Investing money for the future is a topic we like to cover on Let’s Compare Bets.com. Sporting betting, financial betting, and investing all have roots in a similar place. Investing is not all that different from betting. For people who want to invest their money directly into financial markets there are striking similarities. To have a long term investment strategy you have to take a view or form an opinion about the future in order to improve your financial circumstances. A future that is shaped and moulded by a variety of different influences making the end result difficult to predict. This post will focus on how rapidly increasing technological progress will help shape the future.
In the same way as someone who really enjoys football or horse racing can take an opinion on the outcome of a match or race, this post is another in a series of posts analysing financial markets with a view to help investors: possibly people who want to take a ‘DO IT YOURSELF’ approach to providing for a pension, a nest egg, or helping your kids buy their first home. We will take a quick look into the past, then look at what is happening now, how things may turn out in the future, and then how we can profit from it. As anything in life remember to do your own research (DYOR) and caveat emptor.
Change is and has accelerated at an exponential rate at least according to Ray Kurzweil. So it’s worthwhile making a few pie in the sky predictions to help with our analysis not least because it’s makes an otherwise dry topic for some, much more interesting.
So what does the future hold for financial bets and investments?
Have you ever heard the saying ‘ you don’t know where you are going, until you know where you’ve been’. Before taking a journey into the future let’s look at what’s happened in the past that will influence potential returns on our investments.
A big trend affecting all financial investments has been intervention in financial markets by national central banks and actions of political governments. Recent history has seen a massive build up in the supply of money in society. Power in the world has been centred on a capitalist structure, which the USA has been presiding over as current global superpower. USA has overseen a massive increase in global wealth as a result of adapting monetary policy so that money itself is no longer linked to gold. A system that only had it’s roots in tradition. This was a system that worked on the notion that gold is a finite resource (as Gold was made in exploding stars and there is only so much of it available on earth); it has very good properties for use in industry; and for use as money. For instance it does not react with the environment causing it to degrade. For these and other reasons it has worked as a means to pay for goods or services. If the whole financial system and society fell apart people would probably resort to using gold to pay for things, as well as, trading skills and commodities like food.
Removing the link to gold in the monetary system allowed financial institutions to create more money by providing credit. Deregulation of banks and financial institutions amplified this trend. More credit for consumers, business, and organisations. Financial historians and academics have known that these problems have been building up for decades. Negative consequences have included a number of financial crises over time which have been getting bigger and bigger in line with the amount of credit and money in the system. Lehman Brothers collapsing in 2008 was a result of this phenomenon. Many people have criticised the system since the crisis and the negative affects have been felt globally: despite this there have been significant positive effects.
An increase in the amount of money in the system has pushed up the value of various financial assets, from houses, land, companies, and commodities. Consequently people are more wealthy. People from around the world have benefited from an unprecedented increase in wealth, due to the effects of globalisation and free markets. Global financial markets and trade links have become more and more intertwined. Also people have been free to move around more easily. Despite there being massive imbalances in wealth between rich and poor significant numbers of people have been lifted out of poverty due to this process. Infant mortality rates have dropped and on various measures things have been looking increasing rosy.
Lehman Brothers was the bank that the Federal Reserve in the USA allowed to fail. It wasn’t to big to to blow a fatal hole in financial markets but almost. Since Lehman Brother’s a big force driving the future of financial markets and returns that readers here can expect on their investments has been central bank intervention in markets. They have been the ones keeping the wheels on the wagon.
Debt leverage and the amount of risk in the system is still very high and has not gone down since the last financial crisis but gone up. Let’s look at some banks to see what is happening now. Deutsche Bank (DBK) is on a list of important banks to the global financial network of banks, insurance institutions, and financiers. Deemed to big to fail. In simple terms Lehman Brothers had assets of $639 and $619 of liabilities. Compare that to DB which has Assets of 1.64 trillion Euros and liabilities of 1.58 trillion Euros. Banks do something unique which is to account for their loans as assets. Essentially a stream of future interest payments. The trouble with this situation is that it only takes a small change how many loans are actually getting repaid to change the way the bank accounts for this debt. If they state in public via their accountants or via the credit ratings agencies that their loans are more risky (or less likely to be repaid) it will cause a domino affect with global repercussions. Another interesting stat for DB is that they have lent out 100 Euros for every 11 Euros of cash that they can access quickly. That does not sound so bad. There is a big BUT. The system has allowed all these loans to be classed as being low risk. In reality there is a lot more risk on their balance sheet than has be reported. A small change in the balance of assets and liabilities would wipe out DB and topple the first domino or rather multiple dominos. Just one more stat about DB before we continue. One of the assets reported on DB’s company accounts are financial derivatives. Derivatives introduce something called counterparty risk, which is the risk that either DB or the holder of the other side of the contract can not live up to their obligations. What is the value of derivatives that DB has? $72 trillion dollars. That’s right, $72 trillion. More than the money that the USA as a country makes in a year. Using dominoes falling as an analogy does not really do it justice. If DB goes down it will take HSBC and Credit Suisse with them straight away and the rest will be history.
So, DB is too big to fail and the authorities can’t let it happen. Who has been bank rolling and stabilising financial markets? It’s National Governments in the USA, UK, Europe and Asia. Banks in the USA have now been fixed. The UK has almost finishing fixing UK banks. Next it’s the turn of European banks. Europe has not really started the process of fixing the banks yet, as this example of DB shows. Germany is really the one that controls Europe’s financial authorities. Germany have refused to bail out Greece with their financial difficulties and have instead imposed austerity on the country. The trouble is that Germany sitting on the biggest financial time bomb of all and that’s DB. Specifically DB’s operations in the USA. Germany are stuck between a rock and a hard place. How can they bail out one of their own banks and refuse to bailout Greece (then there is Italy, and so on)? They’ll have to come up with something because DB is too big to fail. Either way it’s going to be another problem for the European project in it’s current state. The idea of a united Europe is being questioned and problems with DB will fuel the rise of populist political parties who want to leave Europe.
How have authorities stabilised the system?
By creating more money. Otherwise known in the media as printing money, which, is the same as adding zeros to the number for national debt of governments. Central Banks have used a range of methods including quantitative easing or money printing. The USA has done this to the biggest extent.
So what are the potential end games for all this, and what should we do with our investments?
Something that can not be ruled out entirely is financial collapse leading to war and the end of civilisation as we know it. You know, doomsday. Strong institutions may break down like universal health care, insurers, and universities causing chaos to ensue. No doubt countries with competing ideals and financial interests could be involved. Perhaps involving China and Russia. China are on par with the USA when it comes to superpower status on various measures.
Doomsayers are rarely right and all out war has to be the most unlikely outcome. Furthermore, what would be the point. China has benefited massively from a new era of wealth creation. China rely on globalisation to a massive extent and would not want to disadvantage themselves, and of course it would cause many deaths in the process. China also has lots of debt and needs trade to keep their economic progress in place. Not forgetting that China inspired technological endeavour, viz, the ancient Chinese gave us the compass, gun powder, paper making, and printing during the Tang Dynasty, which was another period of fast moving technological change. Now, China as brought us quantum entangled satellites, based on Einstein’s speculation of what he called spooky action at a distance.
More likely scenarios are tensions that result from the gradual shift of financial power from West to East (mainly China, India, and perhaps Russia – but they are holding on to the communist ideals more firmly than China). When it comes to defense, America has a massive and very technologically advanced war machine with which is can help shape the future to maintain trade and the capitalist structures that have served western nations so well. A bit like Britain was doing during the times of the East India Company (receiving Royal Charter from Queen Elizabeth 1 in December 1600), which was another example, similar to the banking industry now, where Government used a light touch approach to regulation which eventually lead to trouble.
Countries will most likely muddle through because an increasing number of trading partners are in the same financial situation. Trade barriers like tariffs may make a come-back, likely causing economic imbalances. Furthermore, the current situation in the South China Sea may lead to a shift in global trade.
What’s more likely to happen?
Let’s assume civilisation doesn’t nosedive into the dark ages, but, rather technological advances and advances in cooperation between countries will evolve not devolve into chaos. That said, here are some possible changes in the future that can help us along this path.
Governments increasing using Standard Drawing Rights set up by the International Monetary Fund (IMF). The IMF acts as lender of last resort of nations globally and helps ensure the survival of members’ financial systems in a crisis. The SDR has allowed countries with lots of currency reserves like China to provide liquidity for countries with no reserves or low reserves which keep trade going. Foreign currency reserves are exchanged for SDRs. The reserves can then be used to stabilise the financial system of the other members of the IMF. Let’s Comapre Bets is here to entertain and inform so we don’t want to get stuck down in too much detail, but, SDRs have helped allow countries like the USA and UK to have their cake and eat it (by creating money out of nowhere to pay for public services, pensions, and holding up the whole financial system). The extent to which the drawing rights have been relied upon over the decades has been increasing at an almost exponential rate (roughly in line with the amount of money that has been created in the system). Commentators on the SDR system say the process has it’s drawbacks. But for the system to carry on working change will happen as surely as David Bowie reinvented himself artistically on each album he produced.
Currently the SDR system is like a pressure release valve for the global financial system. However, the extent to which it is being used is increasing. Change that has been suggested includes allowing every country to be included in the SDR not just a select few as is the current situation, and, making the mechanism of the system faster and more efficient. In turn increasing the stabilising effect. Further down the line the SDR could herald a global currency which would remove lots of the problems associated with trade disputes and competitive currency manipulation which leads to geopolitical tensions. Now countries are getting the means and technology to make a global currency work, that may be facilitated by blockchain technology. Blockchain would allow currency transactions to be de-centralised, give more control to the end to end users, and increase security. No doubt this will take a long time because the de-centralising effect of this technology would help put central bankers out of a job. Blockchain does have other more immediate uses which will be breaking into our worlds soon. Blockchain will be another driver of economic productivity but will also put jobs at risk or at least force change in how jobs are allocated to people.
A more global and decentralised currency system may also increase the chance of a worldwide debt Jamboree. Everyone rights off everyone else’s debt, simple. In reality nations are already doing this via financial engineering (government debt getting refinanced into non existence by extending maturities on lower and lower interest rates).
What about further in the future?
A new era on industrialisation could be heralded by technologies making the current financial system obsolete. If food and other resources where no longer scarce (in terms of the economic concept of scarcity) a competitive system of wealth creation would no longer be required. Eventually of course, we (humans) would run out of space, which we already are. That means space ships and colonisation of other planets is needed! Yes, this sounds a bit pie in the sky, but, it’s not as unbelievable as it sounds. Here’s why?
Now technology is helping to revolutionise industry and science. Take CERN for example. In the words of Yoda (sorry to add a reference to star wars for the un-initiated), but a nuclear physicist I am not, so, I will not explain how CERN works but give summary of what they are doing. Simply put, to me, it seems as though CERN is working out what nothing is (the smallest elements of existence and the fabric of what holds the universe together). If scientists know this then surely it is possible to work out how to make something out of nothing. Clearly this isn’t a new concept for anyone who has ever watched Star Trek (the American science fiction entertainment franchise). People in Star Trek Next Generation had access to replicators which allowed the crew (of starships) to materialise things out of thin air. That’s right, you want a coffee, you’ve got it. A new iphone, no problem. Who’s going to need money when you’ve got everything you need. Star Trek next generation was set in the 24th century, but, who knows we may not need to wait that long. Scientists believe that powerful lasers are the key to making something out of nothing using the principles laid down by Einstein’s equation E=MC2. A European project is currently producing the most powerful laser ever made for this purpose! Cool. Something else that will definitely change is how Europe works, viz, the migrant crisis and currency that is doomed to failure, but, for nothing else an incarnation of Europe must survive if for nothing other than the exciting scientific projects they are bank rolling.
It’s not just lasers. European research funding is also helping produce unlimited cheap energy by building a massive Tokamak. Based on the original idea of Oleg Lavrentiev, a Soviet physicist in the 1950s. Two other Soviet physicists called Igor Tam and Andrei Sakharov rolled with the idea and progressed a project on nuclear fusion reactors. Tam became an anti war campaigner after World War 1 in 1914 but later went on to work for the Soviet thermonuclear bomb project. Sakharov was more committed to the soviet nuclear project but much later he became an advocate of civil liberties and civil reforms in the Soviet Union. No doubt, if it wasn’t for the funding provided by the Soviets for building a nuclear bomb a design for a thermonuclear fusion reactor called a Tokamak would never have been born.
For film goers you may have noticed Tony Stark’s science project in the Iron Man series. That’s based on the idea of a Tokamak. Anyway, there are competing designs and ideas for a nuclear fusion reactor based on these designs. Europe is building (in France) a large one (in line with France’s socialist roots) and America is going for a smaller more modular design (a smaller and modular design is easier to make commercial – more in line with the USA’s capitalist roots).
The scientific goal is to have a reactor that is self sustaining, does not need to burn fossil fuels and does not create harmful nuclear waste like nuclear fission. Tokamak design uses elctromagnetic traps to contain plasma at high temperature and pressure to sustain a fusion reaction like those that happen in our Sun. Due to relatively simple developments in the design of powerful electromagnets. Researchers at Massachusetts Institute of Technology are close to sustaining a economically viable fusion reaction in a smaller modular reactor. Cheap and plentiful energy will take more scarcity out of the financial system and reduce the negative impacts already being felt by people experiencing environmental change (caused by burning fossil fuels or accidents involving fission reactors).
Such fundamental change in industry and trade may also help shape the political landscape of the future. It seems ironic that Soviet scientists encouraged by the Kremlin to make weapons of mass destruction in order to further Soviet and communist ideals may lead to the death of communism, and, capitalism as we know it. Instead they may be replaced by a Utopian socialist idealist system like that popularised by TV shows like Star Trek!
Bringing things back down to earth let’s cut to the case: many of these things are going to pan out over very long time scales, and, you like us may be thinking how am I going to fund my lifestyle when I retire, the kids are going to need a good education to ‘cut it’ in an increasingly competitive job market, how are they going to buy their first house, how do we pay for the trip to South America we’ve always wanted (assuming you do not live in South America already), and so on. Let’s look at the big trends that may shape our investments in the future.
Readers may also want to read this post with others in this series in the investing section that expand on the topic, like the post on retirement planning not gambling, when will interest rates go up, or artificial intelligence just got interesting. See below in the related article list.
Central banks need inflation. Without it economies will be stuck in a depression similar to the 1930’s which in part led up to events that started wars. A history no one wants to repeat. Expect more central bank intervention. Pumping more money into the economy at least until European banks are fixed. It’s taken from 2007/2008 until now for UK and US banks to sort themselves out. European banking problems may not be resolved until after 2020. At that stage additional regulation or radical changes to the global financial system may be needed. Gold related investments would be a good idea like miners or buying a gold backed fund or ETF. Investments in sectors and sub sectors that will benefit / survive a long period of inflation are the way forward.
Technology, industrial change, and scientific philosophy are going to be to the key to economic success. Effects of this revolution will ripple through various industries, including medicine (people are living longer and there are companies that will benefit from this trend like pharmaceutical companies), transport, the legal profession and more. For instance this is starting to be felt in the farming industry now. The agricultural commodities sector has been smashed recently due to a number of factors causing money to flow out of the sector. Farmers are getting paid less for what they produce, the effects of which have been felt by agricultural machinery companies and the Ag Tech sector. Despite this, huge change is coming because farmers need to increase productivity (do more or the same for less capital investment)…. driverless tractors are here. Using a mixture of sensors for on the ground navigation, detailed mapping like that provided by ordnance survey data in the UK, computer chips and navigation systems. Possible companies for DYOR may include AGCO (AGCO), Trimble inc (TRMB), and computer chip makers.
Let’s go boldly into the future and place our bets in the right places to benefit from a rosy future with exciting technological advances.