The age of the appacus

In fintech, China shows the way

Advanced technology, backward banks and soaring wealth make China a leader in fintech

CHINESE banks are not far removed from the age of the abacus. In the 1980s they used these ancient counting boards for much of their business. In the 1990s many bank employees had to pass a basic abacus test. Today the occasional click-clack, click-clack can still be heard in villages as tellers slide their abacus beads up and down the rack.

But these days the abacus is mainly a symbol, more likely to be used in the branding of China’s online-finance companies than as a calculating tool. At least three internet lenders have paid homage to it in their names: Abacus Loans, Small Abacus and Modern Abacus. The prominence, so recently, of the abacus is testament to how backward Chinese banking was a short time ago. The rise of the online lenders shows how quickly change has come.
By just about any measure of size, China is the world’s leader in fintech (short for “financial technology”, and referring here to internet-based banking and investment). It is far and away the biggest market for digital payments, accounting for nearly half of the global total. It is dominant in online lending, occupying three-quarters of the global market. A ranking of the world’s most innovative fintech firms gave Chinese companies four of the top five slots last year. The largest Chinese fintech company, Ant Financial, has been valued at about $60bn, on a par with UBS, Switzerland’s biggest bank.

How did fintech get so big in China? The short answer is that it was the right thing at the right time in the right place. Even after Chinese banks tucked away their abacuses, they remained remarkably unsophisticated for a high-speed economy. People accumulated wealth but had few good outlets for investing. Entrepreneurs were full of ideas but struggled to get startup loans. Consumers were spending but needed wads of cash to do so. 

New technology offered a way to vault over these many contradictions. During the past decade China became the country with more internet users than any other—more than 700m. A potential revolution beckoned but plodding state-owned banks were slow to respond. The terrain was open for battalions of hungry companies. Some entrepreneurs had roots in e-commerce, others in online gaming, many were just first-timers.

Today, the promise of fintech in China is great. It is shaking up a stodgy banking system and helping build a more efficient one, especially for consumers and small businesses. But limitations are also clear. Banks are fighting back. And regulators, tolerant so far, are wading in. For years China has looked to developed countries for ideas about how to manage its financial system. When it comes to fintech, the rest of the world will be studying China’s experience.
The rise of fintech in China is most notable in three areas. The first, obvious in daily life, is mobile payments. China’s middle-class consumers, emerging as the internet took off, have always been inclined to shop online (see chart 1). This made them big, early adopters of digital payments. China also had a late-starter advantage. Developed economies long ago swapped cash for plastic (credit and debit cards). China was, until a decade ago, overwhelmingly cash-based.

The shift to digital payments accelerated with the arrival of smartphones, bought by many Chinese who had never owned a personal computer. Today 95% of China’s internet users go online via mobile devices. Alipay, the payments arm of Alibaba, an e-commerce giant, soon became the mobile wallet of choice. But it quickly faced a challenge, when Tencent, a gaming-to-messaging company, launched a payment function in its wildly popular WeChat phone app, tapping its 500m-strong user base. Baidu, China’s main search engine, followed with its own wallet.

Competition has sparked a stream of innovations, especially in the way mobile apps can connect online to face-to-face retail transactions. QR codes, the matrix-like bar codes that generally failed to catch on in the West, have become ubiquitous in Chinese restaurants and shops. Users simply open WeChat or Alipay, scan a QR code and make a payment. And phones themselves can serve as payment cards: with another click, users display their own bar codes, which shopkeepers then scan. And it is as easy for people to send money to each other as it is to send a text message—a vast improvement over the bricks of cash that used to change hands.

Many of the payment functions within WeChat or Alipay exist elsewhere in the world, but in disaggregated form: Stripe or PayPal for online shops processing payments; Apple Pay or Android Pay for those using their phones as wallets; Facebook Messenger or Venmo for friends transferring money. In China all these different functions have been combined onto single platforms. Adoption is widespread. For about 425m Chinese, or 65% of all mobile users, phones act as wallets, the world’s highest penetration rate, according to China’s ministry of industry and information technology.

Mobile payments hit 38trn yuan ($5.5trn) last year, up from next to nothing five years earlier—and more than 50 times the size of the American market.

Small is beautiful
A second area where China has become the global leader is online lending. In most countries, banks overlook small borrowers. This problem is especially acute in China. State-owned banks dominate the financial system, with a preference for lending to state-owned companies. The absence of a mature system for assessing consumer credit-risk adds to banks’ reluctance to lend to individuals. Grey-market lenders such as pawn shops provide financing but at usurious interest rates.

Fintech has started to fill this gap. E-commerce was again the launch-pad: online shopping platforms developed loan services, and are using their customers’ transactions and personal information to create credit scores. (How the government might eventually harvest data for social control is cause for concern, but for now lenders are merely trying to master the basics of credit ratings.) Shoppers on Alibaba and, China’s two biggest e-commerce portals, can conveniently borrow small amounts, typically less than 10,000 yuan. According to Ant Financial (Alibaba’s financial arm, spun out in 2014), 60% of borrowers in this category had never used a credit card. On their platforms, Ant and also lend to merchants, many of whom are the kinds of small businesses long ignored by Banks.
However, e-commerce lending is intrinsically cautious. Its targets are clients already well-known to the big shopping platforms. For the more radical side of China’s online lending, look instead at the explosion of peer-to-peer (P2P) credit. From just 214 P2P lenders in 2011, there were more than 3,000 by 2015 (see chart 2). Initially free from regulatory oversight, P2P soon morphed into China’s financial Wild West, brimming with frauds and dangerous funding models. More than a third of all P2P firms have already shut down.

Yet P2P lenders still have a big role to play in China. Despite a string of headline-grabbing collapses, the industry has continued to grow. Outstanding P2P loans increased 28-fold from 30bn yuan at the start of 2014 to 850bn yuan today. The online lenders answer a basic need, like China’s grey-market lenders of old, but in modern garb and, thanks to all the competition, offering credit at lower interest rates.

In other countries, P2P firms typically lend to clients online and obtain funding from institutional investors. The most successful lenders in China flip that approach on its head.

Because of the lack of consumer credit ratings, they vet borrowers in person. Lufax, China’s biggest P2P firm, operates shops—more than 500 in 200 cities—for loan applicants. And for funding, Chinese P2P firms draw almost entirely on retail investors. More than 4m people invest on P2P platforms, up by a third over the past year. The platforms can then divide loans into small chunks, parcelling them out to investors to disperse risks.

This points to the third area of China’s fintech prowess: investment. Until recently, Chinese savers faced two extreme options for managing their money: stash it in bank accounts, where interest rates were artificially low, but it was as safe as the Communist Party; or punt on the stockmarket, about as safe as playing baccarat in a casino in Macau. “In the middle there was nothing,” says Huang Hao, vice-president of Ant Financial. Fintech has opened that middle ground.

In the West asset managers increasingly worry that they face a wave of disintermediation as investors migrate online. In China asset managers barely had a chance to serve as intermediaries in the first place; the market skipped into the digital stage. In large part this resulted from a generational divide that is the inverse of the global norm: the best-paid workers in China tend to be younger, the country’s first big generation of white-collar workers. They are much more likely to be willing to trust web-based platforms to manage their money. “In America people love technology, too, when they are 22. They just don’t have any money,” says Gregory Gibb, Lufax’s chief executive.

The biggest breakthrough was the launch of an online fund by Alibaba in 2013. This fund, Yu’e Bao (or “leftover treasure”), was promoted as a way for people to earn interest on the cash in their e-commerce accounts. The appeal, though, turned out to be much broader. Invested through a money-market fund, Yu’e Bao offered returns in line with the interbank market, where interest rates float freely (see chart 3). This meant that savers could get rates that were more than three percentage points higher than those banks offered. And risk was minimal, because their cash was still ultimately in the hands of banks. Yu’e Bao attracted 185m customers within 18 months, giving it 600bn yuan of assets under management.

As is so often the case in China, new entrants soon appeared. In 2014 Tencent launched Licaitong, an online fund platform linked to WeChat. Within a year, it had 100bn yuan under management. Lufax, meanwhile, outgrew its P2P roots to transform itself into a financial “supermarket”, offering personal loans, asset-backed securities, mutual funds, insurance and more. Robo-advisers (firms that use algorithms and surveys to let users build portfolios) also have China in their sights.

Give me your pennies
And it is not just about wealthy investors. In the West people generally need deep pockets before they can afford to buy into products such as money-market funds. In China all it takes is a smartphone and an initial buy-in of as little as 1 yuan. WeChat, with 800m active accounts, and Ant, with 400m, can afford to be generous.

How to gauge the impact of fintech in China? Measured against the rest of the country’s colossal financial system, the various fintech pieces are puny. Apps and online lenders might have massive user bases, but they are mainly comprised of consumers and small businesses, not the hulking state-owned enterprises and government entities that form the backbone of the banking system. The outstanding balance of P2P credit is roughly 0.8% of total bank loans.

Credit provided by the e-commerce firms adds up to even less. Earnings from mobile payments amount to barely 2% of bank revenues.

Wei Hou, an analyst with Bernstein Research, reckons that the fintech firms will grab less than a twentieth of banks’ business by 2020. That is hardly to be sneezed at, since it comfortably equates to 1trn yuan in revenues. But it is not the kind of radical disruption that fintech’s more ardent evangelists often foretell.

Nevertheless, just looking at the overall size of fintech is insufficient. In the market segments they have set their sights on, fintech firms have made a big mark. Digital payments account for nearly two-thirds of non-cash payments in China, far surpassing debit and credit cards. P2P loans make up about a fifth of all consumer credit.

What’s more, fintech firms have provoked a competitive response. Take the customer experience at China’s biggest banks: it has improved markedly over the past few years. Once-cumbersome online-banking portals are much easier to use.

Even more important, banks are also changing their business models. Prodded in part by the online investment funds, they have moved away from their plain-vanilla deposit-taking roots.

Their focus has shifted to “wealth-management products” (WMPs), deposit-like investments which they sell to their clients, often via mobile apps. Returns are as high as anything on Alipay or Tencent. The banks’ apps are not as slick, but not far off, and they feel far safer, with their reassuringly physical thousands of branches. The outstanding value of WMPs has reached more than 26trn yuan, quadrupling in five years. WMPs have brought new risks into the financial system, in particular concerns over banks’ funding stability. But they have arguably done more to promote interest-rate liberalisation than any regulatory edict.

And banks have come to appreciate their own strengths: branch networks; solid reputations; and risk controls. “You can’t say that banks or fintech firms are better positioned. Both need each other,” says Li Hongming, chairman of Huishang Bank, the main lender in Anhui, a big central province. Fintech upstarts have also learned that lesson. Look at Wheat Finance, one of the country’s earliest P2P lenders, established in 2009. Amy Huang, Wheat’s CEO, says her initial goal was to challenge banks on their home turf. But she soon realised that banks have insuperable advantages, with their stable, low-cost funding bases. Instead of battling them, Wheat is becoming their partner: 70% of its revenues come from selling digital services to banks.

Regulatory attitudes are also shifting. China’s government initially gave fintech companies a free hand, a striking contrast to its heavy policing of traditional banks. The hunch was that fintech firms were small enough for any problems to be manageable, and might produce useful innovations. This wager paid off: the rise of mobile payments and online lending owe much to light regulation.

But the era of benign neglect is over. In 2016, provoked in part by the P2P scandals, China introduced regulations to cover most fintech activities. Most of the rules are aimed at making fintech safer, not at curbing it. Firms can no longer pursue their most ambitious strategies.

Individuals, for instance, can borrow no more than 200,000 yuan from any one P2P lender.

Some of the regulations, though, also constrain what fintech firms can hope to achieve. The central bank is overseeing the creation of an online-payments clearance platform. It wants transparency: all digital payments will be visible to the central bank. But it could neutralise one of the main advantages of Ant and Tencent, forcing them to share transaction data with banks.

It seemed, for a time, that China’s internet titans might go after banks’ crown jewels, when they obtained licences to run online banks. But the government has required that they act in partnership with existing banks for even the most basic functions such as deposits and withdrawals.

Yet this is not the end of the road. Ant and Tencent still have hundreds of millions of users between them on apps that offer a wide range of financial services and products. They just need to persuade enough users to view them not simply as mobile wallets but as mobile brokers and lenders. As Lufax and hone their offerings, they, too, will grow more powerful.

Regulations have placed speed bumps along their path. But the path is still there.
The Chinese are coming
China’s fintech champions are also trying to break into new territory abroad. WeChat’s mobile wallet is usable internationally, mostly in Asia for now. Ant has invested in mobile-finance companies in India, South Korea and Thailand. But replicating their successes in other markets will not be straightforward. Much of their repertoire was devised specifically to address deficiencies in China’s financial system. And anything that touches on core banking abroad will require local incorporation and adherence to local regulations—headwinds against global expansion.

China’s bigger impact is likely to be indirect. Its fintech giants have shown what can be done. For emerging markets, the lesson is that with the right technology, it is possible to leapfrog to new forms of banking. For developed markets, China offers a vision of the grand consolidation—apps that combine payments, lending and investment—that the future should hold.

And the biggest lesson of all: it is not upstarts versus incumbents but rather a question of how banks absorb the fintech innovations blossoming around them. China, an early adopter of the abacus, is, after a long period of dormancy, once again blazing a trail in finance.

Economists in Denial

Robert Skidelsky
. Bank UK

LONDON – Early last month, Andy Haldane, Chief Economist at the Bank of England, blamed “irrational behavior” for the failure of the BoE’s recent forecasting models. The failure to spot this irrationality had led policymakers to forecast that the British economy would slow in the wake of last June’s Brexit referendum. Instead, British consumers have been on a heedless spending spree since the vote to leave the European Union; and, no less illogically, construction, manufacturing, and services have recovered.
Haldane offers no explanation for this burst of irrational behavior. Nor can he: to him, irrationality simply means behavior that is inconsistent with the forecasts derived from the BoE’s model.
It’s not just Haldane or the BoE. What mainstream economists mean by rational behavior is not what you or I mean. In ordinary language, rational behavior is that which is reasonable under the circumstances. But in the rarefied world of neoclassical forecasting models, it means that people, equipped with detailed knowledge of themselves, their surroundings, and the future they face, act optimally to achieve their goals. That is, to act rationally is to act in a manner consistent with economists’ models of rational behavior. Faced with contrary behavior, the economist reacts like the tailor who blames the customer for not fitting their newly tailored suit.
Yet the curious fact is that forecasts based on wildly unrealistic premises and assumptions may be perfectly serviceable in many situations. The reason is that most people are creatures of habit.
Because their preferences and circumstances don’t in fact shift from day to day, and because they do try to get the best bargain when they shop around, their behavior will exhibit a high degree of regularity. This makes it predictable. You don’t need much economics to know that if the price of your preferred brand of toothpaste goes up, you are more likely to switch to a cheaper brand.
Central banks’ forecasting models essentially use the same logic. For example, the BoE (correctly) predicted a fall in the sterling exchange rate following the Brexit vote. This would cause prices to rise – and therefore consumer spending to slow. Haldane still believes this will happen; the BoE’s mistake was more a matter of “timing” than of logic.
This is equivalent to saying that the Brexit vote changed nothing fundamental. People would go on behaving exactly as the model assumed, only with a different set of prices. But any prediction based on recurring patterns of behavior will fail when something genuinely new happens.
Non-routine change causes behavior to become non-routine. But non-routine does not mean irrational. It means, in economics-speak, that the parameters have shifted. The assurance that tomorrow will be much like today has vanished. Our models of quantifiable risk fail when faced with radical uncertainty.
The BoE conceded that Brexit would create a period of uncertainty, which would be bad for business. But the new situation created by Brexit was actually very different from what policymakers, their ears attuned almost entirely to the City of London, expected. Instead of feeling worse off (as “rationally” they should), most “Leave” voters believe they will be better off.
Justified or not, the important fact about such sentiment is that it exists. In 1940, immediately after the fall of France to the Germans, the economist John Maynard Keynes wrote to a correspondent: “Speaking for myself I now feel completely confident for the first time that we will win the war.”
Likewise, many Brits are now more confident about the future.
This, then, is the problem – which Haldane glimpsed but could not admit – with the BoE’s forecasting models. The important things affecting economies take place outside the self-contained limits of economic models. That is why macroeconomic forecasts end up on the rocks when the sea is not completely flat.
The challenge is to develop macroeconomic models that can work in stormy conditions: models that incorporate radical uncertainty and therefore a high degree of unpredictability in human behavior.
Keynes’s economics was about the logic of choice under uncertainty. He wanted to extend the idea of economic rationality to include behavior in the face of radical uncertainty, when we face not just unknowns, but unknowable unknowns. This of course has much severer implications for policy than a world in which we can reasonably expect the future to be much like the past.
There have been a few scattered attempts to meet the challenge. In their 2011 book Beyond Mechanical Markets, the economists Roman Frydman of New York University and Michael Goldberg of the University of New Hampshire argued powerfully that economists’ models should try to “incorporate psychological factors without presuming that market participants behave irrationally.”
Proposing an alternative approach to economic modeling that they call “imperfect knowledge economics,” they urge their colleagues to refrain from offering “sharp predictions” and argue that policymakers should rely on “guidance ranges,” based on historical benchmarks, to counter “excessive” swings in asset prices.
The Russian mathematician Vladimir Masch has produced an ingenious scheme of “Risk-Constrained Optimization,” which makes explicit allowance for the existence of a “zone of uncertainty.”
Economics should offer “very approximate guesstimates,” requiring “only modest amounts of modeling and computational effort.”
But such efforts to incorporate radical uncertainty into economic models, valiant though they are, suffer from the impossible dream of taming ambiguity with math and (in Masch’s case) with computer science. Haldane, too, seems to put his faith in larger data sets.
Keynes, for his part, didn’t think this way at all. He wanted an economics that would give full scope for judgment, enriched not only by mathematics and statistics, but also by ethics, philosophy, politics, and history – subjects dropped from contemporary economists’ training, leaving a mathematical and computational skeleton. To offer meaningful descriptions of the world, economists, he often said, must be well educated.

Could This Time Be Different?

by: Lawrence Fuller

- It feels a lot like the periods just before the prior two bull-market tops.

- Valuations are extreme and fear is nowhere to be found.

- Yet there are reasons it could be different this time.

- Regardless, I remain positioned for an eventual repeat of the previous two cycles.
As I watch the stock market indices march to new all-time highs, including ten consecutive record-high closes for the Dow Jones Industrials (NYSEARCA:DIA), I am reminded of when I was investing in the late 1990s and mid-2000s. While both periods were very different from each other, as well as from the one we find ourselves in today, I view all three as fearless bull markets, rebuffing any macroeconomic or valuation concerns along the way. What is different for me is that while I was one of the truly fearless in the late 1990s, I was far less so in the 2000s, leading to what I can best describe as extremely cautious, if not fearful, today.
What has fueled my steadfast bearish outlook for the broad market in recent years is apprehension, which has kept my equity allocation below what it otherwise would be. Yet, I have continued to participate in the good times through alternate asset classes and an ever-evolving list of individual stocks and exchange-traded equity funds. Perhaps my caution has been misguided during the last leg up of this bull run, but it is a byproduct of 25 years of experience as an individual and professional investor. The saying is to be fearful when others are greedy, and greedy when others are fearful.
What I fear now is that history will repeat itself, yet I continue to ask myself if this time it could be different.
Historical Precedent
The reason I was so brave in the 1990s is that I never experienced a significant loss. Significant losses are not something you can fully appreciate unless you have experienced them for yourself.
Access to information was very limited compared to what we are inundated with today, even for a financial consultant, and what information I did have was bullish propaganda issued by my Wall Street employers. I rode the wave along with everyone else, growing a portfolio of less than $100k into more than $1 million by late 1999. That wave came crashing onto shore in 2000, and it took the majority of my portfolio with it. It was a painful experience, especially after having ignored the advice of my more-experienced father on multiple occasions, but I was a know-it-all at 29 years old. I had millionaire status to prove it.

I had very little understanding of the real economy back then, living in the bubble that houses the financial world and virtually no grasp of the business cycle. As the forest started to burn, I was lost in the trees. I learned painful, yet valuable, lessons during that period. Perhaps the most important was to balance my focus between macroeconomics and the bottoms-up analysis of individual positions.
As a more experienced and knowledgeable investor during the 2000s, I was well aware that there was a bubble in the housing market. My greatest mistake at that time was in trusting that Fed Chair Bernanke had a full grasp of the severity of the crisis and that he would be able to contain it. I also didn't fully appreciate how interconnected various markets could become, as diversification was no defense when all assets became highly correlated, with the exception of Treasuries. I underestimated how severe the bear market in stocks would be, following the bankruptcy of Lehman Brothers, and I also relied on the egregious "adjusted" earnings provided by Wall Street when judging valuations.
Therefore, I didn't have as much liquidity as I needed to capitalize on what I knew was a once-in-a-lifetime opportunity to buy high-quality stocks in 2009.
While I have had many successes over the years, it is these two experiences that have shaped my investment philosophy over time, led to my tactical approach to portfolio management, and instilled a more macroeconomic focus to my market outlooks. I do not intend to lose sight of the forest for the trees ever again, nor will I rely on private or public institutions to act in what is the best interest of the markets or investing public.
I am not aware of very many investors who were able to successfully navigate through both of these bear markets without sustaining losses. I applaud those who were, but my sense is that they would be just as cautious, if not fearful, today as they were prior to the previous bull market tops. The cast of characters may be different in this play, but the story line is very much the same.

The stock market is expensive on a historical basis by every possible measure. Regardless, the consensus continues to rationalize why valuations are not only sustainable, but can continue to climb. The trailing price-to-earnings multiple, as can be seen below, for the S&P 500 index (NYSEARCA:SPY) has only been higher during the peaks in 2000 and 2007.
The price-to-sales ratio for the S&P 500, as can be seen below, has surpassed the peaks we saw in 2000 and 2007.
In fact, the stock market is in the most expensive decile by nearly every metric, as can be seen below.
If this doesn't flash a warning sign, I don't know what does, but the consensus continues to grasp for potential catalysts which could push valuations even higher.
 Source: Goldman Sachs
This does not mean that stock market valuations will decline today, tomorrow or this year.
Instead, they could continue to rise. Yet history has shown that forward returns from these levels are far below average, as the potential for downside risk grows. As a result, given my investment experience over the past 25 years, I am more inclined to focus on what is going wrong now, or could go wrong in the future, than to rely on what could go right in order to justify even higher valuations.

As I grapple with the potential benefits for the market from tax cuts, deregulation and infrastructure spending, I see offsetting macroeconomic headwinds such as declining real incomes, excess capacity and tightening financial conditions. We are at the end of the business cycle, as opposed to its beginning. What disturbs me the most, yet receives no attention at all from the punditry, is that the primary source of those last two crises was never extinguished. In fact, it continues to grow.
The bubbles we saw in 2000 and 2008 were the result of tremendous excess that built up in the economy. That excess came in the form of debt, which was merely transformed and transferred from corporate to consumer to what is now government balance sheets. What is different this time is that the federal government, with the assistance of the Federal Reserve, has been able to pretend and extend year after year, unlike corporations and consumers were able to do in the prior two decades.
So long as the federal government can continue to run deficits and grow the debt in order to finance consumption, perhaps this bull market can continue.
Worse yet is that as government debt has exploded, corporations and consumers continue to accumulate debt, which has once again surpassed record levels. This debt steals forward demand, slowing the potential for future growth, until it ultimately must be extinguished in one way or another. So long as the rest of the world is willing to finance our fiscal irresponsibility, the party can continue. But when our credibility is called into question, our cost to borrow could increase dramatically over a very short period of time and another crisis will ensue.
Still, could it truly be different this time?
What is Different
I see three major differences between today and the prior two bull markets, difference which could prolong the current one. The first is the emergence of computerized trading. Algorithmic trading has accounted for a growing percentage of the volume on our exchanges over the past ten years. I view this practice, which has absolutely nothing to do with investing, as a virus that has infected our markets. The problem is that this virus has now consumed the host and regulators have no way of eradicating it without destroying the host in the process. Nothing will change until there is a full-blown crisis.

It is my view that this dominant force suppresses volatility and maintains an upward bias on prices.
These programs are largely insensitive to longer-term macroeconomic developments, as they begin and end every day in cash, focusing solely on the current day's events. It is conceivable that they could bid up prices well beyond anything that the fundamentals can substantiate. Of course, if all of the machines decide to shut down at the same time, look out below.
Another consideration is how wealth is more concentrated today than it was ten or twenty years ago.
In fact, over the past thirty years the share of wealth held by the bottom 90% has declined from 35% to 22%, while the wealth held by the top 0.1% has gone from 5% to 22%. This can be seen in the chart below.
This could be having a measurable impact on stock prices that prolongs the current bull market. In my view, if stocks were held more broadly by the investing public, then prices would be more sensitive to any deterioration in the macroeconomic landscape and corresponding market fundamentals. The stock market would act more like the voting machine that recently upended the political establishment of both parties.
Lastly, the debt accumulation in the current cycle is being held by the federal government, which seemingly has an unending line of credit from the Federal Reserve. So long as the federal government can continue to borrow and spend to support the very modest levels of aggregate demand we have in our economy today, it could prolong the bull market.
My Bottom Line
Bulls may look at my experience as an investor and deduce that I'm twice burned, thus a third time shy. That is hardly the case, as I continue to hold stocks like Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), Time Warner (NYSE:TWX) and others that I have purchased during this bull market. I have also taken new positions in names like Unilever (NYSE:UL) and Qualcomm (NASDAQ:QCOM) since the beginning of the year. I am simply taking smaller positions, hedging my exposure through a variety of strategies, and holding much larger cash reserves given the macroeconomic headwinds that I now see.

I am not the same investor that I was in the 1990s or the 2000s. My priorities have shifted from fast cars and fun times to my oldest daughter, who will be attending the University of North Carolina at Chapel Hill next year, and with her two siblings, who are not far behind. My tolerance for risk continues to wane as I approach the age of 50, focusing on what I will have saved for retirement.
I can no longer put my faith and trust in a market structure that has failed miserably two times in just the past twenty years. I don't trust the intelligentsia on Wall Street, in Washington or at the Fed to do the right things, no matter how many times they claim to have everything under control. It is important to recognize that very little has changed since the last financial crisis, as we now begin to tear down the good regulations, along with the bad ones, that were designed to prevent another crisis from occurring. Therefore, I recommend investors stay vigilant in their pursuit of gains as the longest bull market on record continues and the macroeconomic headwinds gather. Ultimately, it will not be different this time.

The Future of Not Working

As automation reduces the need for human labor, some Silicon Valley executives think a universal income will be the answer — and the beta test is happening in Kenya.


The village is poor, even by the standards of rural Kenya. To get there, you follow a power line along a series of unmarked roads. Eventually, that power line connects to the school at the center of town, the sole building with electricity. Homesteads fan out into the hilly bramble, connected by rugged paths. There is just one working water tap, requiring many local women to gather water from a pit in jerrycans. There is no plumbing, and some families still practice open defecation, lacking the resources to dig a latrine. There aren’t even oxen strong enough to pull a plow, meaning that most farming is still done by hand. The village is poor enough that it is considered rude to eat in public, which is seen as boasting that you have food.
In October, I visited Kennedy Aswan Abagi, the village chief, at his small red-earth home, decorated with posters celebrating the death of Osama bin Laden and the lives of African heroes, including JaKogelo, or “the man from Kogelo,” as locals refer to former President Barack Obama. Kogelo, where Obama’s father was born, is just 20 miles from the village, which lies close to the banks of Lake Victoria. Abagi told me about the day his town’s fate changed. It happened during the summer, when field officers from an American nonprofit called GiveDirectly paid a visit, making an unbelievable promise: They wanted to give everyone money, no strings attached. “I asked, ‘Why this village?’ ” Abagi recalled, but he never got a clear answer, or one that made much sense to him.
The villagers had seen Western aid groups come through before, sure, but nearly all of them brought stuff, not money. And because many of these organizations were religious, their gifts came with moral impositions; I was told that one declined to help a young mother whose child was born out of wedlock, for example. With little sense of who would get what and how and from whom and why, rumors blossomed. One villager heard that GiveDirectly would kidnap children. Some thought that the organization was aligned with the Illuminati, or that it would blight the village with giant snakes, or that it performed blood magic. Others heard that the money was coming from Obama himself.
But the confusion faded that unseasonably cool morning in October, when a GiveDirectly team returned to explain themselves during a town meeting. Nearly all of the village’s 220 people crowded into a blue-and-white tent placed near the school building, watching nervously as 13 strangers, a few of them white, sat on plastic chairs opposite them. Lydia Tala, a Kenyan GiveDirectly staff member, got up to address the group in Dholuo. She spoke at a deliberate pace, awaiting a hum and a nod from the crowd before she moved on: These visitors are from GiveDirectly. GiveDirectly is a nongovernmental organization that is not affiliated with any political party. GiveDirectly is based in the United States. GiveDirectly works with mobile phones. Each person must have his or her own mobile phone, and they must keep their PIN secret. Nobody must involve themselves in criminal activity or terrorism. This went on for nearly two hours. The children were growing restless.   

Finally, Tala passed the microphone to her colleague, Brian Ouma. “People of the village,” he said, “are you happy?”
Erick Odhiambo Madoho (second from left), shown with another villager (right) and members of the GiveDirectly team, planned to use his payments to buy fishing line to make tilapia nets. Credit Andrew Renneisen for The New York Times    

“We are!” they cried in unison.
Then he laid out the particulars. “Every registered person will receive 2,280 shillings” — about $22 — “each and every month. You hear me?” The audience gasped and burst into wild applause. “Every person we register here will receive the money, I said — 2,280 shillings! Every month. This money, you will get for the next 12 years. How many years?”
“Twelve years!”
Just like that, with peals of ululation and children breaking into dance in front of the strangers, the whole village was lifted out of extreme poverty. (I have agreed to withhold its name out of concern for the villagers’ safety.) The nonprofit is in the process of registering roughly 40 more villages with a total of 6,000 adult residents, giving those people a guaranteed, 12-year-long, poverty-ending income. An additional 80 villages, with 11,500 residents all together, will receive a two-year basic income. With this initiative, GiveDirectly — with an office in New York and funded in no small part by Silicon Valley — is starting the world’s first true test of a universal basic income. The idea is perhaps most in vogue in chilly, left-leaning places, among them Canada, Finland, the Netherlands and Scotland. But many economists think it might have the most promise in places with poorer populations, like India and sub-Saharan Africa.
GiveDirectly wants to show the world that a basic income is a cheap, scalable way to aid the poorest people on the planet. “We have the resources to eliminate extreme poverty this year,” Michael Faye, a founder of GiveDirectly, told me. But these resources are often misallocated or wasted. His nonprofit wants to upend incumbent charities, offering major donors a platform to push money to the world’s neediest immediately and practically without cost.
What happens in this village has the potential to transform foreign-aid institutions, but its effects might also be felt closer to home. A growing crowd, including many of GiveDirectly’s backers in Silicon Valley, are looking at this pilot project not just as a means of charity but also as the groundwork for an argument that a universal basic income might be right for you, me and everyone else around the world too.
The basic or guaranteed income is a curious piece of intellectual flotsam that has washed ashore several times in the past half-millennium, often during periods of great economic upheaval. In “Utopia,” published in 1516, Thomas More suggests it as a way to help feudal farmers hurt by the conversion of common land for public use into private land for commercial use. In “Agrarian Justice,” published in 1797, Thomas Paine supports it for similar reasons, as compensation for the “loss of his or her natural inheritance, by the introduction of the system of landed property.” It reappears in the writings of French radicals, of Bertrand Russell, of the Rev. Dr. Martin Luther King Jr.            
Silicon Valley has recently become obsessed with basic income for reasons simultaneously generous and self-interested, as a palliative for the societal turbulence its inventions might unleash. Many technologists believe we are living at the precipice of an artificial-intelligence revolution that could vault humanity into a postwork future. In the past few years, artificially intelligent systems have become proficient at a startling number of tasks, from reading cancer scans to piloting a car to summarizing a sports game to translating prose. Any job that can be broken down into discrete, repeatable tasks — financial analytics, marketing, legal work — could be automated out of existence.
In this vision of the future, our economy could turn into a funhouse-mirror version of itself: extreme income and wealth inequality, rising poverty, mass unemployment, a shrinking prime-age labor force. It would be more George Saunders than George Jetson. But what does this all have to do with a small village in Kenya?
A universal basic income has thus far lacked what tech folks might call a proof of concept.
There have been a handful of experiments, including ones in Canada, India and Namibia.
Finland is sending money to unemployed people, and the Dutch city Utrecht is doing a trial run, too. But no experiment has been truly complete, studying what happens when you give a whole community money for an extended period of time — when nobody has to worry where his or her next meal is coming from or fear the loss of a job or the birth of a child.
And so, the tech industry is getting behind GiveDirectly and other organizations testing the idea out.
Chris Hughes, a Facebook founder and briefly the owner of The New Republic, has started a $10 million, two-year initiative to explore the viability of a basic income. (He has also been a major donor to GiveDirectly.) The research wing of Sam Altman’s start-up incubator, Y Combinator, is planning to pass out money to 1,000 families in California and another yet-to-be-determined state. Then there is GiveDirectly itself, which has attracted $24 million in donations for its basic-income effort, including money from founders of Facebook, Instagram, eBay and a number of other Silicon Valley companies. Many donors I spoke with cited their interest in the project as purely philanthropic. But others saw it as a chance to learn more about a universal basic income, a way to prove that it could work and a chance to show people the human face of a hypothetical policy fix.
In December, Altman, the 31-year-old president of Y Combinator, spoke at an anti-poverty event hosted by Stanford, the White House and the Chan Zuckerberg Initiative, the charitable institution the Facebook billionaire founded with his wife, Priscilla. Altman discussed the potential for basic income to alleviate poverty, but his speech veered back to the dark questions that hang over all this philanthropy: Is Silicon Valley about to put the world out of work? And if so, do technologists owe the world a solution?

Caroline Akinyi Odhiambo wanted to buy iron sheets for her roof and then maybe pay her dowry. Credit Andrew Renneisen for The New York Times      


“There have been these moments where we have had these major technology revolutions — the Agricultural Revolution, the Industrial Revolution, for example — that have really changed the world in a big way,” Altman said. “I think we’re in the middle or at least on the cusp of another one.”
The idea for the nonprofit came to Michael Faye and Paul Niehaus, who is now a professor of economics at the University of California, San Diego, when they were graduate students at Harvard. Both were studying development and doing fieldwork overseas, an experience that underlined an Economics 101 lesson: Cash was more valuable to its recipients than the in-kind gifts commonly distributed by aid groups, like food or bed nets or sports equipment. If you’re hungry, you cannot eat a bed net. If your village is suffering from endemic diarrhea, soccer balls won’t be worth much to you. “Once you’ve been there, it’s hard to imagine doing anything but cash,” Faye told me. “It’s so deeply uncomfortable to ask someone if they want cash or something else. They look at you like it’s a trick question.”
But at the time, distributing cash aid in a country with little to no banking infrastructure outside major cities would have required an extraordinary amount of manpower, not to mention introducing the risk of robbery and graft. But dirt-cheap mobile phones with pay-as-you-go minutes began flooding into sub-Saharan African markets in the 2000s. Enterprising Ghanaians, Kenyans and Nigerians started to use their minutes as a kind of currency. In 2007, Vodafone and the British Department for International Development together built a system, called M-Pesa, for Kenyans to transfer actual shillings from cellphone to cellphone. An estimated 96 percent of Kenyan households use the system today.
Faye and Niehaus — along with their friends Rohit Wanchoo and Jeremy Shapiro, also graduate students — thought about setting up a website to raise cash in the United States and send it directly to poor Kenyans. But they never found a nonprofit that would distribute that cash abroad. They decided to do it themselves in 2008. “Because it was a start-up, and we started in grad school,” Faye said, “we were open to the idea of it being wrong or failing.”
The following year, Faye traveled to small Kenyan villages during the summer break, offering cash to whoever seemed poor and would take it. (The money, about $5,000, came out of the foursome’s own pockets.) That, surprisingly, worked well enough to give them the confidence to start a threadbare randomized control trial the year they graduated. It found that the recipients, who received an average of $500, saw excellent outcomes: Their children were 42 percent less likely to go a whole day without eating. Domestic-violence rates dropped, and mental health improved.
In time, the nonprofit attracted the attention of Silicon Valley and its deep-pocketed young philanthropists. Two Facebook founders gave six-figure donations. Then, in the spring of 2012, Faye went to a friend’s brunch in Brooklyn and met someone working for, the tech giant’s giving arm. She liked the sound of GiveDirectly and arranged for Faye and Niehaus to give a presentation at Google’s headquarters in Mountain View, Calif. The company ended up contributing $2.4 million.
At first, GiveDirectly handed out large lump sums, generally $1,000 spread into three payments over the course of the year. The nonprofit’s field officers would locate low-income villages in Kenya, then find the poorest families in each individual village using a simple asset test (whether a family had a thatched roof or not). The field officers would introduce themselves to the town elders, explain their purpose and return to provide mobile phones and training to recipient families. Then GiveDirectly would push a button and send the money out.
On a steaming October morning, I went with two GiveDirectly executives, Joanna Macrae and Ian Bassin, to visit one of the villages that had received GiveDirectly’s lump-sum payments. We took off at dawn from Kisumu, a bustling industrial city on the banks of Lake Victoria, and followed a two-lane highway to Bondo, a small trading city filled with cattle, bicycles and roadside food stands.
From there, we turned inland from the lake and drove into a lush agricultural region.
The residents of this village had received money in 2013, and it was visibly better off than the basic-income pilot village. Its clearings were filled with mango plantings, its cows sturdy. A small lake on the outskirts had been lined with nets for catching fish. “Could you imagine sitting in an office in London or New York trying to figure out what this village needs?” Bassin said as he admired a well-fed cow tied up by the lakeside. “It would just be impossible.”
Bethwel Onyando, a field officer for GiveDirectly, meeting with villagers. Credit Andrew Renneisen for The New York Times   

Perhaps, but delivering money by M-Pesa has some downsides, too. We visited an older woman named Anjelina Akoth Ngalo, her joints painful and swollen with advanced malaria. Sitting in her thatched-roof hut, she told us that she had received only one payment, not the three that she was promised. She had given her phone to a woman in a nearby village who transferred the money out of it. Ngalo visited the village elder to try to get her money back, but nothing had come of it. She was now destitute, living on about $5 a week. She had not eaten since the day before, and she had run out of malaria medication. (Bassin said that less than 1 percent of recipients experience theft, crime or conflict.)
By giving money to some but not all, the organization had unwittingly strained the social fabric of some of these tight-knit tribal communities. One man we visited in a separate village nearby, Nicolus Owuor Otin, had acted as a liaison between the community and the GiveDirectly staff, showing them where different families’ houses were, for instance. For that reason, he said, the other villagers thought he was determining who would get what and threatened to burn his house down.
Still, nearly all the recipients described the money as transformative. Fredrick Omondi Auma — a Burning Spear devotee wearing a Rasta-style hat and bell bottoms when we visited — had been impoverished, drinking too much, abandoned by his wife and living in a mud hut when GiveDirectly knocked on his door. He used his money to buy a motorbike to give taxi rides. He also started a small business, selling soap, salt and paraffin in a local town center; he bought two cows, one of which had given birth; and he opened a barbershop in the coastal city Mombasa. His income had gone from 600 shillings a week to 2,500 shillings — roughly $25, a princely sum for the area. His wife had returned.
He had even stopped drinking as much. “I used to go out drinking with 1,000 shillings, and I’d wake up in the bar with 100 shillings,” he said. “Now I go out drinking with 1,000 shillings, and I wake up at home with 900.”
“I didn’t imagine I would be living in an iron-sheet house,” he said, referring to his roof. “I didn’t imagine I’d be wearing nice shoes. I didn’t imagine I would have a business, and earnings from it. I didn’t imagine I would be a man who owns cattle.”
Many popular forms of aid have been shown to work abysmally. PlayPumps — merry-go-round-type contraptions that let children pump water from underground wells as they play — did little to improve access to clean water. Buy-a-cow programs have saddled families with animals inappropriate to their environment. Skills training and microfinance, one 2015 World Bank study found, “have shown little impact on poverty or stability, especially relative to program cost.”
All across the villages of western Kenya, it was clear to me just how much aid money was wasted on unnecessary stuff. The villagers had too many jerrycans and water tanks, because a nongovernmental organization kept bringing them. There was a thriving trade in Toms canvas slip-ons: People received them free from NGO workers and then turned around and sold them in the market centers. And none of the aid groups that had visited the villages managed to help the very poorest families.
In the pilot-project village, for example, Faye and I paid a visit to a woman named Caroline Akinyi Odhiambo, who lives in a mud hut on the edge of town with her husband, Jack, a laborer, and her two small children. The most expensive thing she ever bought, she told me, was a chicken for 500 shillings, or about $5. Her family was persistently hungry. She knew of three nonprofit groups that had helped the village before GiveDirectly. One aided families with school fees, but it chose not to help her children. “I do not want to talk about it,” she said.
What is worse, Faye told me, walking away from Odhiambo’s hut, was that most nonprofit projects in the region were never subject to anything like an impact assessment, either. There is no way to know how well they are working, or whether that money would be better spent on something else. “The question should always be: Would we be better off just giving this money away as cash?” Faye said. “There usually is not a way to answer that question.”
A vast majority of aid — 94 percent — is noncash. Donor resistance is one reason for this; it is not easy to persuade American oligarchs, British inheritors and Japanese industrialists to fork over their money to the extremely poor to use as they see fit. “There’s the usual worries about welfare dependency, the whole ‘Give a man a fish’ thing,” said Amanda Glassman, a public health and development expert at the Center for Global Development. “It’s so powerful. It’s really a basic psychological feature of the landscape. You’ll start drinking. You’ll start lying around at home because you’re getting paid.”
Cash also seems harder to market. American taxpayers might be perfectly happy to fund education for young women in poor countries or vaccinations for schoolchildren. But they might balk at the idea of showering money on poor, unstable countries. “The visual of putting a pill in a kid’s mouth is so much more attractive to people,” Glassman said.

 Mary Abonyo Abagi (left) and Margaret Aloma Abagi, two widowed sister-wives, hoped to pool their money with friends to start a small bank. Credit Andrew Renneisen for The New York Times        

Institutional inertia is another factor. “There are a lot of good people working in the system,” Niehaus said. “And there are a lot of organizations pushing to do cash transfers. But the way they are structured and incentivized from the top down — they aren’t structured to do it. They have a specific mandate, like health. Cash transfers give choice of what goal to pursue to the recipients.”
Moreover, cash might force aid workers and nongovernmental organizations to confront the fact that they could be doing better by doing things differently — often by doing less. “It’s easy to muster evidence that you should be giving cash instead of fertilizer,” said Justin Sandefur of the Center for Global Development. “The harder argument is: You should shut down your U.S.A.I.D. program, which is bigger than the education budget of Liberia, and give the money to Liberians. That’s the radical critique.” Faye put it more bluntly, if half-jokingly: If cash transfers flourished, “the whole aid industry would have to fire itself.”
There is something to that. One estimate, generated by Laurence Chandy and Brina Seidel of the Brookings Institution, recently calculated that the global poverty gap — meaning how much it would take to get everyone above the poverty line — was just $66 billion. That is roughly what Americans spend on lottery tickets every year, and it is about half of what the world spends on foreign aid.
In the pilot-project village, the residents had just started to work through how transformative the program would be, what they could do with the money and how different their lives could feel in 12 years. Detractors often say that no one would work in a world with a basic income, that the safety net could grow a bit too comfortable. Ultimately, what a universal income would do to workers in the rich world will remain a mystery until someone tries it out.
But here, many villagers were concerned primarily with procuring the sustenance and basic comforts that their penury had denied them. Odhiambo, the woman who had not been offered aid by the school group, planned to buy corrugated iron sheets for her roof; she considered possibly paying off her dowry. Another villager, Pamela Aooko Odero, ran a household that had been suffering from hunger, with all eight of them living on just 500 to 1,000 shillings a week. She took her money as soon as she got it and went to buy food.
Many more made plans that were entrepreneurial. Two widowed sister-wives, Margaret Aloma Abagi and Mary Abonyo Abagi, told me they planned to pool their funds together to start a small bank with some friends. Charles Omari Ager, a houseboy for the sister-wives, had his phone turned off and wrapped in a plastic bag in his pocket when the first text came in. He was driving the widows’ goats and cattle from one dried-out, bramble-filled meadow to another when he happened upon an aid worker, who prompted him to pull out his phone, turn it on and wait. The text was there. The money was there. “I’m happy! I’m happy! I’m happy!” he said.
He bought himself a goat that day.
When he got his money, Erick Odhiambo Madoho walked to the cow-dotted local highway nearest the village and took a matatu, a shared minibus, overloaded with 20 passengers, down to Lake Victoria. There he found an M-Pesa stand and converted his mobile money into shillings. He used the cash to buy the first of three rounds of filament-thin fishing line that he would need to hand-knot into nets to catch tilapia in the lake.
When the nets were done, he told me, he would rent a boat and hire a day laborer to work with him. He anticipated that his income, after costs, might reach as much as 2,000 shillings on a good day. I asked him why he hadn’t saved money for nets beforehand.
He shrugged, smiled and said, “I could not.”