We are all banging on about tokenisation this and digital that and not a day passes without something happening in these two spheres. But in reality, how big a deal are they?
I started from the point of crypto/blockchain/digital currency being about $2.5 trillion. Loads a money. I frequently say this represents around 1% of total world assets and therefore money managers should have about that percentage in it. What I failed to notice was that in truth, it is only about 0.002%. How come you may well ask. Working up from the bottom, Gold is about $23 trillion – so 10 times crypto for a start. Money markets $95 trillion. Global equities $128 trillion with bonds a close fifth at $145 trillion. But the big daddy of them all is real estate lumbering in top of the list at a staggering $654 trillion.
So global assets are about $1,047,000,000,000,000. I hope I’ve got the zeros right. Set that beside where we are with crypto and its offshoots and you can see we are getting very excited about not very much.
That said, with inflation now forever baked into the world economy (what a gift to fate!) money managers and finance professionals better start thinking how to cope with 6% inflation. Their job is to preserve wealth, but the most certain way you lose it is by not keeping up with inflation. And 6% you say? No no it’s like just over 3%. I hate to tell you that you are sadly mistaken. American inflation is now running at above 6%. Forget about interest rates dropping anytime soon. Plot that against the S&P 500 price over the last couple of decades and you are pretty much only just holding steady. What that means is you are not actually increasing your wealth and the “worth” of the US Dollar is sinking in terms of what it can buy. Empirically you can see that almost every day.
From about 1871 the S&P remained pretty steady and even WW1, frequently blamed for massive inflation, in reality was but a small blip – swiftly followed by recession and Deflation, perhaps the most anti-growth thing there is. It tootled along quietly up until 1987 when it had a bit of a boost, quickly followed by a bit of a drop. It rose strongly until about 2000, when it took a breather and fell back until about 2005, when it performed the equivalent of a buy signal by creating a double top. Since then it has been upwards nearly the whole time standing at around 7600 now with the expectation that it could reach 10,000 by 2030. If ever there was a hostage to fortune, saying those words is it.
But the good news is the nominal return over the long run has been about 10%, and the net of inflation rate between 4 and 6%. That is pretty impressive. There have been times when it hasn’t kept pace but so far it has always managed to catch up again. There appears to be a very distinct link between inflation and growth in stock prices. Is it that inflation means net profits increase over time? Is it that people buy today because they think it will cost more tomorrow? Or is it that an expectation of rising prices leads people to invest more and hold longer? I’m sure there’s a doctoral thesis in there somewhere. But I offer that to posterity.
The most interesting thing happening at the moment is the distinct caution being shown on all fronts. Crypto is struggling if not actually losing ground. Rates on money market accounts are having to rise to keep the cash flowing. Stock exchange indexes are pretty much flat lining if you bleed out the ups and downs of the oil market. And property? Good question. Anecdotal evidence ie the number of emails being sent out to potential clients from estate agents has tripled in the last seven months. People I haven’t heard from in 3 years are sending me reduced price properties. And gold? It ought to be booming but maybe it’s already done that and now it is consolidating.
All that said tokenisation appears to be humming along nicely. The SEC and others have laid down pretty much how they want to see it working and it aligns with the existing TradFi world (as it should). There will for sure be lots of projects and initiatives over the piece that simply don’t make it (Question: why does a project not make it? Answer: It’s because someone had a wonderful idea that no one wanted. And the people working on the project didn’t check by undertaking a program of validation research).
Kevin Warsh has a nasty baptism as Fed Chair. Trump wanted him because he was seen as a dove on interest rates, which may well be right. But the way things are going, decreasing rates would be like hosing a fire with petrol. I have to say I read Warsh somewhat differently. He has more ammunition than just the rate and in any case the other Fed members most certainly have their own opinions. I’d be very surprised if rates come down this side of Christmas barring accidents. I see a period of retrenchment rather than expansion in the money supply. That said, Warsh is not beyond adjusting various things to make a boom more likely, and that may well be the way he plays it. I am looking forward to watching this next few months in America.
It has been made very clear there will be no CBDC there, but rather commercial stablecoins will be the preferred method of cross-border settlement. XRP is in the mix there too with new licences being granted almost every week. The UK has undertaken extensive consultation on a UK CBDC, so that we are out of step as things stand. I think ultimately it is unlikely it will happen here. The one thing that is making life very difficult is the number of scams and frauds that are being perpetrated in the name of crypto. I was sending not a lot of BTC to a colleague in America via Revolut, and it was stopped by them. I may say I had sent this way several times before. I spent an hour talking to their crypto fraud department (who were actually very good and very thorough) and which highlighted some of the new ways people are getting cheated by scammers. If anyone had approached you in the ways Revolut discussed you would for sure tell them to cancel the send. As it was, I was able to prove who the receiver was and that it was a legitimate payment. But it’s a nice feeling that the banks and crypto platforms realise that they are going to have to police what still remains the wild west for a long time.
The most important thing of course is education about crypto and how it works. That is very definitely what Revolut is doing its best to achieve.
