Buy Businesses, Not Stocks

By John Mauldin 

I write this letter on my way home from Steamboat Springs, Colorado, where I spoke to the fascinating “GoBundance” group of mostly young, successful, enthusiastic entrepreneurs. 

Before that I was in Grand Lake Stream, Maine, for the Camp Kotok economics/fishing retreat. 

I’ll have some details for you later. 

Today we will look back a few months to a Strategic Investment Conference presentation that truly affirms my optimistic outlook for both business and humanity.

You’ve probably heard of Ron Baron, founder of Baron Funds which has grown to a stable of not just mutual funds but a variety of private investments and Ron’s own capital—something like $50 billion in total. 

Ron is a legendary investment genius and we were thrilled to have him on the SIC virtual stage, where my good friend David Bahnsen ably interviewed him.

Below I’ll give you some extensive quotes from that session’s transcript, interspersed with comments from me. 

The GoBundance event reminded me of Ron’s enthusiasm for fast-growing businesses. 

While there may only be a few Ron Baron’s, the US has hundreds of thousands if not millions of entrepreneurs trying to build such businesses. 

The common thread is they all take risks.

Let’s jump in…

Holding Forever

David began by asking Ron what differentiates his philosophy from other managers.

Well, what we try to do is find businesses that we think have a chance to grow a lot. 

There's something about the businesses that gives them a competitive advantage, that makes it very difficult for other people to do the same thing. 

We try to invest in exceptional people and then we differentiate ourselves by investing in those businesses for the long term. 

So, everyone could look at a growth opportunity, but very few people are able to understand or care about a business culture or what its competitive advantages are, and very few, even fewer can invest for the long term. 

And the reason for that is that it's not so easy to find a Charles Schwab and to invest in it in 1992 and have a cost of 60 or 70 cents a share, and it's now $70… and we still think it's going to 100.

Or to find a Robert Half that we invested in 1990 at less than a dollar a share, and it's $60 or $70 right now. 

Or find an Elon Musk in Tesla and invest in it for four or five years, when the stock went up and down dramatically. 

We invested $380 million. 

Market cap then was 35 billion. 

So we invested $385 million, which at the time we had $21 billion of assets under management, so it was 1.5% of our assets. 

And people would say, "Why are you investing in that crazy man? 

Why are you investing in that company, it's so volatile?" 

And what happened is that business over the next... we invested between 2014 and 2016, we bought and since it’s split five for one.

So our cost for eight million shares was about $43, $44 a share, and the stock would go up and down like a yo-yo. 

But the business grew 10 times from 2014 when we bought it, 2014–2016 over those two years and grew 10 times as of last year in business and in revenues. 

But the stock price almost was unchanged, then all of a sudden it went up 20 times. 

Now it's up 15 times. 

Now it's about 650, 620, 630. 

I think it's going… but it's down from 900, but we never... the only stock we've sold is for our clients. 

We've sold 20% of our shares at an average price of 650. 

But the reason we sold was not because we were pessimistic about the prospects for the business, it had just become too large of a position of the portfolio for the clients who were holding it in our funds. 

You can see how that can happen [when a stock more than doubles]. 

But for myself, I own a million shares, 1,150,000 actually, that I bought after all of our clients bought. 

I have not sold a share personally, and I don't expect to for 10 more years. 

So how can someone be willing to hold a stock that he thinks in the short term or she thinks in the short term could go from 900 to 600 and not worry about getting fired? 

And I don't worry about getting fired because I'm not going to fire myself until clients do.

So, we think that in the case of Tesla, we're going to make another triple in the next 10 years, not 20 times, a triple, maybe four times. 

SpaceX is the one I'm really excited about now that we invested in, started about two or three years ago, started with a market cap of about $35 billion. 

It's now $75 billion. 

I think that we're going to make 30 times in the next 10 years. 

So that's a $70 billion market cap presently, and I think has a chance to be $2 trillion. It's certainly going to be $1 trillion. 

So, 15 to 30 times to 40 times, I don't think I'm going to ever sell that stock in my lifetime.

This is so important. 

Ron doesn’t look for stocks to sell higher. 

He looks for solid businesses that will grow. 

The stock price will take care of itself if they do.

You may notice he talks about owning SpaceX, which hasn’t even gone public. 

The owners are Elon Musk and an assortment of wealthy individuals and institutions. 

Having access to those kinds of opportunities is a big advantage now, one (sadly) not available to small investors.

JM: Certain kinds of funds, which you might think hold only publicly traded stocks, also allocate small slices to private companies they think will grow exponentially and eventually go public. 

Curiously, I find myself investing alongside them sometimes. 

You really do want to find visionary managers…

Perpetual Inflation

David asked Ron how macro factors fit into his bottom-up style. 

That led to some surprising comments about taxes and inflation, a theme that is certainly very front and center in relevance today.

I don't worry about, well, prices or inflation or who's going to become the president or the programs they're going to try to increase or pass if they become elected. 

That's not of concern. 

The big idea that I have, though, is about inflation, and I've always had it. 

And I've always said that the big programs that government follows have one purpose, and that's to devalue your currency, to make your money worth less every single year. 

So, people tell you that there's no inflation, and that's not the case at all. 

The value your money has falls about 3% or 4% a year, every single year [JM: Ron uses real-world buying power, not government-created indexes which mask the reality. Good on him for being candid and honest]. 

And it falls in half every 17 years... And half again in 17 years— half that falls in half again.

So my dad, in 1948, we buy our first house, and it's $5,000. 

And before that, we were living in a garage apartment in Bradley Beach, New Jersey, just outside of Asbury Park. 

And the apartment's too small to get the refrigerator in the kitchen, had to be outside in the porch. 

1948, we buy a house. 

It was $5,000, I'm five years old, and he sells it in 1955 for $10,000. 

I went to visit that house, I don't know, two years ago, three years ago, $350,000. 

1122 Grismer Avenue, $350,000… and that's not because he was such a brilliant investor in houses. 

It's just because the value of your money falls 3% or 4% a year. 

And in real estate, it probably increases an average of 4% or 5% a year. 

And 1955, that's 65 years ago. 

So there's a bunch of doubles in there that you get.

But go look up what... when I worked in the patent office, at first, out of college, I didn't get into medical school. 

I wanted to be a doctor… at least, my parents told me I wanted to be a doctor… and I didn't get in because I was messing around with my fraternity. 

And then in 1966, I got a job in the United States Patent Office and my salary was $7,729. 

I first had a scholarship at Georgetown Medical School, PhD, and they were paying me $1,600 a year. 

$1,600 a year. 

And so, I had to work as a bartender, a waiter, to make extra spending money. 

But then in 1966, I got a job in the patent office as an examiner, I'm making $7,729 a year.

And I thought this was the greatest. 

I couldn't imagine being more successful than that. 

But that job now is a $70,000 [plus benefits and a lot more] a year job. 

And my apartment then was $80 or $100 a month living in a basement. 

And now, I don't know what it would be... a couple thousand I guess, $1,500. 

But everything is devalued. 

So I always think about in terms of the money falling in value and trying to protect ourselves against that. 

And that's what I was talking before about investing in an index fund and you make 7% or 8% a year, and you double your money every 10 years from what you started with…

In Baron Partners Fund… if you invested in an index when I started it in 1992, and invested $1,000 in the index, it'd be worth $20,000. 

If you invested $1,000 with us, it'd be worth $80,000. 

So $80,000, and that's the difference between 500 basis points [5% a year]. 

That's the difference in earning 16.5% a year instead of 11% a year. 

So, always thinking about being long-term, the only perspective I have is that we have a really neat country, unbelievably fortunate to be born here and to live here, the rule of law, they encourage capital formation. 

You go through wars, and you go through pandemics, and you go through financial panics and... but the country just keeps chugging along and growing. 

And there's always programs, and sometimes Republicans get in and they cut taxes, and they cut spending. 

And if that doesn't work, then the Democrats get in, and they increase taxes and they increase spending. 

And if that doesn't work, then they go back and forth so it swings back and forth.

Sometimes you get someone in the middle like a Clinton, but other than that, you swing back and forth. 

So I just assume that whatever they try will work for a while. 

And then when it doesn't work anymore, the public fires him, and then they get new people to come in and run the country. 

And then that works for a while and then they fire them, and they get the other guys.

This passage highlights Ron’s patience. 

He doesn’t bother himself with politics because he trusts whoever is in charge will be gone in a few years, for better or worse. 

Inflation won’t be gone, so that’s a far bigger concern to him.

Better than the Market

Ron went on to describe how the same inflation that harms families and investors actually helps politicians and government… which is why we keep getting more of it.

One idea that you should be keeping in mind is that in 1945, right after World War II, the soldiers were returning home, our soldiers, and people were afraid we were going to go back into the Depression again because they wouldn't find a job. 

And so, they have extremely stimulative fiscal and monetary policies in 1945, but debt then was 110% of GDP. 


And then they kept the rate of interest below the rate of inflation for the next 30 years, for the most part. 

And in 1960, debt had fallen from 110% to 45% of GDP. 

So you make the economy grow faster. 

The late ‘70s, you had a lot of inflation. 

In 1960, debt had fallen to 45% of GDP. 

And in 1975, it was 22% or 23% of GDP. 

There's not a penny [of that debt] that’s ever been repaid. 

On the other hand, the way the government continuously defaults on the obligations they have for indebtedness, is they make sure that inflation is higher than the rate of interest, and that makes the value of your currency fall. 

That's what I was describing before, that 17-year cycle about making your money worth less. 

So that's a big idea that the debt will get to be a smaller percentage of the economy if the economy grows faster than the rate of interest.

Every single democracy for 2,000 years, 3,000 years, has done the same thing. 

They have always devalued your currency. 

The Romans did it, they took silver out. 

The Greeks did it, they cut the value of your money in half. 

The Israelis did it. 

Everyone does it. 

And they say, "We're just not doing it." 

So, we're saying we're taking your money and making it worth less. 

We're just doing it by creating inflation. 

And if you think that the government, when they’re buying $120 billion a month of indebtedness, why is there so much money around? 

Because the government has put all this money out there. 

They want to make sure we don't have a financial crisis. 

They want to make sure we don't have a financial crash. 

So they put the money out there and they've learned. 

Though in 1932, they actually tried for a while to make money more sound, tie it to the value of gold, but gold was one of the factors that potentially could have caused the Depression. 

And what they did with gold, is that people didn't trust the banks… so taking money out of the banks and buying gold. 

So instead of expansionary policy, gold is a contractionary policy…

But the bottom line is there's going to be inflation. 

You're going to make money worth less. 

Stocks are a hedge against that. 

Stocks on average increase 7% or 8% a year. 

Real estate is 4% or 5% a year. 

Gold is 2% or 3% a year. 

So we just think about historically stocks are a great thing to buy. 

And the reason we've outperformed is that we buy businesses that instead of growing 7% or 8% a year ago, 15% a year. 

And over the long term, if you stay with it and they keep growing at that rate, you'll do way better than the market.

That’s a great way to close. 

You can buy generic “stocks” (index funds) and, if you can patiently sit through occasional bear markets, keep up with inflation and get a little growth as the economy expands. 

But the real potential is in buying businesses whose growth leapfrogs ahead of everything else.

That’s what I [JM] try to do. 

This week I saw a reader comment alleging I had never recommended reentering the market after leaving it in 2007. 

That’s not quite right. 

It’s true I have never said to blindly plunge into index funds, but this isn’t an either/or thing. 

I have a lot of stock exposure but it’s targeted in companies I expect to outperform. 

Many are private—smaller versions of Ron’s SpaceX play—and I consider the illiquidity an advantage. 

It limits the temptation to sell too soon.

Most investors can’t do what Ron Baron does because they don’t have Ron Baron’s patience. 

Try to develop it. 

You’ll be glad you did.

By the way, David asked Ron what his biggest mistake was. 

He mentioned a few companies that didn’t do well, but…

…A much bigger error than that was sitting next to Bezos for an entire year in that corner all-glass conference room and hearing his crazy laugh, and not investing in Amazon. 

Trying instead to sell him my junky stock in Sotheby's, and ignoring the fact that here's this guy changing the world and I wasn't investing in him, how crazy is that?

If you have our SIC Virtual Pass you can view video or read the full transcript of the full Ron Baron interview. 

Others can still get a pass here, with access to not just Ron Baron but tons of other valuable material.

Ron is still active, engaged, and enthusiastic at 78. I hope I can be like him. I think this quote will be a good way to close:

I hate being called a legend as opposed to an all-star. I like being an all-star, legend sounds like Babe Ruth. So, I'd rather be right now.

A Room Full of All-Stars and COVID Depression

Just a personal note I hope helps some of you going through the same thing.

For the last 7–8 months, maybe longer, I haven’t been on my personal game in the way I want. 

I feel like I’m swimming through peanut butter. 

The spirit (mind) is willing and active but the flesh, or at least my follow-through, is weak. I procrastinate more than normal. 

I see exciting opportunities around me, but lack the energy to finish what I need to do. 

I’ve talked with doctors and friends about this. 

It was really getting to me.

Then I went to Camp Kotok and serendipitously agreed to speak for my old friend Chris Ryan, who now runs a conference for a group of young entrepreneurs called GoBundance. Their enthusiasm was tangible. Clearly not my crowd, as less than 10% of them had ever heard of me. Yet after my speech, they arranged a 90-minute special off-the-record session the next morning. Not a person left the meeting. Their engagement was energizing. I gave them a whole new way to think about the economy and investing. For two days, people kept coming up to me and talking and asking questions.

I was clear about the problems we face, but also stressed how entrepreneurs use problems as stepping stones. I told him how wonderful the future would be, even as we have to go through The Great Reset. For those who prepare, The Great Reset will be the mother of all great opportunities.

At the end of the third day, I realized it had been 20 months since my last in-person speech other than a Zoom call. Zoom is just not the same. Camp Kotok and the conference reminded me I draw energy from speaking and being with people. My doctor, Mike Roizen, says a kind of “COVID depression” (Google it) is a growing problem. Sitting in our homes without in-person interaction puts us “off our feed.”

Reading and writing have always energized me, but I need interaction with crowds and people just as much. That’s just a personal thing for me. You probably have your own psychological needs that keep you going. Figure out what they are and then pursue them.

And with that confession, it is time to hit the send button. Have a great week and let’s go build something!

Your going to be more disciplined analyst,

John Mauldin
Co-Founder, Mauldin Economics

Why Jay Powell should be bold at Jackson Hole

The longer the Fed chair waits to detail his own thinking, the greater the economic, financial and institutional risks

Mohamed El-Erian

Jay Powell’s speech is a valuable opportunity for him to regain the policy narrative © REUTERS

Federal Reserve chairs usually approach the annual confab of central bankers at Jackson Hole, Wyoming, in one of two ways. 

Either fly under the radar screens of markets, or offer up some eye-grabbing policy announcement.

It would not surprise me if Jay Powell, in his keynote speech this week, opts for the former at this year’s virtual event. 

Some might even see this as a more risk averse option. 

That would be unfortunate. 

The wellbeing of the economy, the Fed and financial markets call for Powell to take the latter route. 

It is also the less risky option.

Vacillation by Fed chairs on how to handle their Jackson Hole pronouncements is natural. 

Choosing a lower key approach fits with the symposium’s stated intention of bringing “together economists, financial market participants, academics, US government representatives and news media to discuss long-term policy issues of mutual concern.” 

Yet with all those in attendance and the media coverage this entails, it can also be appropriate to spice things up by signalling an upcoming policy change.

Ben Bernanke memorably did so in 2010, previewing the expanded use of unconventional policies to pursue broad economic objectives rather than just to calm volatile, dysfunctional financial markets.

Powell has repeatedly signalled his preference for a slow and finely graduated evolution in policies. 

It is consistent with a still-uncertain economic outlook and a jobs deficit. 

It seems to minimise the risk of big market turbulence, especially after the 2013 and 2018 experiences.

There is also a lot to be said about the longer-term perspective of this year’s topic: “Macroeconomic Policy in an Uneven Economy.” 

Inequalities of income, wealth and opportunity continue to worsen; climate change threats are multiplying, and there is greater dispersion in growth performance around the world. 

It is an opportune time for central bankers to say more on the role they can, and should, play in ensuring more inclusive and sustainable economic growth.

Despite the importance of these themes, a consequential number of people await to hear what only Powell can deliver — when and how the Fed will pivot away from the Covid-related emergency measures introduced at the start of the pandemic. 

Recent economic data accentuate the need for clarity on this.

On the Fed’s two mandate objectives, employment and inflation, the central bank has got a lot closer to meeting one but exceeding the other. 

The worrisome overhang of its third, and more informal, objective of market stability is getting bigger, as risk assets have continued to decouple from fundamentals, setting new records and fuelling concerns about unsettling market volatility ahead.

The recent employment report suggests labour market improvement is accelerating. 

The monthly unemployment rate fell by 0.5 percentage points to 5.4 per cent in July; the employment-population ratio and labour force participation edged higher; nearly 1.9m jobs were created in June and July. 

Job vacancies have risen to a record 10m. 

Not surprisingly, the respected Harvard economist Jason Furman stated on Twitter: “I have yet to find a blemish in this jobs report. 

I’ve never before seen such a wonderful set of economic data”.

However, inflation concerns have yet to dissipate. 

While consumer price index gauges did not go up in July, they remain elevated at 5.4 per cent for the headline rate and 4.3 per cent for core, excluding food and energy. 

But PPI, tracking producer prices, rose more than expected and to worrisome levels of 7.8 per cent and 6.1 per cent, respectively.

No wonder many companies used their earnings releases earlier this month to signal higher costs and price increases ahead. 

And much of this came before the new round of supply disruptions owing to the surge in Delta variant infections and hospitalisations, undermining cross-border supply chains.

The employment and inflation data have led several more Federal Open Market Committee members to come out openly in favour of an earlier tapering down of the Fed’s $120bn of monthly asset purchases. 

In contrast, Powell is yet to evolve from his often-repeated preference for maintaining these massive liquidity injections for longer. 

Naturally, investors and traders prefer to take comfort from the steadfast dovishness of the only voices that matter for them — that of Powell and his closest two senior colleagues, Richard Clarida and John Williams.

The longer Powell waits to detail his own thinking, the greater the challenges to maintaining Fed unity, and the bigger risk that the central bank will be forced into a more disorderly slamming of the policy brakes down the road.

His highly anticipated speech at Jackson Hole on 27 August is thus a valuable opportunity for him to regain the policy narrative. 

Indeed, failure to do so is more risky than the seemingly easier option of avoidance — for the economy, for financial stability, and for the reputation of the world’s most powerful central bank.

The writer is president of Queens’ College, Cambridge and an adviser to Allianz and Gramercy. 

The disaster scenario

What if bitcoin went to zero?

A thought experiment helps uncover the links between crypto and mainstream finance

THE RECENT expansion of the crypto-universe is a thing of wonder. 

Only a year ago there were about 6,000 currencies listed on CoinMarketCap, a website. 

Today there are 11,145. 

Their combined market capitalisation has exploded from $330bn to $1.6trn today—roughly equivalent to the nominal GDP of Canada. 

More than 100m unique digital wallets hold them, about three times the number in 2018.

Holders have become more sophisticated and deep-pocketed, too. 

Institutions account for 63% of trading by value, up from 10% in 2017 (see chart 1). 

Skybridge, a hedge fund run by Anthony Scaramucci, provides an illustrative example. 

Its diversified $3.5bn fund began investing in crypto in November; in January it launched a $500m bitcoin fund. 

The exposure of its 26,000 clients, which range from rich individuals to sovereign funds, is rising. 

Bitcoin accounts for 9% of the value of its main vehicle, up from 5% originally, and the dedicated fund is now worth around $700m.

This maturation, however, has failed to tame the wild gyrations that characterise crypto markets. 

Bitcoin sank from $64,000 in April to $30,000 in May. 

Today it hovers around $40,000, having dipped to $29,000 as recently as July 29th. 

Every downwards lurch raises the question of how bad the fallout might be. 

Too much seems at stake for the cryptocurrency to collapse—and not just for the die-hards who see bitcoin as the future of finance. 

Algorithmic traders now conduct a hefty share of transactions and have automatic “buy” orders when bitcoin falls below certain thresholds. 

Still, in order to grasp the growing links between the crypto-sphere and mainstream markets, imagine that the price of bitcoin crashes all the way to zero.

A rout could be triggered either by shocks from within the system, say through a technical failure, or a big hack of a leading exchange. 

Or they could come from outside it: a clampdown by regulators, for instance, or an abrupt end to the “everything rally” in markets, say in response to central banks raising interest rates.

There are three types of crypto investors, says Mohamed El-Erian of Allianz, an insurer and asset manager: “fundamentalists”, who believe bitcoin will replace government-issued currencies one day; “tacticians”, who reckon its value will rise as more people invest in it; and “speculators”, who want to gamble. 

Though a crash would come as a monumental upset to the first group, it is least likely to sell out; the third, meanwhile, will flee at the first sign of trouble. 

To avoid a terminal stampede, the second group must be persuaded to stay. 

It is unlikely to do so if the price falls to zero.

A crash would puncture the crypto economy. 

Bitcoin miners—who validate transactions in exchange for a chance to earn new coins—would have less incentive to carry on, bringing the verification process, and the supply of bitcoin, to a halt. Investors would probably also dump other cryptocurrencies. 

Recent tantrums have shown that where bitcoin goes, other digital monies follow, says Philip Gradwell of Chain­alysis, a data firm.

The result would be the destruction of a significant amount of wealth. 

Investors who have held bitcoin for longer than a year, having bought it at low prices, would have less to lose, despite large unrealised gains (see chart 2). 

The biggest losses would fall on those who bought less than a year ago, at an average price of $37,000. 

That would include most institutions exposed to crypto, including hedge funds, university endowments, mutual funds and some companies.

The total value erased would go beyond the market capitalisation of digital assets. 

A crash would also wipe out private investments in crypto firms such as exchanges ($37bn since 2010, reckons PitchBook, a data firm) as well as the value of listed crypto firms (worth about $90bn). 

Payments firms like PayPal, Revolut and Visa would lose a chunk of growing, juicy business, which would dent their valuations. 

Companies that have ridden the crypto boom, such as Nvidia, a microchip-maker, would also take a hit. 

All in all, perhaps $2trn might be lost from this first shockwave, a little more than the market capitalisation of Amazon.

Contagion could spread through several channels to other assets, both crypto and mainstream. 

One channel is leverage. 

Fully 90% of the money invested in bitcoin is spent on derivatives like “perpetual” swaps—bets on future price fluctuations that never expire (see chart 3). 

Most of these are traded on unregulated exchanges, such as FTX and Binance, from which customers borrow to make bets even bigger. 

Modest price swings can trigger big margin calls; when they are not met, the exchanges are quick to liquidate their customers’ holdings, turbocharging falls in crypto prices. 

Exchanges would have to swallow big losses on defaulted debt.

The rush to meet margin calls in cryptocurrency—the collateral of choice for leveraged derivatives—could force punters to dump conventional assets to free up cash. 

Granted, they might give up trying to meet those calls, since their crypto holdings would no longer be worth much, which could contain the sell-off. 

But other types of leverage exist, where regulated exchanges or even banks have lent dollars to investors who then bought bitcoin. 

Some have lent dollars against crypto collateral. 

In both cases borrowers nearing default might seek to liquidate other assets.

The extent of leverage in the system is hard to gauge; the dozen exchanges that list perpetual swaps are all unregulated. 

But “open interest”, the total amount in derivatives contracts outstanding at any one time, provides an idea of the direction of travel, says Kyle Soska of Carnegie Mellon University. 

This has grown from $1.6bn in March 2020 to $24bn today. 

It is not a perfect proxy for total leverage, as it is not clear how much collateral stands behind the various contracts. 

But forced liquidations of leveraged positions in past downturns give a sense of how much is at risk. 

On May 18th alone, as bitcoin lost nearly a third of its value, they came to $9bn.

A second channel of transmission comes from the “stablecoins” that oil the wheels of crypto trading. 

Because changing dollars for bitcoin is slow and costly, traders wanting to realise gains and reinvest proceeds often transact in stablecoins, which are pegged to the dollar or the euro. 

Such coins, the largest of which are Tether and USD coin, are now collectively worth $100bn. 

On some crypto platforms, they are the main means of exchange.

Issuers back their stablecoins with piles of assets, rather like money-market funds. 

But these are not solely, or even mainly, held in cash. 

Tether, for instance, says 50% of its assets were held in commercial paper, 12% in secured loans and 10% in corporate bonds, funds and precious metals at the end of March. 

A cryptocrash could lead to a run on stablecoins, forcing issuers to dump their assets to make redemptions. 

In July Fitch, a rating agency, warned that a sudden mass redemption of tethers could “affect the stability of short-term credit markets”. 

Eric Rosengren, the head of the Boston Federal Reserve, has noted that regulated investors with liabilities similar to Tether’s are not allowed to invest in many assets, because it would represent “a stability concern”.

A cryptocalypse could affect broader sentiment even beyond firesales. 

The extent of this is unclear: more entities are now exposed to cryptocurrencies, but few have staked big shares of their wealth on them, so losses would be widespread but shallow. 

Crucially, banks are immune; and most will not rush to hold bitcoin on their balance-sheets any time soon. 

The Basel club of supervisors recently proposed making banks set aside an onerous $100 for every $100 in bitcoin they acquire.

But a worse case is not hard to imagine. 

Low interest rates have led investors to take more risk. 

A crypto collapse could cause them to cool on other exotic assets. 

In recent months the correlation between bitcoin prices and meme stocks, and even stocks at large, has risen. 

That is partly because punters reinvest gains made on faddish stocks into crypto, and vice versa.

A sell-off would begin with the most leveraged punters—typically individuals and hedge funds—in high-risk areas: meme stocks, junk bonds, special-purpose acquisition vehicles. 

Investors exposed to these, facing questions from their investment committees, would follow in turn, making risky assets less liquid, and perhaps provoking a general slump. 

If that sounds improbable, remember that the S&P 500, America’s main stock index, fell by 2.5% in a day after retail punters’ infatuation with GameStop, a video-game retailer, wrong-footed a few hedge funds.

For general market turmoil to ensue, then, you would need a lot of things to go wrong, including the price of bitcoin to fall all the way to zero. 

But our extreme scenario suggests that leverage, stablecoins, and sentiment are the main channels through which any crypto-downturn, big or small, will transmit more widely. 

And crypto is only becoming more entwined with conventional finance. 

Goldman Sachs plans to launch a crypto exchange-traded fund; Visa has launched a debit card that pays customer rewards in bitcoin. 

As the crypto-sphere expands, so too will its potential to cause wider market disruption.

Big Economic Challenges Await Biden and the Fed This Fall

Expiring unemployment benefits and the Delta variant add uncertainty to a recovery that has brought strong growth but an unusual labor market.

By Jim Tankersley and Jeanna Smialek

Officials say the most important thing President Biden can do for the economy is continue to make the case for more people to be vaccinated.Credit...James Estrin/The New York Times

WASHINGTON — The U.S. economy is heading toward an increasingly uncertain autumn as a surge in the Delta variant of the coronavirus coincides with the expiration of expanded unemployment benefits for millions of people, complicating what was supposed to be a return to normal as a wave of workers re-entered the labor market.

That dynamic is creating an unexpected challenge for the Biden administration and the Federal Reserve in managing what has been a fairly swift recovery from a recession.

For months, officials at the White House and the central bank have pointed toward the fall as a potential turning point for an economy that is struggling to fully shake off the effects of the pandemic — particularly in the job market, which remains millions of positions below prepandemic levels.

The widespread availability of Covid-19 vaccines, the reopening of schools and the expiration of enhanced jobless benefits have been seen as a potent cocktail that should prod workers off the sidelines and into the millions of jobs that employers say they are having trouble filling.

But that optimistic outlook might be imperiled by the resurgent virus and policymakers’ response to it. 

Big companies are already delaying return-to-office plans, an early and visible sign that life may not return to normal as rapidly as expected.

At the same time, long-running federal supports for people hurt by the pandemic are going away, including a moratorium on evictions, which ended on Saturday, and an extra $300 per week for unemployed workers. 

That benefit expires on Sept. 6, and some states have moved to end it sooner.

Federal lawmakers are also planning to repurpose more than $200 billion worth of Covid relief to help pay for a $1 trillion infrastructure plan. 

An infrastructure bill moving through the Senate would rescind previously allocated virus funds for colleges and universities along with unused unemployment benefits and airline aid. 

It would also claw back unspent funds from some expired small-business programs to help offset the plan’s $550 billion in new spending. 

Democratic leaders have been adamant that the Senate will vote on the infrastructure bill before leaving Washington for a scheduled August recess.

White House economists have said they see no need yet to consider major new measures to bolster the recovery. 

After months of blockbuster economic growth, falling unemployment numbers, and complaints from business leaders and Republicans that government support is preventing workers from taking jobs, administration officials remain locked into their current policy stance despite renewed risks.

Administration officials have said President Biden is not pushing to extend the extra $300 per week for jobless people. 

It’s unclear whether the administration will try to extend a program that expanded unemployment benefits to workers who would not typically qualify for them, including the self-employed, gig workers and part-timers.

Officials say the $1.9 trillion economic aid package that Mr. Biden signed in March, and that caused forecasters to lift their estimates for growth this year, has given the economy enough cushion to endure another surge from the virus. 

Mr. Biden has also vowed that the virus will not lead to new “lockdowns, shutdowns, school closures and disruptions” like last year’s.

“We are not going back to that,” he said last week.

White House advisers say the most important thing the president can do for the economy is continue to make the case for more people to get vaccinated. 

On Thursday, Mr. Biden asked states to use money from the March stimulus package to pay $100 to every newly vaccinated person and said the government would reimburse employers who gave workers time off to be vaccinated or take others to get shots.

“We have held the view from the beginning that addressing the pandemic and recovering the economy were inextricably linked. 

That continues to be true,” Brian Deese, who heads Mr. Biden’s National Economic Council, said in an interview. 

“But because of the progress that we have made in addressing the pandemic and in putting in place both historic and durable economic policy supports, we have a set of tools right now to address both of these challenges.” 

The Fed is taking an optimistic but wait-and-see approach. 

Central bankers voted at their July meeting to leave emergency support in place for now. 

They gave no precise date for when they may begin to reduce their help for the economy, though they are beginning to draw up a plan for paring back support.

Much like their counterparts at the White House, officials at the Fed are counting on solid economic data this autumn. 

Jerome H. Powell, the Fed chair, said last week that he expected strong labor market progress in the months ahead, partly because virus fears and child care issues should subside.

“There’s also been very generous unemployment benefits, which are now rolling off. 

They’ll be fully rolled off in a couple of months,” 

Mr. Powell said during a news conference after the Fed’s July meeting. 

“All of those factors should wane, and because of that we should see strong job creation moving forward.”

Administration and Federal Reserve officials have expressed hope that children’s return to schools and fading fears of the virus will encourage more people to begin looking for work again.Credit...Whitney Curtis for The New York Times

Mr. Biden told a CNN forum in Ohio on July 21 that he still sees no evidence that the supplemental benefits have had a “serious impact” on hiring.

But even if they had, he said, they would soon run their course.

“We’re ending all those things that are the things keeping people back from going back to work,” he said.

That stance carries some risk. 

While the economy grew faster in the first half of this year than it had in decades, the job market is still missing 6.8 million positions from its February 2020 level, and while policymakers are optimistic, it is not clear how quickly those jobs will come back. 

The economy has never reopened from a pandemic before, and nobody knows to what degree unemployment insurance is dissuading workers.

“Seven to nine million Americans should be working right now if the pandemic had never happened, so that’s a lot of Americans that we need to put back to work,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said on CBS’s “Face the Nation” on Sunday. 

“But is it six months, or is it two years? 

I’m not sure.”

If it takes workers more time to go back into jobs, it could make for a much slower economic recovery than either the Fed or the White House is banking on. 

Workers stuck on the sidelines without enhanced benefits might pull back on spending, hurting demand and slowing the rapid rebound that has been underway in recent months.

So far, administration economists remain heartened by the economic data. 

Officials said last week that they saw no evidence yet of the Delta variant’s hurting economic activity, and that they were hopeful that the more than 160 million Americans who were vaccinated would not pull back spending even if the variant continued to spread — making this wave of the virus less economically damaging than past ones.

And as government spending support for the economy slows down, the Fed is still keeping money cheap to borrow, which should continue to pad economic growth.

Shoppers in Los Angeles, where masks are required indoors. New public health guidelines could again chill some economic activity.Credit...Alex Welsh for The New York Times

Fed officials have said they want to see more proof of the labor market’s healing before they slow their monthly bond purchases, which will be their first step toward a more normal policy setting.

Mr. Powell said at his news conference last week that “we’re some way away from having had substantial further progress toward the maximum employment goal.”

“I would want to see some strong job numbers,” he added.

In the text of a speech on Friday, Lael Brainard, an influential Fed governor, said she wanted to see September economic data to assess whether the labor market was strong enough for the Fed to begin dialing back support, which suggests she would not favor signaling a start to the slowdown until later this fall. 

But her colleague Christopher J. Waller said in a CNBC interview on Monday that he would probably prefer to begin pulling back bond purchases quickly, if jobs data hold up, perhaps as soon as October.

Increases in interest rates — the Fed’s more traditional, and more potent, tool — remain farther away. 

Most Fed officials in June projected that they would not lift their federal funds rate until 2023 at earliest, because they would like the labor market to return to full strength first.

How rapidly the economy can achieve that goal is an open question. 

Employers regularly complain about the enhanced benefits, but even they have sent mixed messages on whether those are the main driver keeping labor at bay.

“Many contacts were optimistic that labor availability would improve in the fall as schools restart and enhanced unemployment benefits end,” the Atlanta Fed’s qualitative report on business conditions found in June. 

“However, there were several who do not expect labor supply to improve for six to nine months.”

Peter Ganong, an economist at the University of Chicago, said that if the pattern that he and his fellow researchers had seen in employment data held, he would not expect a wave of workers to jump back into jobs just because supplemental benefits expired.

“So far, we see small employment differences even when vaccines are becoming available,” he said. Mr. Ganong and his co-authors compared the job-finding rates of people whose wages were more fully replaced by supplemental benefits and people whose wages were less fully replaced. 

They found small and relatively steady differences, even as the economy reopened.

But Mr. Ganong cautioned that his research tracked the supplemental insurance. 

For many workers, unemployment benefits could come to an end altogether as extensions lapse, which may have a bigger effect.

There is plenty of room for labor market progress. 

People in their prime working years are participating in the labor market by working or searching for jobs at much lower rates than before the pandemic — and that metric has made little progress in recent months.

“Generally speaking, Americans want to work, and they’ll find their way into the jobs that they want,” Mr. Powell said last week. 

“It may take some time, though.”

Alan Rappeport contributed reporting.

Jim Tankersley is a White House correspondent with a focus on economic policy. He has written for more than a decade in Washington about the decline of opportunity for American workers, and is the author of "The Riches of This Land: The Untold, True Story of America's Middle Class."

Is Pax Sinica Possible?

Chinese President Xi Jinping seems to want to build a Pax Sinica, which would compete with – and even replace – the Pax Americana that has prevailed since the end of World War II. But realizing this vision will require China to overcome some daunting internal and external challenges.

Lee Jong-Wha

SEOUL – For nearly a decade, Chinese President Xi Jinping has been promising to deliver “the great rejuvenation of the Chinese nation.” 

This promise – which he dubbed the China Dream – took a clearer form with the introduction of the two centenary goals: building a “moderately prosperous society” by 2021 (the centennial of the founding of the Communist Party of China, CPC) and becoming a “modern socialist country” by 2049 (100 years after the founding of the People’s Republic). 

Now, China is one centennial down – and, according to Xi, it has achieved its first goal. 

Is the China Dream within reach?

While the second centenary goal specifies goals like strength, prosperity, democracy, harmony, and cultural advancement, it also represents a vision of China as a global economic and political power. 

Ultimately, Xi seems to want to build a Pax Sinica, which would compete with – and even replace – the Pax Americana that has prevailed since the end of World War II.

These are ambitious goals. 

But China is no stranger to ambition – or achievement. 

While the CPC made serious mistakes during the People’s Republic’s early years, it has since led the country in a remarkable economic and social transformation. 

For more than three decades, China achieved double-digit annual GDP growth. 

Hundreds of millions of people were lifted out of poverty.

This transformation was made possible by “capitalism with Chinese characteristics” – a system that has proved far more effective and durable than many expected. 

The Chinese state played a central role in mobilizing resources, building national infrastructure, supporting export firms, and facilitating inflows of foreign capital and technology.

China’s record proves that an authoritarian political system does not preclude development and in fact can drive rapid progress. 

In fact, on the question of which political system – dictatorship or democracy – is better suited to economic development, the evidence is ambiguous.

Daron Acemoglu and James A. Robinson have made the case that “extractive political institutions,” in which political power is concentrated in the hands of a small group of people, lead to “extractive economic institutions,” in which the ruling class exploits the majority. 

The result, they argue, is weaker incentives for most economic agents to engage in productive economic activities.

Yet China’s extractive political institutions have built inclusive economic institutions. 

Like authoritarian governments in East Asia – such as Lee Kuan Yew’s regime in Singapore and Park Chung-hee’s government in South Korea – China’s one-party, authoritarian government used its power to implement good economic policies, thereby achieving both political stability and strong economic growth.

This does not, however, guarantee that the China Dream will become reality. 

As many commentators have pointed out, China faces tremendous internal and external challenges, which could hamper economic development and fuel political instability.

For starters, after decades of strict family-planning policies, China’s working-age population is set to shrink by 170 million over the next 30 years. 

Meanwhile, rates of return on investment have fallen, productivity growth has stagnated, and China’s underdeveloped financial system does not necessarily allocate resources to the most productive uses, with unprofitable “zombie” enterprises and highly indebted local governments receiving far more than they should.

Today, China’s per capita income – $10,484 in 2020 – remains far below that of advanced economies, such as Japan ($40,146) and the United States ($63,416), and the chances of continued rapid gains are fading. 

The GDP growth rate in 2012-20 averaged 6.5% per year – far short of the double-digit figures of the past – and it is expected to decline to 3-4% over the next 30 years.

Moreover, China’s fast-growing private sector could pose a challenge to China’s state-capitalist model. 

Already, large private enterprises are reluctant to follow government directives as they once did.

China’s leaders are cracking down on those that defy them – most notably, Alibaba founder Jack Ma (for publicly criticizing government regulation) and ride-hailing platform Didi Chuxing (which flouted the government by going public on the New York Stock Exchange). 

But, while tech giants do need to be better regulated, this harsh approach could impede entrepreneurship and stifle innovation.

All of this could undermine the CPC’s legitimacy. 

With GDP growth flagging, widening income and wealth disparities across regions and social groups threaten to fuel popular frustration, and even political unrest. 

And this comes at a time when the CPC’s capacity to impose its will is dwindling, largely because of the Party’s own success in creating a strong middle class, which now comprises more than 700 million people, and it is growing fast, not least because of rapidly expanding education. 

Over the last 20 years, the enrollment rate in tertiary education skyrocketed, from 8% to 54%.

According to the sociologist Seymour Martin Lipset’s modernization theory, the growth of an educated middle class often leads to democratization, as this group demands the rights, liberties, and political participation they come to realize are possible. 

That is what happened in Korea in the 1980s, and the same could happen in China, though it is difficult to predict what could catalyze such a shift, and when.

The external environment is not helping. 

To sustain economic growth – and thus the CPC’s legitimacy – China must retain its position as a major global manufacturer. 

It needs to continue securing raw materials and intermediate goods, such as semiconductor chips, through a stable global supply chain, and it must continue exporting finished products to the US and other global markets. 

This will be very difficult to do, unless China can find a painless way out of its ongoing trade and technology war with the US.

Finally, to gain the world’s respect, China will need to start upholding democratic values and norms, and cultivating peaceful relationships with other countries. 

Pax Americana has survived for so long, because many countries, including China’s neighbors, rely heavily on the US for trade, finance, technology, and security. 

They will be reluctant to accept Pax Sinica, unless China offers them something better. 

And that must begin with pax.

Lee Jong-Wha, Professor of Economics at Korea University, was chief economist at the Asian Development Bank and a senior adviser for international economic affairs to former South Korean President Lee Myung-bak.