Three critical conditions for any projects to work
- If the technology will work
- If there is an actual applicable use case
- If we can build a viable business model
Once these three conditions are met, it then makes sense to double down on investment and scale the projects rapidly.
The market is a representation of leveraged corporate earnings around the world.
Leverage occurs in two forms. Firstly, through corporate debts take on by companies in expectation of increased future corporate returns. Secondly, through borrows taken on by potential shareholders in expectation of appreciation in equity value due to expectation of future corporate returns.
Corporate returns are driven mainly by productivity. Productivity is a function of technology. Technology advancement is a function of innovation. The market will inevitably increase in size in the long run so long as technology advancement and innovation continues to persist.
Cyclical Boomz and Busts are the results of interplays between market participants and central banks (via fiscal policies and regulations) in reaction to prevailing leverage levels in the market.
Market capitalization in 2008 dropped by a total of 50%. Using this as a proxy, we can assume the effect of leverage is approximately 50% of the market capitalization.
Beware that the market can stay irrational longer than you can stay liquid.
Having ample resources and financing at the onset of a project promotes wastefulness financial habits which quickly becomes part of the culture if not managed properly. Being under-resourced during the initial onset of a project forces project leaders to be scrappy and judicious in the use of resources that are made available to them. This promotes thriftiness which quickly becomes part of the culture. Such a culture has the by-product of maximizing return on capital when more becomes available.
Being capital efficient is the most critical bar for running a business
Three examples of how capital efficiency leads to major growth
In addition to the above it is important not to overkill the problem with too complex a solution as engineers have a tendency to do so.
- Michael Hutchison, UC Santa Cruz
- Darrell Duffie, Stanford University
- Barry Eichengreen, UC Berkeley
- Mark Levonian, Promontory Financial Group
next sources of financial risks
- China’s corporate debt build up
- FinTech disintermediating traditional bankers and removing central bank fiscal levers
- cyber disintermediation
- hackers screwing around with bank account records
- corporate borrowers went away back in 2008. Banks forced to find riskier customers
- new technologies are taking away a lot of the lending business
- new technology
- new payment systems
- digital currencies – Singapore, Canada and China
- cloud provider concentration – Fintech everything on cloud
- US regulation backsliding risk
- management of federal government
- stress test rules
- reduction of 100-200 billion capital in US
- liquidity was the main trigger of the melt down
- Dodd Frank bill
- sovereign funds risk: Turkey is 3-4X of Greece economy
- china corporate debt risk as its financial system becomes more integrated with the rest of the world
- check for excessive short term borrowing
- plenty of shadow banking in China growing rampantly
- institutional funds risk
- banking system is still concentrated in top 5
- US absorbed 85% of low cost homes through Fanny Mae mortgages
- quicken is the largest mortgage generator
- largest banks in the world are all mainly Chinese versus Japanese back 10 years ago
- 2008 melt down
- caused by incompetent regulation rather than wrongful act of financial people.
- Prosecution is setup to go after cases they would likely win
- complexity of financial system
- complexity of corporate structure
- complexity versus usefulness of market actual needs
- populist risk: under funded pension fund. Because of really low risk rates
- financial consumers
- not a priority versus banks
- Dodd Frank act
- consumer financial protection bureau
- growth rate of structured notes?
- trade war
- economic consequences was very limited
- Brexit effect took 4 quarters to show up
- Volatility: is good if is driven by transparency
- leading indicators of financial crisis
- credit spreads
- credit to GDP
- rapid growth of housing credit signals impending recession
- contracts imposed on borrowers – reduced conditions are signs of excessive borrowing
- credit growth
- Debt to GDP
- corporate debt growth in China
- dump truck index – real estate boom
- number of cranes visible in urban skyline
- blockchains (mainly used for security keeping)
- Bank of America mellow – backup in blockchain
- securities – T+2 in block chain