi has issues with being described as allied with authoritarians by MSNBC.
  • The UK government has a go at Stalin-esque photoshop shenanigans.

File-Gate Strikes Again:

  • Classified documents found in Joe Biden’s garage.
  • Politico reports that Biden was “surprised” by the discovery of classified documents in his garage and is cooperating.

Lockdown Side-Effects:

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