The Nation State of California

The Nation State of California

Governor Gavin Newsom accurately referred to California as a Nation State this week in a news conference. What is a Nation State? A bordered geography whose economic and political powers are so great as to make it equivalent to its own sovereign nation. Cue the statistics.

California is the most populous state with over 40,000,000 residents. It is vast; California's 160,000+ square miles make it the 3rd largest state. The California economy? Well with a Gross State Product of over $3 Trillion it is considered the largest NON-national economy in the world. To put that figure in perspective, The Nation State of California's economy is larger than the United Kingdom, France, or even India. But perhaps its greatest (or worst, depending on who you ask) asset is its culture.

That culture has spawned multiple, diverse industries concentrated in several major hubs, while also leveraging abundant natural resources. As a trendsetter, California amplifies both the best and worst extremes. What is rarely mentioned, however, in the formation of this Nation State utopia is the wealth and income inequality. 

How California got to be California is in large part due to the discovery of gold in 1849 which literally acted as a magnet drawing people from all over the world; in fact at the time it was easier to travel from China, Australia, or South America than it was from the then-distant East Coast. The hard scrabble life of a 49er helped create the first economic boom which resulted in California's statehood just a year later. It could be argued California never stopped drawing people from all over the world to throw their lot in and make a better life.

By definition a gamble is taking a chance, and with that very few will reach the higher echelons of wealth (power), while many will fail or succeed only enough to subsist. Over time, a generous social net has emerged as well as increasingly numerous regulations; the former provides a minimum level of survival, the later prevents small successes from becoming large successes as regulation is the friend of monopolies. How can a Nation State survive this dichotomy?

It has been said that all wealth derives from the land. Sometimes it is hard to see this when software companies make billions, while farmers are lucky to harvest peanuts. But the Nation State of California as well as the rest of the United States is built, both figuratively and literally, on the land.

A land of rights and opportunities should offer citizens equal access to the possibility of success without favoritism. It will be increasingly difficult to succeed in this Nation State for future generations when opportunity is locked up by either government via regulations or aristocratic wealth; the success of our Nation State depends on incentivizing small businesses, repatriating manufacturing, and investing heavily into intellectual capital. These investments will provide the infrastructure for future success. Invest like a farmer.

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.

Seeds of Gold

1/4 Ounce 92% Pure Alaska Placer Gold Nuggets

Lao Tzu said, "To see things in the seed, that is genius." As financial farmers we seek to identify opportunities that will provide us with the greatest return; with high returns, however, also come greater risks. A fine example for today's blog post is the "typical" Alaska placer gold nugget mine operation we see on such popular TV shows as "Gold Rush" and "Bering Sea Gold."

As we begin this discussion, it is vital to understand the acquisition of the very land from which this tremendous physical wealth is mined; originally termed "Seward's Folly" after U.S. Secretary of State William H. Seward, the Alaska Purchase was triggered by Russia's fear of war with Britain. Still recovering from the effects of the Crimean War and having a heavy debt to pay to the Rothschilds, Russia entered into negotiations with the United States to sell what was considered frozen wilderness. Negotiations concluded with a purchase price of $7.2 million dollars, or 2 cents per acre. The check below changed hands on March 30th, 1867.

America purchased an area twice the size of Texas and many in the general population considered it a barren wasteland. In 1896, however, the prevailing attitude changed as gold was discovered in Alaska. It triggered a gold rush which brought greater and greater numbers of prospectors, land developers, businessmen and scoundrels alike north to the virgin wilderness.

Thus begins our discussion of placer gold mining and a link to our Invest Like A Farmer philosophy. The earth does not give up its gold easily, and as previously discussed on this blog, I equate gold with toil. There is no "red-tag" sale on toil, it is constant, unrelating, and always present in the struggle of life. That is gold, toil. As a frequent viewer of "Gold Rush" and "Bering Sea Gold," I fully recognize the difficulty the miners have in acquiring the end product of placer gold nuggets. Hundreds, if not thousands, of hours go into the planning, development, construction, shipping, training, mining, and processing of a single ounce of gold. There is no easy way to consistently and successfully mine gold.

The vast majority of placer gold nuggets that are eventually acquired are generally small, even grain-sized. It is now rare to find large gold nuggets and it has even been said that a 5 ounce gold nugget is as rare a find as a 5 carat diamond. Why? The big nuggets  have all been mined and there is increasingly less virgin territory to mine which could result in large nugget discoveries. From a fixed commodity asset like gold, with an increasing demand from a larger and larger population, this is quite understandable. The natural resources of precious metals and gemstones by their very definition should increase in both real and monetary value based on population growth, cultural demand, and difficulty in obtaining these resources.

As financial farmers we then need to ask ourselves, from a utility and scalability standpoint, what investments do not necessarily have the constraints of a physical resource, yet provide similar increasing returns related to population growth, cultural demand, and difficulty in obtaining/creating these resources? I would argue the next gold rush is, and already has been, in the form of the internet, pharmaceuticals, and portable technology such as mobile phones, tablets, and to an increasing use smart watches. I see these three particular areas as having tremendous long-tail growth for anyone planning to Invest Like A Farmer; their respective scale and utility is nearly unparalleled. Gold, however, still has the timeless visual allure of a pure element, remains difficult to obtain, and has acted for thousands of years as a portable store of wealth. I have no reason to doubt the merits of this trend to continue.