A Final Throw of the Dice?

Stock markets, and financial markets in general, have often been compared to gambling casinos – even by those on the Right who defend their existence and personally profit from them. Hence it may not at first sight be especially surprising or shocking to find that the level and intensity of overtly speculative investment – as distinct from investment in support of production or service provision – on global financial markets has markedly increased in the last few years. It may nevertheless seem remarkable how far forms of naked speculation – with no obvious distinction from pure gambling – have developed in recent years. Two of the most conspicuous symptoms of this tendency are:

Cryptocurrencies

The emergence of cryptocurrencies as vehicles for investment is a phenomenon of the 21st century. Their history and rationale is long and complex as well as beyond the scope of a relatively brief blogpost and perhaps, it must be admitted, beyond the competence of the present writer fully to describe or explain. Their origin is generally dated from – and attributed to – the onset of the Global Financial Crisis (GFC) in 2007-8, when the best known cryptocurrency, Bitcoin, first appeared. In fact it seems their emergence was justified by the perceived need to provide an alternative form of money to the US dollar and other fiat currencies issued by governments (or central banks), particularly as they started to be printed in great profusion with the wide adoption of Quantitative Easing (QE).

In principle the merit of cryptocurrencies compared with fiat ones is that a) they are not issued by governments and cannot be manipulated by them and b) they cannot be printed by the issuers and thus easily subject to price distortion. Yet the mechanisms by which cryptocurrencies are in fact created, although they remain opaque, are such as to permit their quantity to be arbitrarily expanded, even without the ready resort to the printing press available to traditional fiat currencies. Hence it is not clear that there is any essential difference between cryptocurrencies – of which there are now hundreds in existence – and the traditional fiat variety, at least in this crucial respect of their capacity to be expanded in volume.

Other main attractions of cryptocurrencies include their potential for rapid and clandestine transfer of payments, which makes them attractive to drug dealers, money launderers and other criminals. This also raises concerns as to their potential to defraud ordinary investors and ultimately threaten the health of the financial system overall. However, there should be no doubt that the main appeal of cryptocurrencies to investors lies in their being a speculative store of value. In the case of Bitcoin, the most widely traded of them, its exponential rise in price – from under $1,000 in 2016 to over $60,000 in late 2021 – bespeaks an obvious attraction for fortune hunters, although some of these may have been rendered rather queasy by its subsequent rapid fall to under $40,000 in early 2022.

Altogether, it is clear that cryptocurrencies as an asset class should be viewed, primarily if not exclusively, as a vehicle for pure speculation.

This is reflected in the fact that a recent survey found that hedge funds expected to expand their holdings of so-called cryptoassets substantially. Instruments linked to cryptocurrencies, such as derivatives, are likely to proliferate: many traders use options to bet on bitcoin’s value. Fidelity, one of the world’s biggest asset managers, has also recently launched a bitcoin exchangetraded fund. Crypto’s move out of the shadows increases the risk that a sharp drop in price could shake confidence among major players, especially those that have funded their exposure through borrowing.

Special Purpose Acquisition Companies

Among the numerous indicators of growing financial fragility in global markets perhaps none is more telling than the massive upsurge in the volume and value of Special Purpose Acquisition Companies (SPACs) created since around 2017. These entities, also known as “blank cheque companies”, have no assets other than funds accumulated from different investors which are intended to be combined in eventual takeover bids for businesses yet to be formed or identified. According to the rules established in the US and other markets a SPAC must provide at its launch for an initial public offering (IPO) to take place within a given time frame (typically 2 years).

Although such SPACs have been around for many years, according to industry sources, from 2004 through 2018 approximately $49.14 billion was raised across 332 SPAC IPOs (an average of around 22 a year) in the United States, which then as now accounted for the overwhelming majority of SPACs. However in 2019-2020 alone a total of as many as 210 SPAC IPOs raised no less than $68 billion (over 30 per cent more than the whole 2004-2018 period), almost entirely by SPACs listed in the US, while provisional figures indicate this figure will have doubled again in 2021.

What accounts for such a sudden huge expansion of this hitherto marginal asset type? In fact a moment’s reflection might suggest that the obvious explanation is the massive acceleration in monetary growth thanks mainly to quantitative easing (QE), which caused roughly a quadrupling in the balance sheets of the central banks of the major developed economies between 2008 and 2020, while GDP rose less than 50 per cent in the same period. Against such a background what seems astonishing is that there was barely any inflation – at least according to official data.

A recent article in the Financial Times has drawn a comparison between this kind of evidently wild speculation and the South Sea mania of the early 1700s, when the public was encouraged to buy stock in a venture at prices far beyond what the profits of the business could ever justify, while a number of ‘bubble companies’ sprung up around the South Sea Company to capitalise on the frenzy. Famously these included one offering investors “an undertaking of great advantage, but nobody to know what it is”.

The acceptance, and indeed promotion, of such vehicles for what can only be seen as gambling pure and simple – with no economic or social benefit whatsoever, but carrying risk of serious loss to ordinary investors – is clearly an example of the ever more degenerate state of the global market economy. The only possible justification for them in the eyes of the authorities can be that they facilitate the growth in activity and of asset values in the financial sector. This calls to mind the remark of a former head of the Confederation of British Industry, and subsequently of the Financial Services Authority, Adair (now Lord) Turner, who described – as long ago as 2010 – some of the activity on financial markets as “socially useless”, much to the understandable fury of many City traders.

Such developments are perhaps sufficient evidence to demonstrate that contemporary capitalism has come to resemble a casino more truly than any of its earlier incarnations. Likewise, any idea that it can be regarded as providing a vehicle for the collective enhancement of public welfare is to be viewed as obsolete – to the extent that it has ever been valid.

What is more pertinent to note in the present conjuncture is that financial markets are more fragile than they have been since the outbreak of the GFC in 2007-8. While we may find it strange that they have remained so stable – with interest rates at historically low levels – for much of the intervening period despite the massive money printing that has taken place (QE), it now seems clear that this bonanza is coming to an end as interest rates start to rise and bond prices correspondingly fall. This seems likely to cut off the demand for SPACS rather abruptly as investors look to deleverage in the face of rising rates.

Unfortunately for all concerned, however, the likely continued inability of the authorities to prevent further interest rate rises threatens generalised bankruptcy for public and private sectors alike, bearing in mind the unsustainably high level of debt prevailing in both – a reality now recognised by a growing number of market analysts. As always, it is hard to foresee the likely response of the authorities and the markets to this emerging scenario, especially given their proven capacity to engage in effective market distorting techniques.

As for investors, we may expect the more intelligent ones to hedge their bets, at least until they get a clear indication of how the markets are reacting to an initial modest rise in interest rates – to, say, 2-3 per cent. If this can be made to appear consistent with a reversal of the recent surge in inflation, even if only with the benefit of some judicious market rigging, both bond and equity markets may stabilise or even resume their upward trajectory. Equally, it may reasonably be perceived that the authorities will readily respond to any undue investor nervousness by resorting to further bouts of QE. Ultimately, however, at some point in the near future, reality must surely assert itself in the shape of higher inflation and a corresponding sharp fall in asset markets.

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