Pipes & Rails

 Pipes & Rails

Velocity of Money is "a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period." The chart above illustrates the historical rate of money usage, with gray-highlighted areas indicating recessions. Up until the mid-1990s the velocity of money was pretty stable. Something happened in the late 1990s however that permanently slowed the usage of traditional forms of money...the internet sparked a tsunami of credit card usage.

Although in circulation for decades prior to the internet surge, credit cards had typically been a "wallet utility" in place of cash or check, not the primary form of payment. With the rise of the internet using a credit card to pay for goods became the de facto solution (readers of this blog old enough to remember eBay prior to credit cards at the dawn of e-commerce will remember sending physical checks to sellers for auction wins!)

Credit cards, however, are not included in the velocity of money because they are considered a debt instrument, hence in the late 1990s we see a precipitous falloff in the velocity of money which usually would be consistent will a massive recession (we have had those as well, most notably the internet bubble, 9/11, 2005 commodities crunch, 2007-2009 global financial crisis, and of course more recently the global pandemic 2020-2021.) One trend has remained in an upslope though; credit card issuances and credit card transactions.

Consider the fact that there are well over 2.8 BILLION credit cards in circulation globally. Although that leaves several billion people uncredit-carded, the credit card companies are working hard to close that gap.  One of the most stunning statistics, and there are many which would make an actuary gleeful, are the daily number of transactions. A Nilson Report indicated in 2018 that there were approximately 1 billion transactions PER DAY. This report is simply fascinating and worth a read. 

OK, so what does all this credit card talk have to do with being a financial farmer? A lot. My theory is that we  should be looking to own velocity; put another way own the roads and tollbooths, not the cars. Or maybe more relevant to today's fascination with "cryptocurrency," own the pipes and rails that it travels over so you can make REAL money on transaction volume. Consider the potential of non-cash transactions projected in the coming years:

Until citizens have the opportunity to own a tax collection and enforcement agency like the IRS, the next best thing in the financial world is to own velocity. It is a bet on population. It is a bet on commerce. It is a bet on technology. The underlying currency itself isn't necessarily as important as the monopolistic positioning of the "pipes & rails" on which it travels; ie we should NOT really be concerned whether dollars or bitcoin or Swiss Francs are being swapped, but rather that we're getting a piece of every single transaction at scale.

Fintech

Esteemed readers of this blog aren't just savvy investors, but financial farmers willing to consider hip new innovations. Surprisingly, one of the biggest trends emerging is actually in finance! Financial Technology (Fintech) has increasingly become part of the lexicon as startups around the world attempt to disrupt normally staid banking, insurance, and financial institutions long-renowned for their complete inability to innovate. The Fintech runway ahead is long, especially in the development of new currencies which facilitate rapid, secure cross-border transactions. The banking monopolies are starting to look out of their frosted glass windows.

One of the most promising developments in Fintech is that of a "cryptocurrency," so termed because of the anonymity it provides in terms of transacting secure payments on a massive, instantaneous basis. Through the use of fragmented computer processing power, the most famous cryptocurrency has emerged named BitCoin.  It promises less friction (transaction cost), full global availability (on virtually any smartphone), and the signifiant potential to alter how "money" is stored.

The apt-termed label of "disrupter," for which Fintech has been associated, is uniquely interesting because it bucks convention in that Fintech upends the traditional banking model of "top-down" innovation. Banking centers like like London, Hong Kong, and New York have traditionally been at the helm of leading financial innovation, whether from a product packaging standpoint or the use of computers on exchanges. The rise of the new financial paradigm, however, is completely different; emerging markets are driving the adoption and growth of Fintech.

Fintech offers a parallel example of what occurred in consumer electronics; leap-frogging. Case in point, recently I booked a scuba diving trip to Papua New Guinea which is about as remote as it gets. Upon arrival after several planes, many hours, a bus, and a canoe, I was warmly greeted in the middle of the jungle by the indigenous population. Their first question? What model iPhone did I have? They had completely leap-frogged fixed transmission lines, cabe providers, and even satellite dishes! Papua New Guinea had literally gone from dense mountain jungles, living in extremely rustic and rural conditions, to using the latest version of the iPhone. This had multiple excellent outcomes in my view; they became connected to the outside world instantly, yet also retained and preserved their traditional environment. Fintech offers a similar promise.

The driving force behind Fintech is an underbanked and unbanked population that doesn't have access to a traditional physical branch network. Fintech will thrive for the very same reason ad-blocking software established a foothold and bloomed; consumers are price sensitive no matter where they live. Emerging market data plans typically charge for usage, thus in short order ad-blocking software won by common sense, so too will Fintech. Hence, a powerful force has coalesced; mass user need and mass user price sensitivity.

Given that the majority of the world's population does not have access to traditional finance such as banking, a mortgage, or life insurance, a stable cryptocurrency like BitCoin offers a compelling solution. Couple this with a developed world where hyper-regulation and declining growth has led to massive layoffs, billion-dollar fines, and exposure of incompetent politicians, the rise of Fintech, and especially a cryptocurrency like BitCoin, was bound to occur.

Two additional enablers of the Fintech revolution, in my eyes, are the rise of the Gig Economy, which is the ability for anyone anywhere to work remotely rather than in a corporate designated facility, and excess computing capacity. Andy Warhol would probably say today that: "Everyone in the future will work from home." While 90% of Americans still don't know what the Gig Economy is, it is becoming more and more of a generational shift from a corporate career to a flexible work profession. A dichotomy, with some third hybrid in-between, is arising from the Gig Economy members who are responsible for their own health insurance, retirement savings, and professional education and another cohort of unionized members of traditional employers. I suspect over time the employment picture will fully split into thirds; with one third being in the Gig Economy, another in the remnants of the traditional Corporate Culture, and the final third heavily Unionized. Fintech will play a role in all three.

If the Gig Economy and slack infrastructure are enablers, then ignorance of currency's history has to rank among the greatest challenges to innovation. Since the proverbial dawn of time, commodities in some form or another (sea shells, gold, gems, paper, or plastic) have facilitated the transfer of value in the form of portable money. There is no physical good, unless measured in computing power or keystrokes, that serves as the backdrop for a cryptocurrency like BitCoin.

The major innovations, value proposition, and success of Fintech, especially the use of blockchain technology, can propel the world into a more secure future as prosperity can be generated and harnessed by a greater numbers of people. The challenge, I believe, is backing these advances with true value, which I define as "portable toil." Toil is labor, work, energy, forgone capacity...all these things. (Personally I'm partial to using Element 79, aka gold, as the bedrock.)

The other great challenge for BitCoin, besides having no physical commodity linkage, is that BitCoin is finite. There will be a fixed number of eventual BitCoins. Successful currencies are "leaky." By leaky I mean that they are backed by a commodity, which preferably is difficult to obtain, and does not have a finite supply. Gold is a great example, and nugget size is particularly poignant. A nugget the size of a man's fist was seen frequently during the days of the Gold Rush in the Klondike, now a nugget the size of a peanut is increasingly rare. Extraction now focuses on smaller and smaller granules approaching the size of microscopic gold dust. There is even talk of mining asteroid gold! That's a good thing for a currency; difficult to add supply, but not impossible. It is leaky.

Ultimately, I believe the Fintech winners will unite successful elements of past currencies into a hybrid currency using blockchain technology with commodity-based backing to offer banking, insurance, and mortgages to the underbanked and unbanked while also driving a massive growth surge in the Gig Economy.