The world’s most valuable retailer, Alibaba, carries no stock.
The world’s largest taxi company, Uber, owns no cars.
The world’s most popular media conglomerate, Facebook, creates no content.
The world’s largest accommodation provider, Airbnb, owns no property.
The creation of intangible value through internet assets has been a popular trend in modern history. In the past this has led to disastrous vicious-cycles, (similar to positive-feedback-loops), that can cause an economic system to descend into chaos.
Speculation on the value of internet assets was what caused the .com bubble of 2000 to inflate - burst. The bubble that popped in 2000 was an asset price bubble that resulted from the explosive stock market growth as the internet emerged. Another period of rapid tech development is almost upon us; in the future it will be referred to as the Machine Learning, AI, and/or Quantum Computing revolution.
Having said that there's the possibility of enormous technological growth in the near future, I'm not saying it will happen tomorrow. The United States could very well end up in another recession if the economy doesn't react well to the unprecedented treatment it's received from the Federal Reserve, ZIRP, etc.
Irrespective of the domestic/global economic landscape, technological progress is inevitable. As time passes the electronics humans use worldwide will only get smarter, faster, and more advanced.
Technological progress sees no regression.
(unless you work at Apple... Iphone 6s > Iphone 7)
The Financial Instability Hypothesis is one of the crowning achievements of Hyman Minsky. It blames debt accumulation for financial crises, emphasizing the macroeconomic impact of three classes of borrowers.
1. Hedge Borrowers - Hedge borrowers are the safest type of debt, as they have the ability to pay back principal and interest regardless of whether or not they are offered additional credit.
2. Speculative Borrowers - Speculative borrowers take out debt less responsibly, they are capable of paying back principle, but must borrow again to make interest payments.
3. Ponzi Borrowers - Ponzi borrowers are incapable of making principal/interest loan payments without additional sources of credit. Ponzi borrowers only remain solvent if they're investing in consistently/indefinitely appreciating assets.
The issue with ponzi borrowers is that no investment appreciates indefinitely. If you could invest for guaranteed return, then it wouldn't have been an investment in the first place.
A combination of asset prices declining and too many ponzi borrowers existing causes macroeconomic issues. Specifically: ponzi borrowers start defaulting across the board, asset prices decline more sharply, causing speculative borrowers to start to default on their loans too. If the lending situation is bad enough, ponzi defaults can even cause some of the hedge borrowers to start to fail.
"When the people find that they can vote themselves money, that will herald the end of the republic".
- Ben Franklin
ETF - Exchange Traded Fund - "A marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund."
In the last decade, ETF's have grown in popularity more than any other investment.
The graph below shows their explosive growth.
Q2 2006 Value: $17,565,000,000,000 - Nearly 18 trillion USD$ in ETFs
10 years later +$384,120,000,000,000 (Yearly growth rate - 219%)
Q2 2016 Value: $401,685,000,000 - Nearly 402 trillion USD$ in ETFs
An issue that could be amplified by ETFs larger market presence is that they can fundamentally fail.
Flash Crash's 2010 & 2015
Flash Crash Wiki
In the "Flash Crashes" of 2010 and 2015, ETFs became unhinged from their underlying "value". Both instances were partially caused by HFT (High Frequency Trading).
"Bids on dozens of ETFs, and other stocks fell as low as a penny a share" -WSJ
(^talking about 2015)
In Complex Adaptive System Theory, a Cascading Failure is when the failure of a part causes the failure of successive parts. (Domino Effect)
Both flash crashes were cascading failures in financial markets. Regulatory measures taken to prevent another ETF issue are insufficient.
On Thursday (9/8) the Federal Reserve released their plan for a financial crisis. They will institute a "countercyclical-capital-buffer"; simply put, they plan to increase reserve requirements.
Increased reserves are likely to reduce the number of bank insolvencies, but they also reduce the amount of money banks can lend. This policy decision could hurt consumers/business owners who have become reliant on debt to function.
The United States is more reliant on debt than at any point in history.
LINK TO SOURCE ARTICLE
Asset Price Bubble
Federal Reserve Bubble
Treasury Bonds and LIBOR
Rucker, Patrick. "Federal Reserve Says It May Ask Banks for Extra Capital in a Crisis." Reuters. Ed. Leslie Adler. Thomson Reuters, 08 Sept. 2016. Web. 09 Sept. 2016.
Source: Moskowitz, Dan. "Overview of VelocityShares TVIX | Investopedia."Investopedia. Investopedia, 13 Apr. 2015. Web. 11 July 2016.
Is not responsible for your investments.