The Fed Has Put Itself Out of Business, Where to Now?

By John Mauldin

New federal initiatives—whether tax cuts, infrastructure, or otherwise—will not provide a boost to the economy if they are funded with increases in debt. 
—Lacy Hunt
As a young bond manager during the Great Inflation and Richard Nixon’s wage and price controls, Lacy Hunt saw the bear market in bonds coming in the late 1970s and made a fortune for his clients. 

I often write about the Fed’s abysmal track record in managing the economy. The main reason they have consistently got it wrong is that they are hampered by their “dual mandate,” which sets “the goals of maximum employment, stable prices, and moderate long-term interest rates.” I know, that is actually three goals, not two, but let’s run with it.

The rationale behind their dual mandate is that by keeping inflation and interest rates steady, they will create a stable economic environment, which will be conducive to employment growth. In theory, the Fed’s mandate works well:
  • When the economy is slowing: The Fed lowers interest rates, spurring economic activity. This helps the economy avoid recession.
  • When the economy is booming: The Fed hikes interest rates, slowing activity. This stops the economy from overheating.
It’s like the Fed has a leaver that they pull, which keeps the economy at near equilibrium. In reality, it doesn’t work that way.

As there is a time delay between the Fed’s actions and the impact of those actions, they invariably overshoot the mark. Fed actions end up working in a pro-cyclical, instead of a counter-cyclical, manner. The Fed’s failures are directly tied to the problems facing the US economy today.

Strict adherence to their dual mandate has made them blind to certain economic developments. For example, while the Fed was focused on unemployment and inflation during the 1990s and early 2000s, they failed to do anything about the massive buildup of debt. This laid the groundwork for the financial crisis.

Sources: Hosington Investment Management

The Fed’s failure to address over-indebtedness has caused irreversible damage to the economy.

When debt levels rise past a certain threshold, additional debt-financed stimulus becomes ineffective. Worse yet, when an economy becomes extremely indebted, monetary policy stops working altogether.

I often get asked if I am still a deficit hawk. The answer is, “Yes, more than ever,” because current debt levels are rendering monetary and fiscal policy ineffective. And that, my friends, is a game-changer.

With traditional methods of stimulus incapable of spurring growth, what will happen in the next downturn? As this trend develops, it could force a rewiring of the financial system and a deleveraging of the global economy. Given the wide-ranging implications, this is a critical trend for investors to grasp.

When I need insight into the relationship between debt and the economy, there is one person I turn to. And that is my dear friend, Lacy Hunt. You almost certainly know Lacy, but in keeping with the spirit of this series, I’ll give him a brief introduction.
Lacy Hunt is the executive vice president and chief economist at Hoisington Investment Management. Lacy was also the chief US economist for HSBC, and senior economist for the Federal Reserve Bank of Dallas.
I’ve known Lacy for over 25 years, and I can say without hesitation that he has been, and continues to be, one of the most influential people on my thought process. I really do enjoy picking his brain about all things economics. I regularly phone him on a Monday morning when something is puzzling me.
Today, I want to focus on Lacy’s insights into the debt overhang and how it has made the US economy resistant to fiscal and monetary stimulus. As Lacy says, By allowing the country to become extremely over-indebted, the Fed has put themselves out of business.”
Let’s begin with Lacy’s thoughts on the huge debt burden, and why it is having a dilapidating effect on the economy.

The Definition of Insanity

In a recent interview, Lacy cited a study by the McKinsey Global Institute which analyzed dozens of instances where countries had become over-indebted:
In 2010, McKinsey looked at 24 advanced economies that became extremely over-indebted. [The findings] show that an indebtedness problem cannot be solved by taking on additional debt. McKinsey says that a multi-year sustained rise in the savings rate, what they term austerity, is needed to solve the problem. As we all know, in modern democracies, that option doesn’t seem to exist.
A decade on from the financial crisis, instead of deleveraging, our debt burden has increased. I referenced these figures in the first part of this series, here’s a quick reminder:
  • Since 2008, total Federal government debt has increased by 113%
  • Nonfinancial corporate debt is up 79% over the same period
  • Household debt has surpassed its previous all-time peak which was made in Q3 2008
All this debt hasn’t spurred economic growth because the economy was over-indebted to begin with.

As Lacy often says to me, “starting points are critical, John.”

Research from Carmen Reinhart and Kenneth Rogoff shows that when a country’s government debt-to-GDP ratio stays over 90% for more than five years, its economy loses around one-third of its growth rate. Lacy also points out that “the longer the debt overhang persists, the relationship between economic growth and debt becomes nonlinear.” This is happening to the US today with the economy growing at only half its long-term growth rate.

Sources: Hosington Investment Management

Until the debt burden is reduced, further debt-financed stimulus will not spur growth. It’s that simple.

One only has to look at the insignificant effect that the $800 billion+ American Recovery & Reinvestment Act had on growth in 2009 to see this problem in action.

While nobody in Washington seems to have realized that our debt problem cannot be solved by more debt, it is important for investors to keep this in mind when allocating capital. Future tax cuts and other fiscal measures may generate spurts of growth, but given the debt burden, it will fizzle out shortly thereafter.

Although the amount of debt in itself is acting like a millstone around the economy’s neck, the type of debt being created is worsening the problem, significantly.

Pouring Money Down the Consumption Drain

At my Strategic Investment Conference this past May, Lacy commented on the type of debt being borrowed:

The composition of our debt is becoming increasingly inferior. We have the wrong type of debt. We’re taking on debt that is not going to generate an income stream, and that feeds financial speculation. That may benefit some, but not the society at large.

The debt has become so burdensome because much of it is for consumptive purposes and doesn’t generate an income stream to repay the principal and interest.

For example, look at Federal government spending. In 2017, mandatory spending totaled $2.7 trillion, of which almost half went toward social security. As Lacy puts it: “The [debt being created] is going back into our household sector, not into productive end uses. It’s going to finance daily living needs, the least productive type of debt.”

But the government doesn’t have a monopoly on borrowing debt for unproductive uses, corporations are also quite good at that.

In 2016, total corporate debt increased by $717 billion, yet investment in plant and equipment fell by $21 billion. Where did the money go? The majority of it has gone toward share buybacks and dividend payouts. It has been a similar story over the past decade as buybacks have risen to near record levels.

Sources: Yardeni Research

The Fed is at the heart of why corporations have preferred financial investments over real investments. In Lacy’s words, “When the Fed undertook QE, they gave a signal to the corporate managers: Your financial investments are protected by us, but we can’t do anything for you on the real side.”

While equity prices and shareholders have increased as a result of financial engineering, it has done nothing to increase the growth capabilities of the US economy.

Economists have been perplexed by the absence of growth and inflation over the past decade.

The unproductive nature of the debt being borrowed goes a long way to explaining why. As I discuss next, this trend is ensuring growth is unlikely to return anytime soon.

Velocity Is Freefalling

In a recent interview, Lacy detailed why economic growth has been poor and will continue to be so:
The critical factors that determine GDP are both working lower. [We are] experiencing considerably slower growth [in the] money supply, at the same time the velocity of money is in a major downtrend. In 1997, $1 of new [money] increased GDP by $2.20. [Now] it is $1.43. This reflects the fact that we have too much of the wrong type of debt.
You may think the velocity of money is some obscure indicator used only by economists. But as Lacy pointed out, it is one of two determinates of nominal GDP, our most important economic indicator.

Put simply, the velocity of money measures the rate at which money is exchanged from one transaction to another, and how much it is used in a given period of time. Therefore, if money is being used for unproductive purposes and doesn’t generate an income stream, velocity will fall.

I think of velocity as a machine which money has to go through to produce economic activity. If the machine is on a low setting, it doesn’t matter how much money you put in—you won’t get growth. The falling velocity of money, which is at its lowest point since 1949, is another reason why growth has remained subdued in the post-financial crisis world.

Sources: Hosington Investment Management

Velocity can also tell us about the long-term direction of bond yields. As velocity is a main determinate of nominal GDP, and yields track nominal GDP, Lacy believes that the secular low for interest rates are not in hand: “In my view, we will not see the secular low in interest rates until the velocity of money reaches its secular trough, and that is not something that’s going to happen soon.”

This is why I consider Lacy’s insights invaluable. His ability to always see the big picture in spite of short-term market moves is truly exceptional. It’s no coincidence that his mutual fund has beaten its benchmark by a wide margin over the past two decades.

While the debt burden is putting downward pressure on velocity, which is dampening growth, it is also incapacitating monetary policy.

Monetary Policy Has Become Asymmetric

Here is Lacy explaining how debt has rendered monetary policy ineffective at stimulating growth:
The root cause of [monetary policy’s] underperformance is extreme indebtedness. The debt creates a situation where monetary policy capabilities are asymmetric. In other words, a lot of action is needed to provoke even a muted impact on the economy, whereas the slightest monetary tightening goes a long way in depressing economic activity.
Again, the reason why inflation and growth have remained anemic despite record-low interest rates and multiple rounds of QE is the over-indebtedness of the US economy.

I don’t wish to get too deep into the weeds here, but to explain this, you have to look to the money multiplier. The money multiplier is the amount of money that banks generate with each dollar of reserves. Due to the over-indebtedness of the economy—or more precisely, the lack of “savings”—the multiplier has plunged from 12.1 in 1985, to 3.6 today.

Sources: Hosington Investment Management

Just as falling velocity has blunted fiscal stimulus, the decline in the money multiplier has made monetary easing less effective in generating growth.

Unfortunately for the Fed, monetary tightening has become more powerful because of the debt.

Lacy mentioned in his latest quarterly review that, “Excessive debt, rather than rendering monetary deceleration impotent, actually strengthens central bank power because interest expense rises quickly. Therefore, what used to be considered modest changes in monetary restraint that resulted in higher interest rates now has a profound and immediate negative impact on the economy.”

This outsized effect can be seen by looking at how the five rate hikes since December 2015 have produced a noticeable slowing in the growth of the money supply and several important areas of bank lending.

Given the strong impact the five 25-basis-point hikes have had on the money supply and bank lending, I am highly doubtful that the Fed can continue on their current tightening path. I am more convinced than ever that the over-indebtedness of the nation is the biggest challenge facing the US economy.

Where Do We Go from Here?

Lacy often quotes David Hume, the great Enlightenment thinker, regarding the debt situation: “When a state has mortgaged all of its future liabilities, the state, by necessity, lapses into tranquility, languor, and impotence.”

Will the US and other advanced economies lapse into languor and impotence now that monetary and fiscal policy become incapable of generating growth? Even before we reach the endgame, there are many questions to be answered.
Given the outsized effect that monetary tightening is having on the economy, will the Fed be able to continue on its current tightening program? How are stocks and bonds likely to perform in this environment? And how will the coming wave of retirees, which will significantly increase mandatory spending, affect the measures I discussed in this letter?

There are many twists and turns ahead. As investors, we must prepare for every eventuality.
I know nobody better qualified to provide insight into where we are today, and where we are headed, than my dear friend, Lacy Hunt. That’s why I’ve invited him back to speak at my Strategic Investment Conference, in San Diego, next March.

Lacy has spoken at almost every SIC since inception and each time he has put on a masterclass for attendees around debt, monetary policy, and the economy. I know this year will be no different because he always brings his A-Game.

His expertise is the reason why Lacy is one of the highest ranked speakers, every single year. I’m really excited to see what Lacy has to say at the SIC, and I hope you can be there in person to experience it with me. Learn more about attending the SIC 2018, and about the other speakers who will be there, here.
Another great conference. I will echo what many others say… that this is the best conference that I attend each year.” —Michael P (past SIC attendee)
So, that’s the fourth installment in this series wrapped up. Although we have covered four groundbreaking ideas, I think the best may be yet to come. In part five, you’ll get my insights into Niall Ferguson and his thoughts on why the liberal international order is over.

Before you go...

What are your thoughts about Lacy’s research into debt and the effect it is having on the economy?

I’d love to hear your questions or comments about Lacy’s insights—or anything else on this five-part series. Please post them in the comment section below.

Your wondering how this debt situation gets resolved analyst,

John Mauldin

The world economy hums as politics sours

But growth remains vulnerable to financial crises, inflation shocks and war

Martin Wolf

© Bloomberg

The world at the beginning of 2018 presents a contrast between its depressing politics and its improving economics. Might this divergence continue indefinitely? Or is one likely to overwhelm the other? And, if so, will bad politics spoil the economy, or a good economy heal bad politics?

As I argued last week, we can identify several threats to a co-operative global political order. The election of Donald Trump, a bellicose nationalist with limited commitment to the norms of liberal democracy, threatens to shatter the coherence of the west. Authoritarianism is resurgent and confidence in democratic institutions in decline almost everywhere. Meanwhile, managing an interdependent world demands co-operation among powerful countries, particularly the US and China. Worst of all, the risks of outright conflict between these two superpowers are real.

Yet the world economy is humming, at least by the standards of the past decade. According to consensus forecasts, optimism about prospects for this year’s growth has improved substantially for the US, eurozone, Japan and Russia. The consensus also forecasts global growth, at 3.2 per cent next year (at market prices), slightly above the rapid rate of 2017. (See charts.)

The economist Gavyn Davies is still more optimistic. In his view, the consensus still lags behind the exceptionally strong quarterly numbers identified in “nowcasts”. He expects further upward revisions to forecasts. He even argues that global activity is currently growing at an annualised rate of about 5 per cent (measured at purchasing power parity, which raises global growth rates by about half a percentage point above growth at market prices).

This would also be over a percentage point above trend growth. On the face of it, this rate is unsustainable. An optimistic response might be that forecasters have underestimated the trend.

More important, investment is playing a big role in generating stronger demand, especially in the eurozone. In turn, stronger demand drives higher investment. In the second half of 2017, notes Mr Davies, investment in the US, eurozone and Japan increased at quarterly annualised real rates of 8-10 per cent, far better than anything since 2010. A virtuous circle of fast growth driving faster potential growth is surely conceivable.

If this growth rate proves unsustainable, the question is whether it comes to an end smoothly or with a bump. The risks of bumps are significant, given elevated levels of debt and high asset prices, notably of US stocks. Meanwhile, happily, inflation remains subdued, and real and nominal interest rates low. For the moment, the latter conditions make debt more bearable and high asset prices more reasonable. Disruption could easily arrive, however, perhaps from stronger inflation or doubts about the solvency of big debtors. It could also come from collapses of overvalued asset prices or turmoil in overstretched debt markets. If economies then started to slow substantially, the room for manoeuvre on monetary or fiscal policy of the high-income countries would seem small.

Nevertheless, as I argued a year ago, such big economic disruptions are rare events.

Remarkably, the world economy has grown in every year since the early 1950s. Moreover, it has grown by less than 2 per cent (measured at purchasing power parity) in only five years since then: 1975, 1981, 1982, 1991 and 2009.

What has created sharp (and usually unexpected) slowdowns? The answers have been financial crises, inflation shocks and wars. War is the biggest political risk to the economy. In the early 20th century, few Europeans imagined the economic and social devastation that lay ahead. Nuclear war could be two orders of magnitude more destructive.

Wars among oil producers have also been highly disruptive: consider the two oil shocks of the 1970s. A war between Iran and Saudi Arabia might be quite devastating. Policy and so politics also play the dominant role in generating inflation and subsequent disinflation shocks. Politics also drives protectionism and irresponsible financial liberalisation. Overall, the risks of disruptive politics might be higher today than in decades.

Politics also shape the longer-term policies that determine the performance of economies. We know policies are often far from being as supportive of widely-shared and sustainable growth as they might have been. Neither the right’s idea that the only thing necessary is to slash taxes and regulations, nor the left’s view that a more interventionist state would solve everything makes sense. Reigniting dynamism is challenging.

Yet it is also possible to have a more optimistic perspective. The bad politics of today are, in significant part, the result of the bad economics of the past, especially the post-crisis malaise in high-income countries and the impact of the subsequent commodity price collapse on many emerging and developing countries. One may hope that as the world economy recovers and optimism about the future becomes entrenched, the distemper of politics in so many countries will start to heal. This might also begin to restore confidence in political and economic elites.

That might make politics less bellicose and more consensual. It might also pull debate away from the wilder shores of populism.

For some time, then, economics and politics can go their somewhat separate ways. In the longer term, however, the questions must be whether the economy fails on its own, the politics end up ruining the economy, or, best of all, the economy cures the politics. Let us hope for the last.

That is worth struggling for.

My Two Big Bets on the Pension Crisis

by Nick Giambruno

Public pensions are a financial time bomb… and I see two ways to profit from the explosion.
In the US, unfunded public pension liabilities have surpassed $5 trillion. And that’s during an epic stock and bond market bubble.

Predictably, the government’s go-to “solution” is already making matters worse.

At first, distressed states simply increase taxes.

The state comptroller of Illinois—the most financially troubled state thanks to its pension crisis—summed it up well. He said: “We can’t go bankrupt and we can’t print money. Taxpayers are going to have to pay this bill.”

State governments always squeeze property owners the hardest.

In 2016, Americans paid over $300 billion in property taxes. In Illinois and other states, property tax bills exceeding $10,000 per year are not uncommon.

Most governments continually raise property tax rates, especially governments in bad financial health. It’s easy to simply ratchet up property taxes to bring in more revenue.

Case in point: Greece, where the country’s bankrupt government has made owning property a burden.

The following excerpt from The Guardian shows just how far Greece’s government has gone:

The joke now doing the rounds is: if you want to punish your child, you threaten to pass on property to them… Greeks traditionally have always regarded property as a secure investment. But now it has become a huge millstone, given that the tax burden has increased sevenfold in the past two years alone.

It’s happened in Greece. It’s happened in Illinois, which has some of the highest property taxes in the US (and rising). And it will happen elsewhere, especially in states struggling to meet pension obligations.

Here’s an excerpt from a local Chicago news outlet. The telling headline reads “Cook County property tax bills cause outrage”:

“Our taxes increased fivefold,” said William Phillips of Rogers Park. “I was expecting it to go up maybe twice as much but not four to five times as much.”

“My tax bill increased almost $1,200 dollars,” said Cornes King of Chatham.

“More than tripled. The city’s piece more than tripled,” said Logan Square resident Janelle Squire.

Fleecing Taxpayers Won’t Fix This Crisis

Politicians don’t seem to realize (or care) that it’s mathematically impossible—and counterproductive—to try to solve the pension crisis by raising taxes.

Even if tax rates double in places like Illinois, it still won’t solve the problem. And that’s assuming the overall tax collected stays the same—which it wouldn’t.

Higher taxes would make more people leave the state and actually decrease the amount collected.
This trend is already underway. More than half a million people have left Illinois over the past decade. That includes over 3,000 millionaires who’ve fled Chicago in recent months.

Many left for a simple reason: rising taxes.

Nonetheless, raising taxes is exactly what politicians are doing. And they’ll continue to do it, even though they’re long past the point of diminishing returns.

The Other Easy “Solution”

Ultimately, the Federal Reserve will paper over the pension crisis by printing more currency.

Politically, it seems impossible that the government would default outright on its promises to millions of its own employees when the Fed can simply print more currency.

Ultimately, this will turn a local debt crisis into a national currency crisis. And many states will effectively default on their pension obligations anyway, since those payouts will be made with depreciated currency.

The pension crisis has clear investment implications for gold.

When the government tries to “solve” the pension crisis with the printing press, I expect investors to rush into gold.

Gold has been a reliable safe-haven asset for thousands of years. Unlike paper money, it has intrinsic value. That value does not depend on a politician’s promise.

I think gold will reach not just multi-year highs, but all-time highs.

That’s why you should position yourself now.

I think everyone should own some physical gold. Gold is the ultimate form of wealth insurance.

It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

Gold Isn’t the Only Way to Profit

The pension crisis is making states desperate for every penny they can get.

That desperation is making them open to new ideas. Necessity has a way of quickly changing people’s minds.

Because of that, I expect many states to further soften their marijuana laws as they look for more sources of revenue.

In many of the states that have or will legalize cannabis, the tax revenue will exceed that of alcohol and tobacco. That’s not something a cash-strapped state can turn away from.

Just look at what’s happened in Colorado, which legalized recreational use in 2012. In 2016, its marijuana industry generated $1.3 billion in sales and $200 million in tax revenue.

A decade ago, Colorado was receiving zero in marijuana taxes.

The industry has also generated over $250 million in taxes for Washington state already.

In California, a recent study estimated that cannabis taxes would bring in at least $1.4 billion dollars each year.

Soon, cannabis tax revenue will become a permanent part of many state budgets. This will encourage other states to follow suit.

Cannabis taxes will generate a lot of money. Still, legalizing and taxing marijuana won’t solve the multitrillion-dollar pension crisis. However, for our purposes as investors, it doesn’t have to.
We’re betting that the pension crisis will boost the US marijuana industry.

It’s already forcing states to look for new sources of revenue. Inevitably (and probably soon), they’ll find the economic benefits of legalized marijuana too good to pass up.

Legalized medical marijuana has already been approved in 29 states, plus Washington, DC. And eight states (plus DC) have approved recreational use.

It’s only a matter of time before other states start cashing in on this trend, too.

And the best way for investors to cash in on the coming US legal marijuana boom is through select publicly traded cannabis companies.

Those who get into these companies stand to make a fortune in the months ahead.

Of course, no investment is risk-free. Especially with young companies in a brand-new industry.

There is also the risk of a federal crackdown. But given the sheer amount of tax revenue and jobs at stake, I think this is very unlikely. Sooner rather than later, the Deep State is going to throw in the towel on the War on (some) Drugs.

Oprah: Prophet, Priestess … Queen?

Ross Douthat

Oprah Winfrey on stage with fans in 2014 in Seattle. Credit Mat Hayward/Getty Images 

In the fall of 2014, Oprah Winfrey ran a “transformative two-day live event,” a traveling roadshow that was held in eight cities around the country. For this interactive revival-tent experience, she was joined by her “handpicked life trailblazers,” authors and personalities whose work she considered essential for the theme of the roadshow, “The Life You Want.”

The trailblazers included, among others, Iyanla Vanzant, a spiritual teacher of New Thought, a 19th-century movement with links to Christian Science that emphasizes the idea of God as “infinite intelligence” and the human capacity to think our way toward godlike power … Rob Bell, an erstwhile evangelical megachurch pastor who has reinvented himself as an itinerant preacher of the vaguest sort of Christianity … Elizabeth Gilbert, author of “Eat Pray Love,” the megaselling memoir about finding religious ecstasy in India (as well as great pasta in Italy and a hot romance in Bali) … Mark Nepo, the poet-philosopher author of “The Book of Awakening” and other tracts on the spirituality of the everyday … and of course Deepak Chopra, the aging prince of the New Age.

I list these figures and their theologies because in all the thousands of words that the political press has written about Oprah since her Golden Globes speech on Sunday night invited 2020 presidential speculation, there has not been nearly enough focus on the most important aspect of Oprah’s public persona, the crucial and fascinating role she really occupies in American life.

We’ve heard about Oprah the entrepreneur, Oprah the celebrity, Oprah the champion of holistic medicine and the enabler of anti-vaccine paranoia, even Oprah the neoliberal (don’t ask). But though she is entrepreneurial and rich, Oprah is not Jeff Bezos; though she is famous, she is not the Rock; though she has elevated various dubious approaches to wellness, she is not Gwyneth Paltrow.

Instead, her essential celebrity is much closer to the celebrity of Pope Francis or Billy Graham. She is a preacher, a spiritual guru, a religious teacher, an apostle and a prophetess. Indeed, to the extent that there is a specifically American religion, a faith tradition all our own, Oprah has made herself its pope.

In other columns I have suggested that American culture is divided between three broad approaches to religious questions: one traditional, one spiritual and one secular. The traditional approach takes various forms (Catholic and Protestant, Muslim and Orthodox Jewish) but its instincts are creedal, confessional, dogmatic; it believes in a specific revelation, a specific authority and a specific holy book, and seeks to conform itself to teachings handed down from the religious past. The secular approach is post-religious, scientistic, convinced that the laboratory and the microscope will ultimately account for everything that matters, while hopefully justifying a liberal society’s still-somewhat-Christian moral commitments along the way.

But in between secularism and traditionalism lies the most American approach to matters of faith: a religious individualism that blurs the line between the God out there and the God Within, a gnostic spirituality that constantly promises access to a secret and personalized wisdom, a gospel of health and wealth that insists that the true spiritual adept will find both happiness and money, a do-it-yourself form of faith that encourages syncretism and relativism and the pursuit of “your truth” (to borrow one of Oprah’s Golden Globes phrases) in defiance of the dogmatic and the skeptical alike.

Because this kind of faith is not particularly political, because it’s too individualistic and personalized (and comfortable with the post-Me Decade American status quo) to be partisan and programmatic, it doesn’t always get the attention it deserves from a press accustomed to analyzing everything in terms of the clash of left and right.

Not that it doesn’t have partisan tilts and colorations. Some of its manifestations are more common in conservative America — where they usually have an evangelical and commercial gloss, as with Joel Osteen and his epigones. (This red-state style of spirituality was recently co-opted, with some success, by the prosperity preacher known as Donald Trump.) Others are more common in liberal communities — where they emphasize Eastern wisdom and Lost Christianities and the New Age and Esalen-style mystical humanism. Where the spiritual worldview blurs into secularism, it’s usually claiming scientific bona fides; where it blurs into traditional religion it’s usually talking about Jesus. And Oprah herself, with her Obama-endorsing, #MeToo politics and her tendency to mix spirituality with pseudoscience, is clearly somewhat on the blue-state side of that divide …

… but only somewhat, because the divide between blue-state spirituality and red-state spirituality is much more porous than other divisions in our balkanized society, and the appeal of the spiritual worldview cuts across partisan lines and racial divides. (Health-and-wealth theology is a rare pan-ethnic religious movement, as popular among blacks and Hispanics as among Americans with Joel Osteen’s skin tone, and when Oprah touts something like “The Secret,” the power-of-spiritual-thinking tract from the author Rhonda Byrne, she’s offering a theology that’s just Osteen without Jesus.) Indeed, it may be the strongest force holding our metaphysically divided country together, the soft, squishy, unifying center that keeps secularists and traditionalists from replaying the Spanish Civil War.

Which is not to say that it’s a good force in its own right; you could fill a book (as I once tried to do) with theological and sociological arguments about what’s wrong with religious individualism, its false ideas and fatal consequences. But it clearly holds the balance of power in our cultural conflicts, and it’s hard to imagine our civic peace surviving without the bipartisan influence of its soothing faux profundities.

I know, I know: You’ve stuck around this long to find out what all this religious business means for an Oprah presidential campaign. The disappointing answer is that I have no definite idea. It could be that Oprah would cease to be a figure of the spiritual center the instant she assumed a partisan mantle, that in entering in the political fray she would automatically lose her papal tiara. Or it could be that her religious authority would make the Democratic Party far more popular and powerful, more a pan-racial party of the cultural center and less a party defined by its secular and anticlerical left wing.

It could be that she would be extremely effective in the increasingly imperial role that our presidency plays, effectively uniting throne and altar and presiding over our divisions with a kind of spirituality-drenched “mass empathy,” to quote Business Insider’s Josh Barro, that our present partisans conspicuously lack. Or it could be that by turning the spiritual center to partisan ends she would hasten its collapse, heightening polarization and hustling us deeper into metaphysical civil war.

All of these scenarios seem possible, even as the most plausible scenario remains the one where she decides being a prophetess is better than being a president and declines to run at all. But either way, the Oprah boomlet is a chance to recognize her real importance in our culture — and the sheer unpredictable weirdness, perhaps eclipsing even Donald Trump’s ascent, that might follow if our most important religious leader tries to lay claim to temporal power as well.

Forget Cryptocurrencies, Invest In Platforms

by: Lynn Sebastian Purcell


- Total market capitalization for cryptocurrencies has surged 400% in just 60 days, while Bitcoin has mostly stayed flat since December.

- The emerging story for 2018 is not Bitcoin; it’s everything other than Bitcoin.

- This article lays out the map for the entire Alt-Coin universe. Surprisingly, there are just three kinds of ideas for the 1400+ coins in existence.

- The analysis suggests an unpopular thesis: forget crypto-currencies, invest in crypto-platforms.

If the story of 2017 for the financial world turned in large part on the mainstream recognition of Bitcoin, then the story for 2018 in the cryptocurrency world has already changed focus to all the other coins, the “Alt-Coins.” This has come into focus recently with Ripple’s 1000%+ gain in the last month. While an outlier, most Alt-Coins in the top 150 have noticed gains between 300%-600% in the same period, and the total market capitalization in crytpocurrencies has surged 400% in just 60 days.
[Data Source:]
With this picture in mind, the purpose of this essay is to give the reader something that has yet to appear here on SeekingAlpha, or anywhere else as far as I can tell, namely a roadmap to understand this jungle of ideas and technologies. It aims to explain in a coherent and succinct way just what this space looks like, and how one might think about investing (yes, really) in this space. To this end it provides a taxonomy for all cryptocurrencies, and suggests an investment are of focus. The taxonomy of the roughly 1400 “coins” presently in existence suggests there are only three types of “coins,” where these do not include unregulated (and quite dubious) securities. The investment focus may be put in a line: forget cryptocurrencies (from Bitcoin to RaiBlocks), and invest in platforms (like Ethereum). Let’s begin with the taxonomy.
[Data Source:]

Three Types of Coin

The terms “coin,” “token,” and “cryptocurrency” are often used interchangeably. To make the discussion that follows clearer, however, I reserve the term “coin” for the general class of technological ideas that are unique to blockchain-type technologies. I hope primarily to distinguish these, which appear as the first three ideas in the chart below, from the fourth, which is not a blockchain-type technology, but an unregulated security “gussied up” as a coin, and which might best be called a crypto-security.

IdeasParadigmOther Examples
“Coins”1. CurrenciesBitcoin (BTC)LiteCoin (LTC), DASH, Bitcoin Cash (BCH), RaiBlocks (XRB)
2. PlatformsEthereum (ETH)NEO, Cardano (ADA)
3. TokensRipple (XRP)Sia Coin (SC), OmiseGo (OMG), Golem (GNT), IOTA (MIOTA)
“Cryptosecurities”4. SecuritiesBitDice (CSNO)

BitDice (CSNO) is an example of a “cryptosecurity.” The company initially hoped to capture the online gambling market by enabling players to use Bitcoin (and other cryptocurrencies) to gamble on their games. Yet, since cryptocurrencies make up only 5% of online gambling, they sought to expand into traditional fiat currency gambling. To fund the technological expansion, they offered their BitDice “coin.” Owners of this coin are entitled to a proceed of net income on a regular basis, a little like a dividend, but the “coin” has nothing to do with any technology, blockchain or otherwise. Their games still run on traditional computer technology, since not all computer programs run well on blockchain. As a result, the Bitdice “coin” is effectively a security (even if the SEC has not yet decided on the matter).
This distinction is important because cryptosecurities are not required to register with the SEC, do not have the same legal status to recover losses (especially if the company is located in some place other than the United States), and imply no ownership over the equity of the company (quite unlike stocks and bonds). Moreover, because these companies are not publicly traded and registered with the SEC, they are under no obligation to file 10K or 10Q reports, disclosures about insider investments, and so on. One would be wise, then, to avoid all cryptosecurities (see the SEC’s general warning).

I reserve the term “cryptocurrency,” for coins like Bitcoin and DASH, which aim to replace existing currencies and use blockchain-like technology. This sort of idea is quite different from platforms, like the Ethereum network. Bitcoin uses blockchain technology to keep track of who owns which coin.
The Ethereum network uses the coin, Ether, to power the blockchain technology as a sort of “gas.”
The network itself is a global, decentralized virtual machine which runs other apps (called D’Apps because they are distributed apps). In short, a platform like the Ethereum network, is like an operating system, and while one of the D’Apps that could be run on it is a coin, almost anything else programmable could be too. There are really only three competitors for Ethereum: NEO, which is focused on China, Cardano (ADA), which is run by “academics” who implement only peer-reviewed ideas, and of course Etherum Classic, which is a forked version of the Ethereum network.
Except for the qualifications in the next section, everything else is a “token,” which is to say a blockchain-like technology focused on a specific idea. Ripple (XRP) is a paradigm case. Though not built on the Ethereum network, as most other tokens are, Ripple enables banks to send money internationally cheaply and quickly (within seconds), rather than waiting days for bank clearance (as has been the case with traditional transfers). The technology, moreover, can be “plopped” on top of the software infrastructure that most banks already use. While one might be tempted, then, to think of Ripple as a coin, its was a technology developed with a specific aim in mind: to solve a problem banks faced transferring money internationally with blockchain technology. This is the hallmark of a toke: it is a specific use case of blockchain technology for an existing problem.
Other examples of tokens include SiaCoin (NYSE:SC), which uses blockchain technology to offer cloud storage services as a fraction of the cost of Amazon Web Services, Golem (GNT), which uses the advantages of distributed computing and blockchain to offer supercomputing services, and OmiseGo (OMG), which is a decentralized financial exchange (and payment service as a result). These tokens are legion, and make up the bulk of the coin universe.


My hope is that the above will prove useful in simplifying the jungle of alt-coins. Yet, any classificatory scheme needs qualifications so as not to mislead. To my mind there are two such principle qualifications.
A first concerns the (unhappy) phrase: “blockchain-like technology.” I have been writing “blockchain-like technology” because IOTA does not use blockchain, but instead uses the tangle (based on different mathematical principles, specifically directed acyclic graphs). A transaction is verified in this system when enough other transactions have gone through, so that it is caught up in the “tangle” of transactions. RaiBlocks (XRB) also uses directed acyclic graphs, but it verifies through (delegated) proof of stake. It is still a blockchain technology, then, but a rather different sort, which might be consider a hybrid. In any case, not all coins use blockchain technology, and recognizing technological innovations is crucial for understanding whether a new competitor is likely to oust a seated favorite.
[Image Source: Public Domain]
The second qualification concerns the possible class of coins that Venezuela’s proposed Petro represents. While details on the coin remain sparse, it does look as though Venezuela is planning to use blockchain technology to secure the leger for their proposed Petro. What is distinctive about this proposal is that the value of each Petro is to be indexed to the value of a barrel of oil in Venezuela’s oil fields. This would qualify, then, as a kind of currency coin under the present scheme. The additional advantage it looks to solve is volatility of price. While the price of oil moves rather more quickly that the world’s reserve currencies, e.g., the US Dollar, it certainly moves less quickly than Bitcoin or any other proposed cryptocurrency. This hybrid between cryptocurrency and a sovereign commodity might thus turn out to be just what is needed for a viable cryptocurrency (assuming they develop the technology correctly).
What this Means for Investing
Cryptocurrencies are entering the phase of mass adoption, and while I doubt that Bitcoin will fare poorly, given the established institutional support it has (by way of futures, exchange integration, even possible leveraged ETFs), 2018 is likely to see the largest gains in the Alt-Coin universe. Among the possibilities, the conceptual scheme already indicates where an investor should concentrate their focus: platforms.
Of the three sorts of coins, cryptocurrencies, like Bitcoin, take last place because they face an uncertain future. Even if Bitcoin were to fix its technological problems related to scale next week, so that it had low fees and could process as many transactions a second as Visa (about 1500), it would still be a poor currency because it would be too volatile to function as a currency (see: Forget Bitcoin, Buy Ether). What holds for this hypothetical Bitcoin holds for any related proposal, from LiteCoin to RaiBlocks (though perhaps not the Petro as noted). To outcompete fiat currencies, cryptocurrencies need to have lower fees AND roughly equivalent volatility.
Presently, the only real advantages they have is with international transfers and the desire for anonymity, the last of which will face increasing headwinds from legal bodies.
Individual tokens, like Ripple, are likely to do well if they provide real solutions to real problems, and so as a group take second place. Not every technological problem is better solved on blockchain technology, as not all of them need a trustless, immutable ledger. But for the cases that do, and Ripple is certainly one, an investment in these technologies is in principle sound. As a group, I think that tokens are like to appreciate the most over 2018, but this is simply because there are so many of them.
Platforms, to my mind, take the top spot for long-term growth. The reason is obvious: they support the other tokens and cryptocurrencies and so have the status of operating systems rather than individual programs. The largest and by far the most dominant of these is Ether, and while I am enthusiastic about Cardano as a technology, the coin is still in its early developmental stages.

An interesting possible entry point is that the Ethereum Network is incorporating other coins as part of its “second layer.” This is to say that the Network is technologically dependent on them for its own operation, so that it will include not only Ether, but also RaidenNetwork and OmiseGo among other possible coins. This is somewhat Microsoft’s use of its platform dominance (Windows) to push some specific technologies into prominence, including the Office Suit and (for quite some time) Explorer.
To continue the analogy, imagine that it is the late 1990s and you had the ability to buy into Microsoft Office as an independent company, knowing that it would be pushed to every user by Microsoft’s dominance. This is roughly the situation with the RaidenNetwork and OmiseGo.
One way to buy into the future of Ethereum, then, might be to pick up a few of these related coins.
That’s it. Those are the reasons why you should forget cryptocurrencies, and buy platforms or at least look at tokens instead. Until a really good idea emerges that solves the volatility problem for cryptocurrencies, one should look to someplace other than Bitcoin for 2018.
I look forward to your comments as always!