Tsunami Warning

By John Mauldin


A tsunami is a wall of water that wipes out everything in its path, typically caused by earthquakes. 

But first, the water actually disappears from the usual shoreline, leaving land where there should be sea.

If you are on the shore and see that happen, the correct response is to run for high ground. 

Tragically, though, people often rush toward this new and unusual sight. 

It’s hard to blame them; we humans are drawn to the unknown. 

This impulse explains much of our progress, but it has costs, too.

Right now, the stock market is in the land-where-there-should-be-sea phase. 

What we don’t know is when the wave is coming. 

Maybe there’s time to venture out and see what treasure was hidden beneath the waves... or maybe not. 

Prudence would suggest that we go searching for treasure on higher ground.

This is an age-old investor conundrum. 

How do you balance risk and reward? 

You have clues, but you can’t be certain of what is coming, or when it will arrive, or what it will look like. 

You know you need positive returns, but you also need to avoid major losses. 

The answers are never easy. 

You take your chances, no matter what you do. 

Today we’ll see what some of my favorite market wizards see on the horizon.

First, I’m pleased to announce the Strategic Investment Conference ticket counter is officially open. 

We are only two and a half weeks away from (virtual) curtains up. 

I can hardly wait, and I think once you see our all-star list of 45+ presenters and panelists, you will feel the same. 

We have pretty much wrapped up our faculty and agenda—now we are down to the last details.

I’m going to give you a quick list of some names you know. 

But just as important, the names that you don’t know are going to be the ones that will simply amaze you. 

My team and I have spent countless hours listening to videos and working our contacts to assemble an incredible fountain of knowledge over the five days of the conference, just for you.

By the way, you’ll know many of the names but take note of the new ones, too. 

Trust me: I have good reasons for bringing them. 

Think of them as undiscovered gold.  

Alphabetically: Ron Baron, Peter Boockvar, Ian Bremmer of the Eurasia Group, Danielle DiMartino Booth, former Dallas Fed President Richard Fisher, George Friedman, Louis Gave of Gavekal, Karen Harris of Bain, Lacy Hunt and Jim Bianco in conversation, Ben Hunt and John Hussman in conversation, Constance Hunter, chief economist for KPMG, former GE CEO Jeff Immelt, Doug Kass interviewing Byron Wien (whom he calls the greatest strategist of all time) and Jerry Jordan (whom Doug calls the greatest trader of all time), Joe Lonsdale (co-founder of Palantir and a major venture capitalist), Dr. Mike Roizen and an all-star COVID panel, David Rosenberg of course, David Rubenstein, chairman of the Carlyle Group, Liz Ann Sonders of Schwab, Bill White (former BIS chief economist), Cathie Wood of ARK, and the absolutely brilliant Felix Zulauf. 

Plus several dozen more.

My team and I have spent countless hours and a lot of elbow grease creating an event that, I believe, will wow both seasoned SIC fans and first-time attendees. 

We added even more panels and fireside chats, plus an extra half-day of programming... all for the same low price as last year. 

Order your discounted SIC 2021 Pass here.

Now on with today’s topic.

When Every Lot Is Odd

One sign the water may soon rush out of stocks, indicating tsunami, is the amount of money rushing in

My friend Doug Kass recently shared this staggering chart. 

It shows the inflows to stock funds since November exceed the total inflows of the last 12 years

Doug helpfully pointed out that one of the legendary Bob Farrell’s rules is that “individuals buy most of the top and buy the least at the bottom.”


Source: CNBC


Note also, this is just stock funds

It doesn’t include individual trading accounts, and I suspect the amount entering the market via those is equally staggering.

Where is the money coming from? 

The obvious answer is from the Federal Reserve and government stimulus. 

But Danielle DiMartino Booth gives us a visual chart to understand just how completely out of historical context the current levels are (from Quill Intelligence):


Yes, some of this is showing up in retail sales (which were gonzo last week), but clearly some of it is showing up in stock purchases (see some reasons why below). 

We see well over three times the normal tax refund and stimulus number (pushing $700 billion), and I assume this doesn’t even include state unemployment and other indirect stimulus. 

Also, notice the tiny blip on income tax deposits. 

The differential is even more stark.

When markets change, as they clearly have in the last two years, you want to ask if something else changed that might explain it. 

Federal Reserve activity and COVID stimulus payments are obvious factors, but I think something else is contributing. 

Some history may clarify it.

Way back in ancient times, which some of us can remember, stocks traded in 100-share “round lots.” 

If the share price was $30, you had to invest $3,000, or $6,000, or some other multiple. 

You could trade in smaller increments but brokers frowned on it and some charged higher commissions, which back then were already extremely high compared to today. 

And odd lot orders often got executed at inferior prices, too.

(I have a friend who once ran serious money for a family office, focused entirely on buying bonds in odd lots. 

He didn’t need to find odd lots, as they had plenty of money. He could simply get 1 to 2% more yield for the little bit of extra work.)

Over time, “odd lot” trading became a sign of amateur activity, to the point some used it as a contrary indicator. 

More odd lot activity meant uninformed people were entering the market and a top was approaching.

By the 1990s, back office technology had made the whole round lot preference obsolete. 

Brokers stopped caring how many shares you traded. In effect, a “round lot” became one share. 

But now it is even less. 

Robinhood and many other trading platforms let users trade fractional shares, as little as 1/1,000,000 of a share. 

I believe this may be more consequential than is generally recognized.

Look at the share prices for of some of today’s top companies: Apple (AAPL) is around $130. 

In the old round-lot world, you would have needed $13,000 to trade it efficiently. 

Now you need less than a penny. 

This vastly expands the universe of people who can trade Apple shares. 

And Apple is low-priced compared to some other popular names like Tesla (TSLA) around $750, or Amazon (AMZN), which is over $3,000 per share.

We have, without really noticing, severed the connection between share price and liquidity. 

This matters in ways I think we may not fully understand. 

Combine it with game-like mobile apps that let people buy and sell in individually tiny amounts that add up to the big numbers once reserved for giant institutions. 

And without any kind of institutional decision-making process to constrain rash moves.

Further add trillions in government cash payments, often to people with time on their hands because they are unemployed, and who need ways to generate income. 

Of course, some turn to stock trading. 

It’s an attractive “side hustle” for a time when Uber driving is less attractive. 

If all you have is $100, that’s okay.

We have raised a generation playing adrenaline-charged video games. 

For a relatively small stimulus check, they get to play in a game where Dave Portnoy assures them that stocks only go up, or they can “stick it to the man” in GameStop. Sigh….

In the bigger picture, all those small accounts add up to enormous sums of hair-trigger money. 

Some of it has much higher risk tolerance. 

The app users don’t see it as a nest egg to preserve. 

In their minds, it’s more like buying gas to get to work—something you have to burn. 

The whole concept of a stock being overvalued or undervalued doesn’t apply. They just want it to move.

Where all this leads is uncertain but I suspect it won’t be good.

One of the first rules my mentors taught me: All it takes to create a bull market is for buyers to show up. 

All it takes to create a bear market is for the buyers to disappear. 

Just reading the zeitgeist, I don’t think they’re going to disappear for a while.

Dave Rosenberg at Rosenberg Research has also been following these inflows, and finds them problematic. 

He added another perspective in his latest monthly chartbook. 

The line in this chart shows current equity exposure in the AAII Asset Allocation Survey going back to 2002.


Source: Rosenberg Research


As you can see, equity exposure dropped in early 2020 as the coronavirus struck, climbed sharply and is now far stronger than it was when the last bull market began in 2009. 

I’m not sure the AAII survey captures the individuals (it’s hard to call them “investors”) trading small amounts on Robinhood and other apps. 

But their inclusion would only make the point stronger. 

A bull market needs fuel and this one has already burned a lot of it.

This is important also because we are talking about percentages, which include whatever money people may have received from the various stimulus programs. 

That money is already in the woodpile and being burned along with preexisting cash.

Dave has another chart showing the result. 

Comparing S&P 500 gains in the last four recessions, this one is stronger than the others were.


Source: Rosenberg Research


This market recovery has actually tracked the 2009 one pretty closely. But remember the previous chart: In 2009, investors had pulled out and then spent months furiously reinvesting. The current recovery happened with people closer to fully invested. That means it is even stronger than the price action shows.

None of this means the bull will tire in the near future. Major market trends often persist far longer than we think possible. Precedent is reliable until something unprecedented happens. It is certainly plausible to think the economy will bounce once the pandemic is out of the way, which we all hope will be soon. I’ve noted how crises often generate growth-sparking innovations. Good things may be coming. The question is whether they will both justify today’s valuations and even higher future valuations that justify further price gains.

Let’s think about this. The Fed is adding QE at an ~$1.5 trillion annual pace. They say interest rates won’t rise until 2023 at the earliest. The US government (by my latest count) has thrown, or soon will, $5 trillion of stimulus money, almost 25% of annual GDP, into the economy. Yes, not all of it goes directly to individuals, but it will eventually find a home, creating new jobs or programs.

At some point the government stimulus simply has to stop. 

Job openings are plentiful and the economy is opening up. 

Employers are having to pay much higher wages to get someone to come to work. 

When you can make $20-$30,000 a year staying at home, $10-$12 an hour just isn’t appealing. 

Ironically, the unemployment checks are actually creating wage inflation

While we may get a massive infrastructure bill later this year, it will be spread out over a decade. 

I don’t think we are going to see anything like the current free-for-all, multi-trillion-dollar injections like the last 12 months.

The Contest of Supply Versus Value

Central banks and governments worldwide are supplying massive amounts of rocket fuel for supercharged markets. 

The yields on high-yield bonds (junk bonds) are close to the recent all-time lows. 

Investors are desperate for yield and the only place that seems to offer return, if you’re only paying attention to price momentum, is the stock market. 

So Baby Boomers and retirees, along with their Millennial children, are taking more risk than they can possibly imagine.

The stock market is trading at more than three standard deviations above its 50-day moving average (courtesy Doug Kass).


Source: Doug Kass


Our friend Lance Roberts at Real Investment Advice offered these two charts



Source: Real Investment Advice


I don’t know of a time when valuations and markets were more stretched than they are right now. 

I also don’t remember a time when monetary and fiscal stimulus was more than it is right now. 

I would not be surprised to see the market rise considerably more from here. 

That being said, let me repeat what I said last week. 

I do not want to play the stock market or bond market game. 

There are other, more profitable games with much less risk.

I am not bearish. 

I am 100% invested and as aggressive as I have ever been in my life. 

Just not in index funds.

CPI inflation has a real chance of approaching 3% and maybe 4% this year. 

Something could easily become the tipping point (it literally doesn’t matter what it is) that makes the market roll over 20% or more.

In that scenario, I will bet you a dollar to 47 doughnuts the Federal Reserve steps in, and in giant size. 

QE increases another $50 billion per month? 

Or Whatever It Takes! 

If that’s not enough, then some clever lawyer will find a loophole to allow the Federal Reserve to enter the stock market through the back door. 

Or Janet Yellen walks over to her friend Nancy Pelosi and says we need a bill letting the Fed be more aggressive. 

It won’t be Hank Paulson on his knees to Pelosi this next time. 

Literally nothing—I truly mean nothing—will be off the table. 

When you are in the middle of a crisis, you channel your inner Mario Draghi and do whatever it takes.

Will it work? 

Who knows? 

I truly don’t know what will happen. 

We are exploring brand-new territory this decade. 

The new era we are entering can bring challenges as well as opportunities. 

Time to think about changing your game if you are still playing the old one.

SIC and Amanda’s Stroke Recovery

As noted above, SIC registration is open and we’ve posted the full speaker list. 

Doug Kass, Dave Rosenberg, and Louis Gave are all on the agenda, and I’m sure we will talk about the issues I just described, plus a lot more. 

Click here for more details and registration info

You saw the list of speakers above, and I guarantee you the ones that I didn’t mention are just as powerful. 

You want to be in that room. 

You can watch it live or at your leisure, you can read the transcripts and see the PowerPoint decks. 

The technology is truly state-of-the-art. 

This will be the best SIC ever.

As proud as I am of the SIC, some of you may remember that my daughter Amanda had a stroke last year. 

It was pretty frightening. 

Last night, I got a video of her after physical therapy doing a fairly complex balancing act on one leg, moving a ball to the other hand and changing legs. 

She was walking down the hall with two nurses to catch her if she had a problem 

Her physical therapy is grueling, but she stays with it and works hard. 

With tears in my eyes, I am as proud of that girl as anything in my life.

With that, I will hit the send button and wish you a great week. And sign up for the SIC!

Your meditating on what’s really important analyst,



John Mauldin
Co-Founder, Mauldin Economics

The year of learning dangerously

Covid-19 has shown what modern biomedicine can do

It can move very quickly, but needs to be well applied


The number of deaths officially attributed to covid-19 now stands somewhere over 2.5m. It is a terrible toll, but hardly an unprecedented one. 

The ongoing hiv/aids pandemic has killed between ten and 20 times as many worldwide. 

The death toll from the influenza pandemic of 1968 is believed to have been similar to that of covid-19, with a range of 1m to 4m, and until the past year you would have been hard put to find a mention of it outside a medical text. 

Similarly the flu of 1957. Yet covid-19 has had social, economic and political impacts beyond those of any other health crisis in modern history.

There is no starker illustration of the fact that, in the body politic as in the bodies the virus infects, the host’s response can matter far more to the course of the disease than the direct action of the pathogen itself. 

An infection which many do not even notice causes in some an immune response which can be fatal. 

Pandemics, too, are shaped by and reveal the particulars of the world they hit.

The covid-19 pandemic struck in an age more thoroughly interconnected and information-saturated than any which has come before. 

Though China was shamefully opaque early on, there was no way the situation could be kept from the world for long. 

In 1957 Britain’s Ministry of Health suppressed estimates that that year’s flu might infect a fifth of the population; it would be, in the words of a junior minister, “a heaven-sent opportunity for the press during the ‘silly season’”. 

Many politicians have lied and prevaricated about covid-19. None has been able to simply keep schtum.

The policy response, too, has been one only possible in the information age. 

The closing of workplaces and shops would have been impossibly disruptive just ten years ago. 

The shortcomings of Zoom, Microsoft Teams, Amazon and all the other services that the well-off world has relied on are manifest. 

But their benefits have been vital.

The greatest technological revelation, though, has been the medical and public-health responses. 

That the internet has changed the world is not news. 

That basic biomedical science is now in a position to do so is. 

Labs were running specific tests for a never-before-seen virus barely a month after the first cases were reported. 

Crucial information on which therapies, old and new, did and did not work was available by the middle of the year. 

The evolution of the virus was revealed as it happened by genome sequencing on a scale to which no previous pathogen had ever been subjected. 

Most remarkably of all, a range of safe and effective vaccines based on various novel approaches was available within a year. 

One of the technologies used—directly injected mrna—opens up all sorts of further possibilities.

This Technology Quarterly will examine how the response to covid-19 has revealed the true potential—and, sometimes, the failings—of these various technologies. 

It is not, yet, a tale of triumph. 

But the pandemic has laid bare a hard-won corpus of technological achievement just waiting to be harnessed to the cause of a better future.

Buttonwood

What the enthusiasm for funding startups means for the VC world

More money chasing scarce ideas means that the prices paid for startups rise


Financial markets are fuelled by stories, and the most skilful storytellers are found in venture capital. 

For a start, venture capitalists have to listen to a lot of fairy tales from the would-be entrepreneur. 

“The world will look different in a decade,” he says. 

“My startup will be the leading business in a new industry.” 

vcs tell themselves stories about how they can foresee what others cannot, and how this stands to make them a lot of money. 

And they retell them to potential investors in their funds.

Who to believe, when you cannot easily verify such tales? 

This difficulty is a version of the agency problem of asset management. 

When venture capital was clubbier, it was manageable. 

But in recent years investors who are new to the terrain have been piling in. 

A vc trying to raise money may favour startups of the kind that has done well recently, even if they are not the best long-term bet. 

Oddball startups with more potential might then be starved of capital.

There is thus a nagging fear that the more money that is funnelled into Silicon Valley and other centres of venture capital, the less “true” innovation will occur. 

Well perhaps. 

But it is not obvious that great business ideas are being ignored. 

The downside of the flood of venture capital is more prosaic. 

Run-of-the-mill startups are overindulged. 

And prospective returns are depressed.

More and more pension schemes are looking to alternative investments, including venture capital, to juice up their returns. 

vc funds have on average beaten the public market, net of fees, over the long run. 

The best funds do a lot better than the average. 

But it is not only a matter of returns. 

Smart investors in public markets realise that they own a lot of companies that are at risk of disruption from emerging technology firms. 

A good way to balance that risk is to own a stake in the next generation.

More money for new businesses is surely a good thing. 

Nevertheless there is a lingering disquiet. 

One source of discomfort is that funds are often narrowly segmented by region, industry, or stage of investment—and sometimes all three. 

This helps with marketing. 

Money is attracted to themes that have worked well recently. 

As Hollywood has discovered, it is easier to sell a variant of an old story than a brand-new one.

There are drawbacks, though. 

A truly game-changing business may sit astride several themes and be ignored, says Ajay Royan of Mithril, a vc firm based in Austin, Texas. 

In the public markets buying stuff that has worked well recently is called momentum trading. 

It does fine much of the time, and has an appeal to the investor who is out of his element in venture-land. 

By “social-proofing” vc investments the anxious can get more comfortable with the risks, says Mr Royan. 

“But it can devolve into the vc equivalent of ‘you can’t get fired for buying ibm’.” 

And the trouble with crowded trades is that they are prone to crashes.

Some vc funds will fall prey to the vices of asset gathering—telling a good story about the latest fad to maximise the amount of fee-paying money under management. But there is a culture that militates against this. 

The best vc firms pride themselves on being oversubscribed. 

They turn money away. And an industry that hears a lot of fairy tales has some inbuilt discipline. 

Venture capitalists have to kiss a lot of frogs to find a prince—even a halfway handsome frog. 

The average vc firm screens 200 targets a year, but makes only four investments, according to one study.

And thematic vc can sometimes have a logic to it. 

Regional funds make sense for consumer-facing startups, because of local variations in tastes and habits. 

Increasingly, the seed or early-stage venture funds with better returns tend to have a thematic focus, says Simon Levene of Mosaic Ventures, a London-based vc firm. 

Nor is it obvious that moonshot ideas are starved of funding. 

SpaceX, Elon Musk’s space-exploration firm, was valued at a whopping $74bn at its most recent funding round. 

Even borderline scams are given a respectful hearing.

The trouble with abundant capital instead is more straightforward. 

More money chasing scarce ideas and talent means that the prices paid for startups rise, which all else equal means returns fall. 

And the absence of cash constraints can spoil a promising startup. 

If it blows a lot of money on marketing, the resulting growth can distract the founders from underlying faults with the product. 

Telling a good story is vital in the startup business. 

But there is a danger in believing your own fairy tales. 

 Saudi Arabia Takes Its Authoritarianism Online

The Saudi government has tried to control its image online by any means necessary.

By: Hilal Khashan


The past few years have seen a surge of activity on social media platforms, especially Twitter, in Saudi Arabia. 

Forty percent of tweets that come from the Arab world originate in there. 

But in a country that’s generally unaccepting of free speech, the Saudi government has tried to control the narrative by any means necessary. 

It launched an aggressive campaign to suppress any criticism of the royal family and promote a positive image of the royals. 

It also dealt harsh punishments to those who refused to toe the line. (In 2013, one Saudi blogger received a seven-year prison sentence and 600 lashes for promoting liberal thought.) 

It seems the Saudi royals are taking their authoritarian style of rule online.

Riyadh’s Electronic Army

Saudi Arabia understands that, in the digital age, cybersecurity is an essential part of national security. 

It has thus made a concerted effort to protect itself against hostile countries, Saudi dissidents and foreign critics wishing to tarnish its reputation.

One of the main ways the Saudis have chosen to manage their image online is by deploying its so-called electronic army. 

The campaign began in 2009 when a group of Saudis active on Facebook encountered Iranian-sponsored groups critical of the kingdom, its religious doctrine and leading members of the royal family. 

The Arab uprisings in late 2010 – and the wave of Arab activists calling on Saudis to overthrow the regime – resulted in the rise of the electronic army, which adopted the slogan “a homeland that we do not defend, we do not deserve to live in.” 

The campaign gained momentum after King Salman acceded to the throne in 2015 and his son, Mohammed bin Salman, widely known as MBS, was appointed minister of defense and secretary-general of the Royal Court, a body that acts as a link between the monarch and government institutions.

The electronic army project was spearheaded by Saud Qahtani, one of MBS’ Royal Court advisers who was later indicted by Turkish prosecutors for his role in the murder of Saudi dissident Jamal Khashoggi. 

Qahtani led the drive to silence critics, recruiting insiders at Twitter to track down detractors and deploying an army of trolls, sometimes referred to as “flies,” to harass them online. 

The Saudis even offered generous compensation to those willing to go after their critics on their behalf. 

They often use abusive language to discredit human rights advocates and twist the truth to promote the government’s agenda and prevent Saudis from thinking independently.

Since joining the Royal Court’s propaganda efforts, the Saudi electronic army has become one of the largest disinformation networks in the Middle East. 

Twitter has deleted thousands of fake accounts linked to the Saudi state but admits that it can’t fully stamp out the problem.

Setting the Agenda

Cybersecurity efforts are usually used to safeguard critical assets against espionage and hacking. 

In Saudi Arabia, however, the priority seems to be protecting the image of the royal family, which is wary of any hint of opposition and extremely sensitive to criticism, however mild. 

Khashoggi’s death is a case in point.

Online trolls have recently targeted the Palestinians ahead of a possible normalization deal with Israel. 

Anonymous Saudi social media users have demonized the Palestinians, referring to them as remnants of the Canaanite and Roman eras who have become “something of a liability for our sister state of Israel.” 

Trolls repeatedly claimed that there was no such country as Palestine and that Saudis will never have peace with Palestinians. 

Last year, the centralized command that issues directives to the “flies” circulated a memorandum to discontinue use of the “Palestine issue” label. 

It also issued an order to describe Syrians, Lebanese, Palestinians and Jordanians as the “northern Arabs,” and North Africans as “Africa’s Berbers.”

The trolls are MBS’ weapon of choice against his enemies at home. 

A concerted online campaign by his loyalists justified the removal of his predecessor, Mohammed bin Nayef, as crown prince by alleging he was guilty of administrative mismanagement and drug abuse. 

Other targets include those in the highest echelons of society who took issue with MBS’ most important policies, such as Saudi Arabia’s war effort in Yemen and the controversial Vision 2030 project.

Riyadh justifies its attack campaign by pointing out that Saudi Arabia has been the target of numerous destabilization efforts since the 1950s, and yet its leadership has managed to stabilize the country, politically and economically. 

In 2017, the government announced the Saudi Federation for Cyber Security and Programming, an initiative primarily designed to involve more Saudis in promoting the country’s security, though it is also used to harass those who believe in extreme religious ideologies.

Apart from defaming its critics and human rights activists, much of Saudi Arabia’s digital media efforts revolve around MBS himself – not only his capacity as crown prince but also his competence as military commander. 

A mysterious video that appeared on YouTube in 2018 showed him commanding a successful invasion of Iran to cheering Iranian crowds who celebrated the arrival of Saudi troops in Tehran. 

The video sought to demonstrate Saudi Arabia’s impressive arsenal as well as MBS’ competency as a military leader. 

It’s extremely unlikely that the video would be posted without his consent.

The crown prince is constantly in the news. 

Rarely a day goes by without online Saudi newspapers printing his photo and highlighting his achievements. 

Saudi media and the electronic army are currently celebrating MBS’ latest stunt to reduce carbon emissions in the Middle East by planting 50 billion trees in a massive afforestation project. 

The project is part of an effort to rehabilitate MBS’ reputation after a spate of scandals and policy failures. 

He began his rise to power by joining the war in Yemen, a conflict that has inflicted a heavy toll on Yemeni’s impoverished population. 

In November 2017, he arrested dozens of Saudi princes, business leaders and government ministers allegedly to eradicate corruption but in reality to centralize power in his hands. 

A month later, he launched the Saudi Entertainment Ventures Company, partly to deflect attention from his sweeping political and economic changes. 

The recent release of the CIA report that implicated MBS in Khashoggi’s murder has further tarnished his image in the West.

Saudi Socialization

Not all Saudi social media users who express enthusiastic support for the royal establishment operate under the umbrella of the electronic army. 

Saudis frequently issue disingenuous statements of support to dispel any belief that they might not be good citizens. 

During the Saudi-led blockade of Qatar, for example, many Saudis expressed support for the government stance, even if the issue didn’t mean much to them.

That’s because Saudi Arabia has a rigid system of socialization in which the importance of obedience is instilled at a young age. 

Thus, Saudi political culture does not tolerate criticism or questions being asked of leadership. 

Occasionally, Saudi writers question why Saudis refuse to listen to opposing views. 

When confronted with ideas that challenge their belief system, they usually reject them and often hurl insults at their opponents. 

Presenting new ideas isolates their advocates and creates cognitive dissonance among people socialized in an environment that does not encourage free thinking.

There have been many high-profile cases in which people who exercised free speech felt the wrath of the Saudi establishment. 

Khashoggi, who once called MBS a “beast,” was killed in the Saudi consulate in Istanbul. (Though he feared the crown prince, he failed to take adequate measures to protect himself when he entered the consulate.) 

Saudi princess Basma, the daughter of King Saud, who ruled Saudi Arabia between 1953 and 1964, antagonized MBS when she demanded recognition of freedom, justice and universal human rights. 

She was arrested in 2019 and held in the notorious al-Haer prison despite her poor health. 

A top Saudi diplomat publicly threatened to kill Agnes Callamard, the secretary-general of Amnesty International, in 2020 for investigating Khashoggi’s murder. 

The Saudi electronic army accused her of attempting to extort money from the kingdom – a common accusation leveled against foreigners. 

These cases are lessons for others who might try to challenge the royal family’s authority in the future.

All Eyes on Digital Payments

There is justifiable excitement surrounding digital payments, given the potential of the technology to support a wide range of financial services for businesses and consumers alike. But the rise of powerful new platforms and means of exchange raises public policy concerns that cannot be ignored.

Raghuram G. Rajan




CHICAGO – Digital payments are attracting growing interest, and eye-popping numbers abound, as demonstrated by the US payment processor Stripe’s recent $95 billion valuation. 

Why all the excitement, and why now?

Bold, specific, and usually alarming predictions about automation and coming job losses obscure a basic fact: the future remains uncertain. 

Whether technology is used to liberate or enslave us is always ultimately the responsibility of the humans in charge.

At one level, the reason is straightforward: digital payments allow buyers to pay sellers without physical currency changing hands. 

Though the technology has been around for a long time, it is finally becoming much easier to use for small-value retail payments. 

Moreover, the pandemic has accelerated the switch to digital payments, as people have shifted to e-commerce and taken steps to avoid handling currency in ordinary purchases.

Digital payments also generate real-time data on sellers’ businesses, the timing of cash flows, and buyers’ purchasing habits, allowing payment providers to offer credit, savings, wealth management, collections, insurance, and other financial services. 

Where credit was once the way to draw in customers and offer a panoply of financial services, payments may be a safer channel for such upselling.

But a provider who handles only a fraction of a customer’s payments has only a partial picture of that customer. 

Payment providers therefore are eager to control all means of payment: bank accounts, e-wallets, credit cards, cryptocurrencies, and so on. 

And e-commerce and social-media platforms want to go a step further by combining their powerful data-collection engines with payments.

With near-total knowledge of users’ behavior, a provider can both address customers’ every need (directly or through partners) and lock them in for the long term, because the costs of seeking similar services elsewhere will be too high. 

This tie-in need not be entirely exploitative: a merchant who uses a provider for a wide suite of services can be offered more credit, because she will be less likely to risk losing those services by defaulting.

There is also much excitement about cryptocurrencies, which are just one form of digital payment, typically requiring an initial exchange of a fiat currency like the US dollar into a given unit. 

A cryptocurrency like Bitcoin offers ostensible benefits as a means of payment because, unlike fiat currencies, it cannot be inflated away (because its supply is fixed), and it allows for decentralized payment verification, eliminating the need for any party to trust the others involved, let alone trusting government or regulators.

But there are impediments to Bitcoin’s use. 

Its value is not managed by a central bank, so it can fluctuate wildly. 

Firms, barring those led by true believers, do not want to keep a currency whose value can fluctuate by 10% every day. 

And Bitcoin transactions are expensive and inefficient, owing to the costly decentralized verification process. 

By some estimates, the annual electricity use needed to verify Bitcoin transactions exceeds that of a medium-size country. 

It is hard to imagine that such an environmentally destructive process will be tolerated indefinitely.

Other cryptocurrencies have a fixed value, because they are pegged to a currency like the dollar and fully backed with cash reserves. 

These “stablecoins” are easier to use in payments; but like other traditional means of exchange, they are dependent on (those pesky) regulators. 

While some stablecoins have tried different methods of payment verification than Bitcoin’s, none has emerged as the next “killer app.”

Cryptocurrencies are thus a work in progress. 

By design, Bitcoin addresses the lack of trust in fiat currencies, central banks, and governments. 

But, beyond the paranoiac, criminal, and terrorist communities, such concerns are not widely shared. 

That could change if more people start believing that central banks are out to debase fiat currencies, or if the world breaks up into US- and Chinese-led blocs that don’t trust each other’s currency or settlement systems.

Of more immediate use would be a cryptocurrency that focuses on reducing transaction costs in difficult payment situations such as small-value or cross-border exchanges. 

For example, a voracious but eclectic reader could make micropayments for every article she reads online without taking on a bunch of costly subscriptions. 

Equally promising are proposals for smart contracts that would deliver a payment automatically once some verifiable condition has been met (eliminating the need to trust humans).

In any case, the emergence of a dominant digital-payment provider, cryptocurrency or otherwise, would raise important public policy concerns, such as whether it could be trusted to collect and handle customer data responsibly. 

Owing to its mixed track record on data and privacy issues, Facebook’s proposed stablecoin (Libra, which has since been rebranded as Diem) met with skepticism from financial regulators. 

For its part, Europe has made an initial attempt at regulating data use under its General Data Protection Regulation. But the law will need to be fine-tuned in light of developments in the digital-payments sphere.

A related issue concerns antitrust. 

Does a single payment provider that handles all business services – including e-commerce and logistics – have an excessive amount of market power? 

The recent tensions between Chinese regulators and Ant Group owe something to the fear that e-commerce platforms like Alibaba (Ant’s parent company) are using their market power – enhanced through payments – to restrict competition. 

One remedy here would be to create public payment bridges, such as India’s Unified Payments Interface, where the key payment services are open to all comers and not controlled by any one private entity.

But perhaps the greatest regulatory concern is systemic risk. 

When one or two providers dominate an entire country’s digital retail payments, commerce could be devastated if anything goes wrong. 

Advances in cryptography (through quantum computing) may make it easy to subvert existing schemes of digital verification. 

And public bridges, while increasing competition, may concentrate risk. 

The only way around this is to have multiple providers, multiple bridges, and multiple technologies in the payment arena.

Central banks are now contemplating getting into the digital-payments game themselves. 

They fear losing control over payments as physical cash becomes redundant, that the private sector will get it wrong, or that other central banks will steal a march on them. 

Central bank digital currencies would ensure a public presence in payments; but, again, this option would concentrate data and risk, while also raising questions about the viability of private digital payments. 

But that’s a subject for another (my next) commentary.


Raghuram G. Rajan, former governor of the Reserve Bank of India, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.