ARAMCO’s direct listing arithmetic

ARAMCO, the Saudi Arabian oil company, issued stock at a  USD1.7 trillion valuation last week  and promptly traded up 18% to top USD2trillion. This was in line with the Saudi government’s initial valuation expectations.

This result was achieved essentially by direct listing. I say this since the cap raise was a miniscule 1.5% of market cap. ARAMCO had originally planned to raise closer to 10% of market cap through a network of international banks however the bankers almost unanimously rejected the valuation target that the Saudi’s had suggested. The banks had argued for more of a USD1.2trillion valuation when issuing new shares.

The IPO market is one of the last bastions of financial inefficiency and the Saudi’s determination to stick by their valuation deserves praise. It is well documented that the degree of underpricing in the IPO market is 30% on average, so that investment banks deliberately stuff their favoured clients with cheap stock, which their clients then stag for a quick profit. So when an investment bank quotes $1.2trillion for an IPO they really mean $1.6trillion after factoring in their stag premium.

It appears that this back of the envelope calculation drove the Saudis to dismiss their dealer panel and go it alone. The banking community publicly expressed their criticism of the Saudis based on valuation numbers generated by their captive analysts’ teams but, no doubt, the banks privately bad mouthed the Saudis as crazy and inept in order to keep their clients away from the deal. Depriving the ‘Saudi renegades’ of the international investment community would surely see the direct listing strategy flop, they surmised, thereby exposing ARAMCO as fools and more broadly serving a warning to any other issuer contemplating a direct listing themselves…

…but the fools turn out to be the investment banks themselves. The $1.6trillion inclusive of stag premium is pretty close to the $1.7trillion the stock priced at. This means that the Saudis kept the stag premium for themselves, all $36 billion of it. That is a lot of money…and a watershed victory for the direct listing camp that seems to be growing in importance and actual listing frequency.  In 5 years time my prediction is that direct listing will be the normal approach for any company going public.

One final point on ARAMCO’s decision to go it alone.  The investment banking community seemed to treat ARAMCO as purely a private corporation going public.  In fact, ARAMCO is a sovereign asset ultimately owned by the Saudi people.  ARAMCO therefore had a public duty to their citizens to maximise the value of the asset.  Private shareholders make decisions to go public for many reasons and they internalise the costs versus the benefits as they are the asset owners.  ARAMCO, on the other hand, are stewards of their nation’s natural resources and it is not for them to simply pay a 30% premium of their country’s wealth to a group of international bankers. This point is lost on every commentator that I have read.  Full marks to the Saudis!


A comment on the UK election…

Well, we were correct in predicting a clear triumph for Boris Johnson but the Labour Party route turned out to be deeper than anticipated.  The mischief vote in favour of the Tories sends a clear message to the UK Parliament that the electorate thinks it is an inept institution.  Irrespective of whether they voted for or against Brexit, the UK electorate was aghast at how their representatives cannot follow a simple instruction.

The US Democrats should take note of this dissatisfaction and disenfranchised attitude toward elected representatives.  Our long-range prediction is that Trump and the Republicans sweep the elections in 11 months time for this very reason.


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An FDV threeway: Swinging in Saudi Arabia…plus Our UK Election Special…plus the latest release from DJ Dr Fish

Swinging in Saudi Arabia

ARAMCO officially listed yesterday.  The Saudi owned company is the world’s largest oil producer, world’s largest company … the world’s largest many things.  It has played a political role, a diplomatic role and a world economic role for many years as the ‘Swing Producer’ in the oil markets.  Swing producers have the capacity and substance to stabilise oil markets should there be short term fluctuations in supply.  Swing producers can also act as policeman to a price-fixing cartel such as OPEC.  Swing producers, it is fair to say, may not necessarily act to maximise profits, especially when it belongs to a Sovereign entity with many competing objectives…

…but now that ARAMCO is a listed entity does this change?  The starting point for a public company is to maximise profit and it is not clear that ARAMCO’s activities to date have had that objective.  Cartels, such as OPEC, aim to control the supply of a commodity in order to fix a price that will benefit all members in terms of higher revenue.  That price is typically way higher than the marginal cost of producing the commodity so there are clear incentives for one or more members of the cartel to chisel away at their production quotas, selling more oil than they are permitted for profits at the expense of other members.  Cartels are inherently unstable, therefore, and it is the role of the Swing Producer to bring discipline to its members.  In this way, the Swinger is not acting to maximise their own profit per se, rather they are bearing the cost of policing other members sly activities.

Public companies are not meant to engage in price-fixing arrangements, collusive anti-competitive behaviour nor any supply manipulation.  On the face of it, however, ARAMCO’s raison d’etre has been all these things.  Owing to its  ‘strategic global importance’ ARAMCO will get away with all these activities as the global regulators turn a blind-eye to it all.  ARAMCO’s shareholders, however, may think differently.  While the non-government shareholder register represents only 1.5% of the stock, they will want their rewards – as either higher dividends or higher stock prices.  This may force ARAMCO to abandon their Swing activities and, quite possibly, become a source of instability themselves.

UK Election special: Money v Mischief in the UK Brexit Poll

Speaking of cartels, the UK is going to an election om December 12 to break the impasse caused by the UK parliament’s inability to follow a simple instruction.  In 2016, the UK’s electorate decided to leave the European Union, a particularly vicious cartel that favoured members such as France, Italy and Germany over others such as the UK.  Breaking the cartel seemed, on the face of it, the right thing to do.  But the UK’s government has had difficulties letting go of the security blanket and their Whitehall bureaucrats got busy negotiating a ‘Claytons Brexit’ – an expression for the Brexit you have when you are not having a Brexit.

Frequent readers will be aware of my ‘Money v Mischief’ theory of voter behaviour.  Basically, the ‘thoughtful swinging voter’ make their mind up only when they reach the polling booth and they do so based on (i) how much money they expect to make from each party and (ii) how much mischief they can cause within their own parliament.  On this basis, the Labour Party in the UK might well surprise with their pork-barrelling of promises such as free fibre internet for everyone.  The mischief vote goes squarely to Boris Johnson who, despite being a career politician, candidly expresses his impatience with the talk-but-no-action that is modern democracy.  Sadly for the Liberal-Democrats, they offer neither money nor anything other than ‘good policy’ which, irrespective of its content, is pure boredom.

So on this basis, my prediction for the UK elections are

(i) The Liberal Democrats get decimated to the point of extinction

(ii) The Conservatives easily obtain a majority as the electorate send a message to the parliament to just get Brexit done

(iii) The Labour party pick up the Lib-Dems losses


…and finally, check out the Christmas Album from DJ Dr Fish

The latest release does NOT have any of the songs that your DONT want to hear at Christmas.  Just 63 minutes of relaxing, progressive trance.



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Beware: Libra threatens to stabilise the World’s monetary system!

“We have security concerns with this initiative ” is every IT department’s Ace of trump’s for effectively stopping any project in its tracks. No board of directors will dare challenge said “security concerns ” since their personal liability is too great to risk it.

Those of us old enough to remember the Y2K soap opera know how diligent we all were in cooperating with the legions of consultants allocated to this pending doomsday event, while at the same time thinking what a load of rubbish the entire exercise was. I personally remember explaining to a Y2K vigilante that the computer code THAT I WROTE MYSELF was not exposed to any Y2K risk, only to be told that there were 3 layers of approvals needed to verify what i knew to be fact…rather than rage against the machine I quietly surrendered to the higher powers.

Y2K came and all our private doubts about the security risks were proven correct. Nothing happened. Y2K, it turned out, was an IT pink elephant fabrication (“we see a pink elephant, prove to us that there is no pink elephant “), that no one was game enough to challenge before it became a corporate tamagotchi requiring constant attention.

Rather than confronting the flaws in the global monetary system generally, the collective Governmental response to Facebook’s plans to launch its own ‘currency’ has been to float an array of pink elephants.  Let’s be honest, Libra is nothing more than a prepaid gift certificate that people can deposit with Facebook and use to purchase whatever is being offered by Facebook’s retailers.  Libra does not pay interest nor lay claim to anything tangible.  Instead its a swap from Government issued fiat money into Facebook issued fiat backed by a currency board of the Government issued fiat money that is swapped-in in the first place. If Libra operates in this way, then whatever happens to the Government fiat drives Libra. Libra is a benign translation of dollars/yen/euro/sterling into some gift certificate registered on Facebook…

…but whoa, the pink elephants that have been floated!  Libra will be a haven for terrorists. Money launderers. Drug dealers.  Retail junkies. Libra threatens a nation’s sovereignty and its ability to conduct monetary policy.  Libra will provide Zuckerberg with the means to control the international monetary system.  And so on and so on.  What truth is there to any or all of this?

Lets first deal with the terrorists/launderers/druggies/spendthrifts.  Entering the Libra system should require hard fiat to begin with.  Either the t/l/d/s uses, say, USD to exchange directly for Libra with the Central Repository of FaceBook (CRFB) or they elect to buy existing Libra from Facebook’s loyal supporters.  Libra does not just drop out of the air nor does it get funneled or produced by the t/l/d/s crowd.  In fact, it is hard to imagine a scenario where the bad guys have managed to earn their money other than in the official hard currency system – that is, the current system is to blame for the bad guys having access to Libra.

Next, the scaremongering that Libra will invalidate or compete with a nation’s monetary policy is also vacuous.  Just like Hong Kong’s peg to the USD, Facebook has elected to peg Libra to the existing official currencies in operation (a basked peg where the weights reflect the inflows to Facebook’s system).  Technically, an exact peg backed by a currency board (that is one USD is held for every USD represented in Libra) outsources monetary policy to the original currency issuers.  This means that the US Federal Reserve, the ECB, the Bank of England etc etc control the monetary conditions inside the economy of Facebook and not vice versa.

Finally, can Zuckerberg take over the monetary system?  This is challenging for the Zeitgeist would need to decide to break the strict link between Libra and its currency board, for example by issuing Libra without the hard currency to support it, and the holders of Libra would need to refrain from converting back to hard currency.  This is the Argentina problem – in the 1990’s Argentina famously pegged its currency to the USD without holding any USD to back the promise – and the trick did not last long.

Zuckerberg could, however, offer something tangible to back Libra in place of Government issued fiat…gold, oil, digital assets… something that an owner of Libra could confidently switch into should the supply of Libra become excessive and switch out of if Libra became more scarce than the physical assets.  That, Ladies and Gentlemen, would be a true threat to the official currency markets since it would represent a stable, convertible, medium-of-exchange …something that doesn’t exist in the current world of official fiat.

For some reason, however, none of the Government officials has mentioned this ‘threat’ to the world’s financial system.  The true threat of Libra is that it STABILISES the World’s monetary system!


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CB Libre

The Cuba Libre (Rum and Coke) became the symbol of Cuban independence during the Spanish-American war.  What will symbolise the take-no-prisoners war about to erupt between Facebook and the world’s Central Banks over Libra?

I recently attended a meeting of senior Central Bank and Academic researchers in Singapore. The discussion quickly focused on the effectiveness of Monetary Policy – to be more exact, it was all about the ineffectiveness of Monetary Policy. The mood amongst the Central Bankers was that of capitulation- interest rate targeting had failed even with negative interest rates in place and QE in all its forms had failed to either influence prices or output. All is lost…

To be honest, while Central Bankers are no longer rock stars in the eyes of the markets or businesses or the general public, they should not be surprised. The writing that monetary policy is ineffective has been on the wall (and in the volumes of empirical evidence that modern economics has generated)  for decades and decades. The Real Business Cycle literature made this point elegantly 30 years ago by simply omitting money from its analytical framework altogether! Critics of RBC at the time dismissed the framework completely, arguing that a theoretical economy without money could not generate realistic predictions. Three decades later, the ‘money doesn’t matter ‘ chorus is being sung by those critics themselves.

Reluctantly admitting that current approaches to monetary policy are ineffective, radical approaches were proposed and contemplated. One idea is to ‘helicopter drop ‘ money directly into people’s bank accounts. Radical as it may sound, this is probably the purest expression of the classical monetary injection…but while increasing the money supply might bring joy, reducing the money supply means confiscating cash from bank accounts and would lead to riots.

Another idea is to give Central Banks the right to tax. The argument here is that tax policy is quite powerful (true) and that elected governments cannot be trusted to tax properly (also true) while independent Central Banks can be trusted to tax correctly (not true, but less not true than the truth that elected governments cannot be trusted).

Central Bankers have all this misery and introspection to deal with, only to be sucker punched by the rise of crypto and private money. Admitting your own ineffectiveness is one thing, being challenged by your serfs is another. There was uniform agreement amongst all the Central Banks that everything that has to be done to prevent crypto from dominating traditional fiat money will be done! As a contingency, Central Banks globally have crypto currencies of their own, ready and waiting to challenge the potential threat of a private currency…

…and then came Libra. Facebook, the internet phenomenon with the world’s largest privacy waiver, announced their plans to issue a crypto-currency for online payments within the Facebook ecosystem…

Libra is planned to have full backing from the underlying mix of currencies represented by the official fiat currencies used to purchase it. This is a trade-weighted valuation reflective of the proportion of Facebook online shoppers’ currency sales.(If 50% is USD and 50% Yen, then Facebook will hold the subscribed currency in cash-like securities in a 50-50 proportion). While most trade weighted baskets reflect a nation’s external business transactions, Libra will reflect Facebook’s demographic consumer mix.

Reading the description of Libra from Facebook’s press release it becomes quite clear that the currency has been constructed quite intelligently. Zuckerberg must have decided to ignore the dreaming of the crypto-zealots and hired some quality monetary theorists to design Libra…

The big problem, however, is that any interest earned by Facebook on its deposits of traditional fiat money is kept by Facebook. Very greedy and very dumb. Even the Central Banks don’t favour themselves that much when it comes to paying interest on reserves. By construction, therefore, the Libra is designed to fail as an alternative to USD or Euro since it has no value other than to trade online with Facebook merchants.

Mark Carney, the Bank of England’s Governor, told parliament that the BoE and other major Central Banks would have ‘oversight’ of Libra to prevent money laundering and terrorism usage. Beyond that the Central Banks collective silence on Libra has been deafening.

So even though Libra will fail initially, eventually the Central Bank of Facebook will wake up to their self-imposed handicap. Central Bankers know this and war rooms have been set up around the world readying for a fight. A massive coordinated attack on Libra is being prepared for launch at any moment.


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Money v mischief in the Australian election

There is less than 2 hours until voting finishes in the Australian federal election. My money v mischief theory is difficult to determine a winner. The Labor party is a clear leader in the money category, promising everybody everything…but my suspicion is that mischief will decide this election…

The current global trend is to protest against the elitist elements in both the media and politics. Labor has siddled up to the elitist vision of utopian socialism, much as the US Democrats have done. The natural mischief vote is to reject the chardonnay socialist set to piss them off.

As voters stand pencil in hand, a vote for the boring liberal party is really going to stir up the anger of the left who are already claiming victory.

I think the liberals will be handed an upset win precisely because the losers will be very upset!

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Private is now the New New-Private not the Newish Public

The recent transition of a slew of high profile tech companies from private to publicly listed corporations has reinstated the valuation premium that public companies hold over private ones. Spotify, Lyft, Pinterest, Zoom and soon to be listed Uber clearly show that public markets still dominate private ones when it comes to valuation.

The Private-is-the-New-Public mantra advanced the view that raising capital had become easier in the private markets than in the public ones, therefore obfuscating the need to list. Since access to capital was previously perceived to be the fundamental advantage of the public markets, listed companies should have traded at a premium. The rise of Venture Capital and Private Equity created the ability for private companies to raise capital on similar or better terms than the public markets.  This should have arbitraged that public-listing premium away. Accordingly, newly listed privates should trade at the same price as before listing, or at least at the IPO price set by the brokers leading the deal…

Apparently not.  Spotify, Lyft, Pinterest and Zoom each listed at 12%, 15%, 30% and 72% premium to their pre-listing prices.  Lyft subsequently declined below its pre-listing price but it still had its first public day in the sun and was welcomed heartily.

Critics of the private markets argued that going public would expose the over-optimistic expectations of the fancy Venture Capital and Private Equity firms to the full scrutiny of institutional investors, in turn marking down their irrational exuberance. That is, the public markets would see through the cult-like blue-sky beliefs and bring valuations back down to earth. Perennially loss-making unicorns would face the reality of the need for profits and dividends; failure to do so would see prices slashed…

Apparently not.  Even in the pre-market roadshows to institutional investors, each of the newly listed companies priced their offers at or above the top of the range suggested by the brokers.

The most interesting result of the recent listings is that being public still commands a premium.  Access to capital cannot be that reason.  Two possible explanations are either (i) access to liquidity accounts for the additional premium or (ii) the VC’s and PE’s expectations were too pessimistic.

Liquidity is precious to investors who cannot influence decision making – the ability to exit a position if the investor doesn’t like what he sees is much easier in the public domain than when there is no secondary market.  Back of the envelope calculations can easily justify a 15 to 30% liquidity premium for a listed corporation with a 0.5% to 1% reduction in the required risk-premium.

Pessimistic VC’s and PE’s?  There is an element of truth in this explanation as well.  We are all taught that the value of a company is the discounted sum of all future cash flows.  Traditional ‘value’ investors like Warren Buffett are more comfortable dealing with positive cash flows today and extrapolating these forward.  ‘Growth’ investors tolerate extended periods of early losses in order to harvest fantastically rich cash flows in the future. Exactly how those riches will be generated and how much they will be is difficult science, so a smart VC/PE investor risking their own cash would surely prefer to underestimate their magnitude rather than overestimate.  Growth investors are only really competing with Value investors for the same deals, so if the likes of Buffett don’t even consider investing in firms that post losses early on, then the VC/PE can effectively buy these companies at a price-point where the competitors drop out.

Irrespective of the reason, the clear message from the unicorn-parade is that being public still commands a premium.  Founders and shareholders in unlisted companies should pay close attention to this fact.  Opting to remain private may appeal to a founder’s romantic notion of non-conformist disruptor but it’s still going to cost everyone money.  Private may have become more sophisticated and Newish, but Private is not the New-Public.

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The speech

Last Thursday evening, First Degree hosted a Launch Party for our manager platform. Everyone was having such a pleasant time that we decided against puncturing the enjoyment with a boring speech…

…for those of you who are curious about what I would have said, here it is!

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The Great Wall of China took several thousand years to build and was primarily a method for stopping Mongolian invaders from expanding into China. As a piece of military technology it dominated all-comers however it was rendered entirely useless with the advent of the flying machine. The 20th Century was not a good one for the Chinese military defenses…Walls work until someone finds a way to bypass them completely.

So it is astonishing that the political agenda in Europe and the US is currently fixated on walls.

First, Europe. The pantomime that is Brexit has been derailed by the wall that may have to be built in Ireland to keep out cheap imports from a trade-liberated UK crossing into Europe. “Fancy a pair of these fine Italian shoes or these Chinese ones fresh in from Northern Ireland this morning at a quarter of the price?”  The reality is that this is the least of the worries for the EU who stand to have their service sectors decimated by liberal UK policies in the Finance, Legal and even Medical sectors. The City of London can easily attract companies and investors by simply cutting trading taxes or liberalising listing rules. No wall can stop this arbitrage.

Second, the US. The US Democrats have cut off funding the Government until President Trump abandons his promise to build a Wall along the Mexican border. If you had have asked Donald Trump “What do you think about shutting down the Government?” before he became President he would have said “Great idea!”. Not much has changed since becoming President. The irony of this tale is that the Democrats are the BIG GOVERNMENT believers and the shutdown is primarily at odds with both their philosophy and their constituency. Trump on the other hand, is in a win-win position and I suspect he would rather keep the Government shutdown than build his wall anyway!


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Private v Public is the new Active v Passive …plus Our US Election Prediction Special

One of the early contributions of Modern Finance was questioning the wisdom of active investment management. The empirical evidence indicated that active managers underperform passive strategies.  While a finer analysis of the data subsequently demonstrated that some active managers are able to consistently outperform static benchmarks, the general principle that passive outperforms active remains, particularly for the high fee retail portfolios that the average man in the street is able to access. Curiously, it took 40 years for passive investments to assume their rightful role as the core of an investment portfolio(1).

The contemporaneous equivalent of the active v passive debate is the current infatuation with private asset markets.  Private assets cover a range of investments such as venture capital, private equity, unlisted equity, partnerships, private lending, private placements, private real estate etc etc.  Private assets all have the common feature that they are not listed on a recognised exchange which means that they are not publicly traded. This means that private assets are difficult to buy and sell and they are often described as ‘illiquid’.

The private v public debate centres on whether the expected rate of return on private assets is attractive enough relative to publicly quoted assets to induce investors to sacrifice liquidity.  So far there appears to be a substantial premium to be earned in some private markets while others are dubious.  For instance, early stage Tech-VC has generated long run risk premia of about 20% per annum compared with public equity premia of around 6%.  On the other hand, while private equity appears to share a premium over public equity in gross performance terms, a lot of that gets eaten up in fees to the PE managers who undertake the investments.  The bottom line is that private assets do offer superior returns versus their public counterparts but accessing these opportunities is difficult if you are a small investor.

While private assets make sense from a risk premium standpoint, their drawbacks are brutal.  Investors are asked to lockup their capital for 10 years or more, information about the underlying investments is scant, investor protection is minimal compared with public markets, disclosure is optional, managers are gatekeepers, secondary sales are difficult to execute, regulators are at worst hostile and at best adopt a caveat emptor attitude.  Lumped together, these drawbacks are the root cause of private asset illiquidity and therefore impede the public capital pool from crossing over into the lush private space…solve these problems and private asset markets will become more mainstream thereby challenging the dominance of the public markets.

The key to unlocking liquidity in the private space is understanding that the illiquidity stems from a confluence of factors rather than a single cause. Simply creating a token that sits on some cyber-exchange will not create liquidity since the other problems remain. For instance, the information asymmetries between sellers (who are often insiders) and buyers (who have no rights to ensure disclosure at any level on the actual investments) effectively drives the bid price well below fair value.  If a buyer is scared of getting stitched up then he will bid low.  Similarly, regulators need to accept that private markets are here to stay and, if the regulator is going to influence outcomes, then they need to ease the path to the public trading of private securities.

Solving the liquidity problem would take 3 simultaneous initiatives to my mind,

(i) Investors demand and entrepreneurs commit to high rates of continuing disclosure from private companies

(ii) Ease of price discovery and secondary transfer of private assets in some open marketplace

(iii) Regulatory tolerance of open markets with softer disclosure standards

Of these conditions, item (i) is the most important and suggests that private companies should voluntarily act like a public company when it comes to keeping markets informed.  Entrepreneurs cite the relatively low level of continuing disclosure as a benefit of remaining private, thereby allowing them to focus on the business, but this is rubbish.  Investors reward higher levels of disclosure with additional capital and higher valuations both before ipo and during the process of going public.

Just as ETF’s provide public vehicles which bring passive investing to the masses, sooner or later a public vehicle will bring private to the masses. Exactly what that looks like will make someone very rich.


Long-term readers of this blog will be familiar with my theory that the great majority of swing voters in elections only decide who they will vote for when they are physically in the ballot room with pencil in hand. These voters are motivated by “Money and Mischief” – money in terms of which party or candidate offers them the best prospects and mischief in terms of pissing people off.  So what is my prediction for next week’s US mid-term elections?

It is not fashionable to be a Republican in America.  While the vocal left-leaning media fume at everything Trump says and does, it behoves the right-leaning Republican voter to simply sit quietly during dinner party debates or football afternoons with their Democrat friends.  But the US economy is booming, the US President is ACTUALLY TRYING TO DELIVER ON HIS PROMISES and nobody seems to like Trump – publicly anyway.

So next Tuesday when the voters reach the polling booth and actually make their decision, the “Money and Mischief ” vote goes firmly to the Republicans.  My prediction is an increased majority for the Republicans in both the Senate and the House – that will piss CNN/NYT/Washington Post/etc/etc off!


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(1) The first studies showing active managers underperforming passive benchmarks emerged in the 1970s but it wasn’t until the last decade that passive has become central.  The reason for this is the emergence of Exchange Traded Funds (ETFs) that make buying a passive portfolio easily accessible to the average invest. The lesson here is that new investment ideas will only be embraced once the investment vehicle is publicly traded.

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Brexit: non-market breakdown…

Here’s a riddle.  If the solution to market-breakdown is regulation, what is the solution to non-market breakdown?

If ever there was a demonstration of the inability of Government to plan, decide and execute a simple instruction it is Brexit. The UK referendum instructed the Government to leave the EU cartel.  The rights and obligations that European and UK governments, corporations and citizens under the cartel agreement were therefore to be abandoned.  Whatever fills the void and however the economic relations between the EU and UK proceed in the future is to be determined…but by whom?

Not surprisingly, the GOVERNMENTS of both the UK and the EU think that their role is to construct an alternative legislative framework to replace the existing cartel. This is rubbish and they have misunderstood entirely the economic forces that decided the referendum.  When a cartel breaks down, which cartels tend to do, the economic solution is not to try and patch it up.  Cartels are bad for many and only good for some. The competitive pressures that chip away at the cartel’s stability, have at their basis a better solution.

The proper role for Government is to facilitate this better, more competitive solution by discarding the protected waste and facilitating the more open, freer trading environment that Brexit stands for.  Neither the EU nor the UK Governments understand this basic fact.  These institutions operate non-market bureaucracies that are incapable of relinquishing control. Worse they think that the cartel is fundamentally good, so if one rule is abandoned then it must be replaced with another rule to achieve the same thing.

One ‘sticking point’ in the negotiations, for instance, is whether Ireland and Northern Ireland should have a hard or soft border? This is really dumb, completely irrelevant and anti-competitive. Market forces don’t care about imaginary borders. Market forces just want to do business.

The Brexit negotiations are being undertaken by non-market people from non-market institutions.  The World is witnessing arguably the greatest example of Non-Market Breakdown ever in economic history.

So what is the answer to the riddle? The Market, of course.


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