capitalism

ARTIFICIAL INTELLIGENCE: 10,000 People at Citi Fertile for Machine Processing

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Nothing quite makes human people like us perk up more than being described as "most fertile for machine processing". And yet, that's exactly what Jamie Forese, the president of Citigroup told the FT about the investment bank's personnel. Out of 20,000 operating roles, he sees 10,000 potentially going away over the next five years. Now that 50% is a pretty big number, and not everyone agrees. HSBC, for example, see only 5-10% more automation potential over the same time period. So let's cut the pizza at 25%, and still gawk in disbelief.

Yet, this live data point is exactly in line with our analysis of what artificial intelligence will do across the financial services sector. In Augmented Finance, we identified $1 trillion of cost at play across banking, investment management and insurance. Behind that cost are those real human people -- 2.5 million of which are in the United States, and about 160,000 of which sit in the middle office of investment and banking organizations. Looking at the last 10 years only, the FT found 60,000 jobs cut from the top investment banks. The way things are headed, sounds like it's time to take programming courses at General Assembly.

None of us should be glib about the potential impact on the lives of employees of these companies. One of the ethical questions with which we struggle is -- whose responsibility is the welfare of these employees? Does Google and free machine learning software share a responsbility? Do CEOs of too-big-to-fail finance firms share a responsbility? Do investors looking for cost cutting share a responsibility? Does the consumer, wanting to pay nothing for banking, share a responsibility? And if yes to all, how do we come together to make a world where we celebrate not the cost cutting potential, but instead the potential human productivity growth? Is technology a shield or a sword?

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Source: Autonomous NEXT (Augmented Finance), FT (Citi), Look and Learn (Lamp Lighter),

CRYPTO: Economic Rent-seeking is Universal

Source: American Institute for Economic Research

Source: American Institute for Economic Research

The post-AI and post-crypto world will reconfigure many of our basic economic assumptions and requires a bit of philosophizing. So forgive our attempt, but we need to talk about economic rent-seeking and wealth creation. The Peter Thiel definition of building a successful company is to discover a piece of information around which a monopoly can be built. Building a monopoly is the primary reason that supports the venture capital industry model of rushing to massive unprofitable scale fist, and then creating moats and extracting value (i.e., economic rents from the monopoly/oligopoly position). See Amazon, which has leveraged not-caring about profitability into an unshakeable bedrock of retail. And once you have rent-seeking monopolies in place, they grow tendrils into media, politics, and customers -- and are very hard to remove. This snowballs and leads to extreme inequality, which is exacerbated by the power laws of software and the attention economy.

In the crypto world, there is a techno-utopia story that posits that a decentralized open technology ecosystem will be the antidote to centralized institutions that are controlled by questionable interests.  A key argument by bitcoin maximalists is that central banks print fiat money at will (often at the behest of bailing out Wall Street), which represents debt that erodes regular people's hard-earned savings through inflation. The argument goes that Bitcoin, on the other hand, has a fixed supply of currency and therefore cannot be manipulated to enrich some particular hegemonic party. This view is unsurprisingly contentious and only tells some of the story. We may be upset with instances when governments, which are to some extent accountable to citizens, use sovereign power to lower our purchasing power. But does that mean anyone and everyone else should be able to do the same?

Crypto currency and tokens issued by projects, through ICOs or reverse ICOs or airdrops or forks, are all a version of money printing. Mature capital markets do this all the time, through the issuance of debt and equity that time-shift financial resources to enable productive use. We allow and regulate such activity to encourage economic growth -- but may rightly be concerned that oligopolies have captured the process and are taking economic rents by being closest to the river of money. But does that imply that any individual at any time should be able to issue personal currency in billions of flavors? And that those most enriched by this process are those with the highest control of the attention economy -- i.e., the armies of bots pushing the latest altcoin, the ICOs with the best bounty programs, the biggest celebrities, the largest pump and dump Telegram groups? Disagreeing with central bank policy execution does not imply a right to be a Bernie Madoff.

While the stated motivation for much of the crypto movement has been to solve economic rent seeking by traditional finance and governments, we are now at a place in the industry where crypto is full of rent-seekers. Crypto investors have focused on owning the protocols of the new world. That means owning the highways on which information travels and taking a toll (through capital appreciation) any time someone uses the highway. Is that a productive outcome for global wealth distribution? Look at the blockchain name game and the reverse ICO phenomenon. Telegram is aiming to raise $2 billion for which it will give out no equity, with 52% of the tokens will accrue to the company owned by the founders. Looks like a self-minting of billionaires - a massive economic rent on controlling a popular messaging platform that dilutes the ecosystem. And that's not to mention the self-enrichment from premining in forks like Bitcoin Gold

But the traditional system is catching on! See Japan's largest bank, Mitsubishi UFJ Financial Group, which plans to launch its own coin in 2018. If it is okay for tech firms to extract this type of value, then those who are most familiar with the money printing process will do it too. As another data point, Bank of America has more blockchain patents than IBM, trying to create intellectual property control over a resource that is meant to be open source and free. We need only look at the sideways journey of the web -- with the loss of net neutrality and the walled gardens of Facebook and its newsfeed algorithm -- to understand the danger of unabridged rent-seeking behavior on public goods.

So after all that, what is the answer? We don't have many. But we know at least to (1) highlight that rent-seeking is a universal human trait that exists in all types of communities, and (2) avoid cultish beliefs that are allergic to evidence. Penny for your thoughts?

CRYPTO: Value of All Economic Activity (or Max Bitcoin)

Source:  WSJ

Source: WSJ

Ah, Bitcoin opinions -- it used to be that only geeks cared, then it was millionaries and financiers, and now everybody has one. With the advent of crypto-derivatives, institutional investors can bet on these opinions. You can steal one from this Bloomberg visualization telling us what every "important" business magnate thinks about BTC. Of course, most of these folks have little technical understanding, thereby lacking at least some subject-matter credibility, so why not check out the ground zero of Reddit or BitcoinTalk.

Assign no magic importance to today's price. The only thing special about $10,000 is that it is a round number, made special by the fact that humans are social animals that use shortcuts in their thinking. The growth from $1,000 to $9,839 vs to $11,483 is not meaningfully more or less impressive. Further, BTC can be subdivided into teeny fractions. So owning "1 Bitcoin" or "0.93 Bitcoin" or "0.0001 Bitcoin" is technically equivalent. No argument should be based on the unit. What we need to think about instead is the overall stock, and the best we have today is the total Price x Quantity of about $200 billion. Looking at all crypto, that is trending at $350 billion. But remember that this is also a fragile number -- it is both extremely volatile and also not particularly liquid. If I pay $100 USD for 1 percent of 1 percent or 1 percent of a company, that company would have a market capitalization of $100 million. How confident would you be that, let's say, another party would put in $5 million at the $100 million valuation based on my $100 USD?

So let's go on a numbers adventure. Suspend all disbelief (as you should when trying to take seriously an argument on its own terms), and imagine that Bitcoin is not a cryptocurrency but an inevitable technology that required first the global adoption of the internet. Or put a broader way -- the crypto economy, that uses blockchain as infrastructure, grows according to Moore's law and is not merely a foolish human meme

What can crypto become? See the spectacular visualization from the WSJ. Total US currency in circulation is $1.6 trillion, about 5x the size of global crypto. Total marketcaps on the Nasdaq in the 1999 DotCom bubble reached $3.2 trillion (adding $1.6 trillion in a year prior), which is about 10x. All gold ever mined at today's prices would be valued at $7.6 trillion, let's say 20x. Global foreign exchange reserves are at $10 trillion, or 30x. All equities of all public companies are worth $80 trillion, or 230x, and if we add in all other asset classes including alternatives and real estate, we can get up to $500 trillion. Another way to get to $500 trillion is to get the net present value of global GDP (obviously a silly exercise, but why not). That would be about 1,400x today's global crypto. And if we want to go completely bonkers, we can estimate the statistical value of all human life on the planet -- that would be $5 quadrillion, or 14,000x current crypto valuations. So there you have it. Now you know how much more it can go up, adjust your belief system accordingly.

Source:  Adamant Research    

Source: Adamant Research