Valuing Information v. Money: How Silicon Valley Fell for Wall Street
Invasions into incumbent finance by the FINTECH 100, the some 5,000 blockchain-based Silicon Valley startups and cryptocurrencies continue accelerating due to global interconnectivity. Good reasons why conventional traders and asset-allocators will need to pay close attention, starting with several books, including Don and Alex Tapscott’s Blockchain Revolution (2015).
Today’s global terrain of change and transformation needs a wider lens to encompass its deeper conceptual paradigm shifts. The planetary context is best seen through the eyes of natural scientists: from Charles Darwin to physicists including Albert Einstein, Ilya Prigogine, Eric Chaisson, mathematicians including Rene Thom to information theorists including Cesar Hidalgo in Why Information Grows: The Evolution of Order from Atoms to Economies (2015).
This underlying paradigm shift is from finance’s reliance on traditional economics based on assumptions of material scarcity, competition and conflict over resources extracted from the Earth and other species -- to the new multi-disciplinary systems view of abundance, non-rival goods and services, knowledge-sharing, open-source cooperation and the underlying co-evolution seen in natural ecosystems.
Every Wall Streeter knows that information drives markets and is more valuable than fluctuating fiat currencies. Nick Gogerty, author of The Nature of Value (2014) knows all this. He is a former Wall Street quant, employee at hedge fund Bridgewater Associates and London-based propriety forex trader, and his advice for current investors in this book is invaluable. Gogerty explains why price no longer reflects value in today’s markets. We see mounting evidence of this fatal divergence, due to the flaws in economic models still driving too many financial decisions in business, government and investments, focused on past price data. All are still backing into the future looking through this rearview mirror, since pricing models are usually based on history and assumptions based on past performance.
Many critics have analyzed the failures of conventional finance and risk models leading to the crises of 2008 and beyond (see my book reviews on www.seekingalpha.com), yet few have the breadth of experience and inter-disciplinary knowledge of Nick Gogerty. He traverses the paradigm shift he personally experienced as he left Wall Street and finance and entered the territory of the Information Age and planetary knowledge. Just as investors in mining fossil energy and minerals needed to learn geology, now they must study earth systems science, developed with NASA and other space agencies’ using earth-orbiting satellites beaming real-time data to human decision-makers. This knowledge includes monitoring oceans, biomass, desertification, atmospheric conditions, shifting to ecology and biological models with the understanding that our planet’s income is the daily free photons from our Sun -- the source of all life on Earth.
Gogerty sees today’s global transformation beyond price and financial models, as similar to my Mapping the Global Transition to the Solar Age (London,2014), with a Foreword by NASA Chief Scientist Dennis Bushnell. This kind of new worldview led Gogerty to his latest enterprise, SolarCoin.* This new info-currency is a rewards program for enterprises, cities, communities and individuals who capture the Sun’s daily energy income. He says “Society now has the accumulated knowledge and capability to deliver cheap solar electricity that gets cheaper by the day. In many parts of the world, solar electricity is a cheaper and better alternative for energy” (pages 93). I expounded this similar view in my The Politics of the Solar Age (1981,1988) after my six years in Washington as a government science-policy wonk -- witnessing first-hand the struggle between incumbent fossil and nuclear energy interests and the budding renewable energy and efficiency sector. Today, crowdfunders, Mosaic, Wunder Capital and Crowdfund Capital Advisors are serving this sector, along with private equity groups including Generation Investment Management, Generate Capital* and many others. Today oil prices are risky on the upswings and downturns, amplifying either gluts or shortages, both driving the global shift to electric vehicles.
Economics is usually politics in disguise and prices are distorted by subsidies, tax policies and the “externalizing” of costs still permitted on company and government balance sheets. Torque has been building up in the US political system’s continuous blocking Solar Age technologies for decades. In 2015, the dam began to break worldwide as the United Nation’s (UN) 195 member states adopted the new Sustainable Development Goals (SDGs) and the Paris accords on climate change, with timetables for each country’s shift to low-carbon, ”green” technologies. At the G20 meeting in September, 2016, in Hangzhou, China, Premier Xi of China and US President Obama both ratified these Paris accords. China now leads the G20, and its central bank, the Peoples Bank of China (PBOC), and Britain’s Bank of England are now spearheading the G20’s Green Finance Initiative along with China’s adoption of the circular economy model (see “G20 Embraces Green Finance”).
As Gogerty reminds us, knowledge advances through “inos” (units of innovative information). This process accords with the step functions in nature described by biologist Stephen Jay Gould, as “punctuated equilibrium”. Thus, changes in human societies and technologies follow this same process, as we see in today’s accelerating rates of step-function changes. Similarly, human perception is expanding in evolutionary leaps due to today’s unprecedented connectivity and global interaction. Accountants are keeping up with these changes as they serve real world corporations now shifting to broader valuation models (www.cimaglobal.com). Meanwhile bloated ranks of the economics profession continue to bloviate at conferences and in academic ivory towers -- still exhibiting theory-induced blindness and cognitive biases. Their cognitive capture of regulators, politicians and many legacy business leaders encouraged the complacency now shattered by the disruptive 2016 election campaign in the USA, the backlashes of Brexit and populist uprisings in the European Union (EU).
Gogerty offers his roadmap to asset-allocators on How To Invest in the Adaptive Economy -- the sub-title of his book. I recently connected with Gogerty and other infotech innovators at an expert workshop on FINTECH and its disruptions of incumbent finance and legacy firms, convened by the UN Inquiry on Design of a Sustainable Financial System (www.unepinquiry.org). Many experts present agreed with the view that value and valuations in financial markets were now morphing beyond fiat currencies and over-burdened central banks (see my Bernanke and Friedman Were Right: Helicopter Money or Qualitative Easing?). This failure of money circuitry is driving the shift toward pure information-based transactions and trading on electronic platforms and barter-based exchanges.
The task now is to stitch together workable interfaces between the old currency-based systems and the newer information-based systems of exchange, so as to assure: trust, verification, custody, property, insurance, contracts and new global standards, such as Blythe Masters Digital Asset Holdings addresses with a focus on public interest criteria. Many see the blockchain startups as providing secure distributed ledgers as described in Blockchain Revolution and underpinning SolarCoin, Ethereum, Everledger and many other firms of the FINTECH 100 firms offering direct transacting and trading without intermediaries and financial middlemen. In my background paper for this workshop “FINTECH: Good and Bad News for Sustainable Finance”, I credit the firms now lowering barriers and democratizing access to financial services for those billions still left out: for payments, loans, transfers of remittances and funds, crowd-investing for local businesses, all at much lower cost. The bad news includes the cooption of these firms, platforms and blockchain models by incumbent giants including Citi, Barclays and others, for the purpose of protecting their business models – overlaying their byzantine layered IT systems purely to lower costs and increase profits by “paving their obsolete cow paths.”
The more fundamental bad news is in the prevailing currency-based worldview and price system -- less a measure of real value under new conditions, and more a measure of human ignorance of how planet Earth actually functions. This culture persists on Wall Street and is mimicked in Silicon Valley. Therefore, the fintech disrupters’ value system must encompass the new realities and metrics of the Solar Age, or perpetuate the narrow pricing models that helped crash markets in 2008 and still pose threats globally. A case in point is the contrast in values behind the cryptocurrencies Bitcoin and SolarCoin – both based on blockchain technologies. Bitcoin, embraced by Silicon Valley, is based on the values of speculation, accumulation, hoarding, greed, individualism and sometimes criminality, while using vast computer power and fossil-based electricity -- a thermodynamic black hole unlikely to be sustainable. SolarCoin is the opposite: rewarding only those who have learned to successfully capture the Sun’s free photons as efficiently as green plants in photosynthesis: life’s great technological achievement and the basis of human survival. While Bitcoin is entropic, SolarCoin is negentropic, another “ino“ evolving our human knowledge base.
Thus, we turn to examining the value-system and culture of Silicon Valley and most of its fintech startups and their many trivial “innovations”. In Chaos Monkeys (2016), author Antonio Garcia Martinez, former Goldman Sachs trader, tells all in a frightening, hilarious look at the often infantile “frat boy,” testosterone-driven, emotional adolescents leading most of Silicon Valley’s startups, as well as giants Amazon, Microsoft, Facebook, Twitter, Instagram, Snapchat -- all focused on Wall Street’s price system and currency-dominated values. Thus, most of these companies focus on competing for eyeballs to sell to advertisers and data-brokers and aspire only to cash out in high-multiple IPOs.
Martinez is of Cuban descent, rejecting both Fidel Castro’s communism and Silicon Valley capitalism with equal disdain. He is deeply immersed in human history, philosophy, literature, art and culture and brilliantly juxtaposes these historical insights to illuminate the mindless sophistries of the Valley. Chaos Monkeys is a great read, with all the blow-by-blow personal encounters, as a startup CEO of AdGrok, and its deals with Y Combinator, venture capitalists on Sand Hill Road and various angel investors. He describes working with the bureaucrats at Facebook as fascism with their slavish allegiance to its totalitarian founder “Zuck”. This “Big Brother” culture is also behind the algorithms that now run our lives and circumscribe our experience, including the hyping of the Internet of Things (IoT) which now invades our homes, monitors our babies and controls our identities (see my Artificial Intelligence + Algorithms = Assumptions).
After succumbing to all the “big money” temptations in the Silicon Valley lifestyle, author Martinez rejects them and returns to his sailboat in San Francisco Bay. The deeper knowledge and broader values he expresses in Chaos Monkeys have now made him a literary icon and best-selling author. Such a path was also followed by author Michael Lewis – from a Wall Street insider at Salomon Brothers to the success of “Flash Boys” and the movie of his “The Big Short”. Let us hope that Silicon Valley’s values evolve beyond infatuation with money and technological trivia toward deeper knowledge of humanity’s current condition on this planet. If not, their further takeovers of incumbent finance will be bad news for our common future.
* I am so impressed with SolarCoin that my company Ethical Markets has exchanged logos with SolarCoin on our websites.
* I am a Limited Partner.