CHRISTIE’S TURNS VENTURE INVESTOR WITH A NEW TECH-FOCUSED FUND

Christie’s announced on Monday that it’s now investing in leading-edge technology related to the future of the art market through an internal strategic venture fund.

Christie’s Venture will focus on early-stage financing for companies developing Web 3.0 and related technologies, innovations that make it easier to consume art—including digital art, and on financial technologies that make it easier to buy and sell art.

“We’re particularly interested in founders who are doing things that reduce friction in our space—whether it be buying and selling, provenance, security, or technologies that help people consume art better,” says Devang Thakkar, global head of Christie’s Ventures. “Those are the kinds of areas that we’ve identified where we can help move the needle.”

Thakkar began advising Christie’s CEO Guillame Cerutti and the executive team during the pandemic on a range of digital considerations, including web and mobile applications, trends in nonfungible tokens, or NFTs, and digital ownership.

“With the growth of that area last year, we had a front-row seat to the development and innovation that founders were bringing to us,” he says. At the time, Christie’s didn’t have a way to participate in these fledgling businesses, so Thakkar pitched the idea of a venture fund.

The vehicle’s first investment is in LayerZero Labs, which Christie’s describes as a “cross-chain interoperability company.” In other words, LayerZero is developing technology that will allow people to move assets between blockchains such as Ethereum, Solana, and Algorand.

There are more than 1,000 blockchains currently in existence and Christie’s expects consolidation in the sector will reduce the number to 20 to 30 within the next year-and-a-half. LayerZero should make it easier for individuals to move their holdings without going through several steps and paying lots of fees. It’s technology that should benefit any crypto holder, not just those who own NFT-based art, Thakkar says.

Aside from such Web 3.0 technologies, Christie’s will also invest in technology that makes it easy to consume art, whether it’s through today’s computer systems, advanced screens, or something else, he says, adding, “It’s an area of investigation for us.”

Concerning financial innovation, Christie’s, which has its own art financing division, is looking outside of traditional art lending to the selling of fractionalized shares in fine art and other innovations that make it easier to sell art.

The fund is launching at a time when cryptocurrencies have fallen sharply, taking the value of many NFTs down too. Ethereum, which is the basis for many NFTs, was down nearly 66% through Friday.

But Thakkar says this “crypto winter” actually makes it “a little more realistic to invest in this space—the fog of speculation and high-price points have tapered down a bit.” He points to Andreessen Horowitz, a US$33 billion California-based venture firm that began investing in leading-edge tech in 2009, in the midst of the financial crisis.

Christie’s Ventures is seeded from the auction house’s balance sheet and will not include other investors. Legal and financial due diligence will all be handled in house, too.

Thakkar, who has been investing in companies on his own for 10 years, worked at Microsoft for a decade and was a former executive at Artsy, and he says, he also grew up around art. This new role at Christie’s is “a perfect blend of every fabric of my being,” he says.

July 20, 2022

BOSSES SWEAR BY THE 90-DAY RULE TO KEEP WORKERS LONG TERM

In the quest to retain workers, companies are sharpening their focus on a very specific common goal: 90 days.

Hold on to an employee for three months, executives and human-resources specialists say, and that person is more likely to remain employed longer-term, which they define as anywhere from a year on in today’s high-turnover environment. That has led manufacturing companies, restaurants, hotel operators and others to roll out special bonuses, stepped-up training and new programs to prevent new hires from quitting in their first three months on the job.

Heating and air-conditioning company Carrier Global Corp. began pairing new hires with a more experienced “buddy” in its manufacturing facilities after discovering most attrition happened before an employee hit the three-month mark, said Chief Executive David Gitlin. Executives at Minneapolis video software company Qumu Corp., have retooled training and onboarding processes partly around the goal of reducing what the company calls “quick quits,” or departures within three months, said Mercy Noah, Qumu’s vice president of human resources.

Some franchisees for McDonald’s Corp., Wendy’s Co. and others advertise new-hire bonuses of hundreds of dollars, many payable after 90 days; CVS Health Corp. gives warehouse workers at some of its facilities a $1,000 bonus if they stay on the job for three months.

“If you see someone hit the three-month mark, the reality is, they’re going to be here for at least a year,” said Marissa Andrada, chief people officer at Chipotle Mexican Grill Inc. Chipotle has focused on consistent scheduling and giving new hires a clear explanation of company operations and benefits, she said. The tactics are designed to help employees be comfortable in its restaurants and motivated to stay, she said.

This summer’s labor market is among the tightest in decades, and finding enough workers, let alone desirable workers, remains so difficult that companies are increasingly motivated to retain new hires. Three months has traditionally been considered enough time for employees to begin to prove themselves, veteran human-resources executives say. Many companies also still enforce 90-day probationary periods, with some withholding benefits like health insurance in the meantime.

Just as it can take weeks of consistent effort to develop an exercise habit that sticks, employers have found that 90 days is typically enough time for workers to get into a steady routine of a new job. This can be particularly important for hourly employees in higher-turnover industries like hospitality or manufacturing, executives say, where workers have plenty of options.

The unemployment rate stood at 3.6% last month. Employees have benefited from a labour market that has given them the ability to more easily change jobs for higher pay. Workers are flexing their power in other ways, too. Employees at an Apple Inc. store in Maryland voted earlier this month to unionize, creating the first Apple retail union in the U.S., adding to unionization drives at companies such as Starbucks Corp.

Patrick Whalen, director of human resources and organizational development at the aerospace manufacturing company TAT Limco in Tulsa, Okla., watched late last year as a number of the company’s welders, assemblers and others left for jobs that, in some cases, paid only a dollar or two more an hour. Some workers, he said, barely stuck around for a month. Frustrated, Mr. Whalen began making a case inside the company that it needed to rethink its approach to bringing on new employees. He wanted a 90-day plan.

“It seems to be a magic window,” he said.

After he explained that every new hire who left early cost the company thousands of dollars in training expenses, time and lost revenue, Mr. Whalen said managers agreed to a change. In January, the company instituted a new 90-day onboarding process.

TAT Limco hired an onboarding coordinator to oversee every new employee’s entry into the company. Managers now contact employees before their first day, part of an effort to provide more contact points with new hires so they don’t get lured to a rival. Supervisors set weekly expectations for new employees to guide them in their first three months, giving staffers structured goals and time to get up to speed.

Turnover, at 37% in January, has fallen by more than half, to 16% today, Mr. Whalen said. Newer employees are also sticking around. In the first three months of the year, the company lost one of 45 employees it hired. “If we lose somebody within the first month or two months or three months, it’s very rare,” Mr. Whalen said.

There are signs the labour market is cooling, particularly among salaried workers. Companies including Tesla Inc. and Netflix Inc. have announced plans to cut staff, and some employers have rescinded job offers to new hires. Yet for hourly jobs across a broad range of sectors, demand for workers remains historically high.

Workers say they often know within weeks if a job will be a fit. Aliyah Abbott, a 23-year-old rising senior at Temple University, said she left a marketing internship in Philadelphia recently after about a month. Though Ms. Abbott said she had never before quit a role and hesitated to leave the internship before it ended this summer, she thought the position turned out to be different than initially presented to her. It paid less than she thought she had been promised, with some compensation based on a commission structure, she said.

“By the third or fourth week, you’re kind of like, ‘Is this right for me?’” she said. She quickly found a new job working as a marketing coordinator. “The bigger picture with jobs is just trial and error sometimes,” she said.

Much of the success of a job in the first three months also comes down to an employee’s connection with a company, executives say. At the San Francisco software company Intercom, new hires at all levels are asked to embark on what the company calls a listening tour to understand the company’s operations and meet with as many colleagues as possible. For lower-level staffers, that might last two weeks; for executives, it could stretch to six.

“The first 90 days is almost like an extended interview process by the employee of the company,” said L. David Kingsley, Intercom’s chief people officer. “Those are the critical moments where someone is truly deciding.”

Some companies, like workplace software provider Envoy, have hired staffers in recent months who will check in with hiring managers and new employees to see how the experience is going for all sides. “That first 90 days are when you have people that either say, ‘This was the best thing I ever did,’ or ‘I made a mistake because it’s not what I thought it was going to be,’” said Annette Reavis, Envoy’s chief people officer.

Waste Management Inc. plans to roll out a tool that will allow managers to get real-time feedback from their teams; workers will be able to leave comments anonymously. The tool will be available to both new workers in their first months on the job and veteran employees. “You’re going to get tidbits from your folks,” said John Morris, Waste Management’s chief operating officer. “It’s going to be, ‘Hey, this is what my group is telling me what’s on their minds.’”

The trash-and-recycling hauler studied its employee turnover data and found the first 120 days to be particularly critical for keeping new staffers as they learn their roles. The company pairs new hires with more experienced staffers and sends some workers to in-person training in Arizona and Florida.

Many factors play into retaining a new worker, Mr. Morris said, including educational benefits and pay. But the company wants to make sure its managers are also equipped to respond to issues in a variety of channels, one reason for the new tool.

“We all get a ton of feedback. But if it’s 800 pages, nobody’s going to read it,” Mr. Morris said. “So how do you give these frontline leaders tidbits, nuggets, actionable things that they can do?”

Jennifer Sick, a 29-year-old based in Richfield, Ohio, took a position in late February as a sales representative at Group Management Services Inc., a provider of payroll, outsourcing and other services to small businesses. The company has a 90-day probationary period, with clearly outlined goals, the first Ms. Sick experienced in her career.

At a minimum, Ms. Sick said managers required her to make 300 cold calls a week and to visit two small businesses; if she wanted to achieve a bonus at 90 days, she could make 375 calls a week, and visit four businesses. Managers checked in repeatedly to see if she needed anything, she said.

“It was a constant communication of, ‘How are you feeling? How are you doing?’” she said.

She completed day 90 on a Friday in early June, and received the bonus for making additional calls and visits. By the following Monday, she also had the keys to a company-issued Hyundai sedan and gas card, another perk for moving past her probationary period.

“I worked really hard in my 90 days because I just saw my future at this company,” she said.

July 20, 2022

HOUSING BOOM FADES WORLDWIDE AS INTEREST RATES CLIMB

Rising interest rates are slamming the brakes on a global housing boom during the pandemic, heaping extra pressure on central banks as they try to tame inflation without triggering deep downturns in their economies.

From Europe to Asia to Latin America, residential real-estate markets are coming off the boil, and in some cases seeing home values spring, as central banks jack up borrowing costs to bring consumer-price growth to heel.

The seasonally adjusted average home price in Canada was down nearly 8% in June from a peak earlier this year. In New Zealand, prices had slipped 8% in June from their peak in late 2021. Prices in Sweden in May fell 1.6% from the previous month, the biggest monthly decline since the pandemic began.

For the world’s central banks, skimming froth from bubbly housing markets is all part of the battle to bring inflation under control. Falling house prices usually result in weaker consumer spending as homeowners see wealth evaporate, easing upward pressure on inflation. Overall economic activity should slow as construction dwindles, banks issue fewer loans and real-estate agents make fewer sales.

“We are expecting to see some moderation in housing activity. And frankly, that would be healthy, because the economy is overheating,” Tiff Macklem, governor of the Bank of Canada, said last month.

The risk, economists say, is that central banks move too aggressively, causing a global housing-market slowdown that turns into a rout, with unpredictable effects.

Countries including Canada, New Zealand, Australia and Sweden look especially vulnerable, based on metrics such as real-estate’s share of their economies, the extent of their recent booms and homeowners’ sensitivity to rapid interest-rate increases, some economists say.

Analysts say the risk of a housing blowup of the scale of the 2008-09 financial crisis is remote. Banks and borrowers are mostly in far better financial shape now.

Still, a bigger-than-expected housing downturn could mean a deeper economic slowdown than central banks are aiming for to tame inflation.

A shrinking real-estate sector means laid-off construction workers and weaker demand for steel and other commodities. Falling home prices also hurt household and bank balance sheets, which tends to weigh on other parts of the economy. In extreme cases, financial distress ensues.

Faced with those risks, some central banks may decide they can’t lift rates as much as investors currently expect. Others may even pause or reverse rate rises to prevent a real-estate bust from spreading.

“Moderate housing downturns will be tolerated as a price that has to be paid for getting inflation back down,” said Neil Shearing, chief economist at Capital Economics in London. More severe downturns, though, could trouble central banks enough to shift policy, he said.

The U.S. is still experiencing strong house-price growth despite higher mortgage rates, as fierce competition outstrips limited supply. Average home prices in the U.S. rose by an annual 20.4% in April, according to the S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas.

Federal Reserve officials have expressed determination to bring U.S. inflation down, even at the risk of causing a recession.

Global housing prices took off in 2020 and 2021, when central banks slashed interest rates and governments spent big on keeping companies and workers afloat during the pandemic.

An index of global house prices compiled by real-estate consulting firm Knight Frank shows that prices rose 19% worldwide between the first quarter of 2020 and the first quarter of this year, or 10% after adjusting for inflation, though some markets logged much stronger appreciation.

Inflation-adjusted price growth slowed to 3.9% globally in the first three months of 2022 from a year earlier, the index showed. Over the same period, house prices fell in real terms in countries including Brazil, Chile, Spain, Finland, South Africa and India, Knight Frank research shows.

The slowdown coincides with tighter interest-rate policy across much of the world and expectations of more to come.

After earlier rate rises this year, the Bank of Canada last Wednesday raised its policy rate by a full percentage point to 2.50% and said further rate increases are necessary. Gov. Macklem has said cooling housing is essential to push inflation down from a 39-year high of 7.7% in May.

With Canada mortgage rates at their highest level since 2009, house sales in June were down 24% from a year earlier, according to the Canadian Real Estate Association.

Real-estate brokerage Realosophy said Toronto sales declined 40% in May from a year earlier and now sit at a 20-year low. The median price for a Toronto home, excluding condominiums, is down nearly 20% from a February peak.

Daniel Foch, a real-estate agent who focuses on Toronto’s suburbs, said the mood among would-be buyers is “somewhat bittersweet, because a lot of them are seeing prices come down and they’re thinking, ‘all of sudden I can afford that house.’”

The problem, Mr. Foch said, is when they seek financing. “They realize their buying power has been reduced by the same amount.”

Economists are marking down their expectations for Canada’s economy as housing, which accounted for about one-fifth of the growth in gross domestic product last year, slows.

The Bank for International Settlements, which brings together many of the world’s top central banks, said in June that it could take a while for countries such as the U.S., where most mortgages have fixed rates, to feel the effect of higher rates.

But the same isn’t true for countries where floating-rate mortgages—which adjust as interest rates rise—are more common, as they are in parts of Europe and elsewhere, according to BIS data. In Australia, 85% of mortgages are floating rate. In Poland, the share is 98%.

The Reserve Bank of Australia is currently raising interest at the fastest pace in nearly three decades. Some retreat in house prices would ease affordability problems, but economists say any hint of a coming market collapse would quickly see the RBA stop tightening policy screws.

Overstretched borrowers are a particular concern.

“These are people who have taken out their first housing loan in the last year or so or who have bought a bigger house in the past couple of years and have borrowed as much as the bank would lend them,” RBA Gov. Philip Lowe said in a recent speech.

Economists say there are some grounds for optimism over housing. The price run-up was driven primarily by rock-bottom rates and evolving consumer preferences for more space, not the loosened lending standards or excessive risk-taking that culminated in the 2008-09 crisis. Supply of homes is tight.

Healthy labor markets and pandemic stimulus programs mean many households are in decent financial shape, though inflation is eating into incomes.

“As long as the unemployment rate stays low, interest rates should be manageable for the vast majority of households,” said Sharon Zollner, ANZ Bank’s New Zealand chief economist. “You won’t have a lot of sellers who have to just take whatever the offer is on the day.”

The impact of slowing markets will still be felt, however.

In New Zealand, where home prices rose 45% over 2020 and 2021, the median house price in June was down by about 8% from its November 2021 high of 925,000 New Zealand dollars, equivalent to about $565,500.

The reversal came after New Zealand’s central bank began raising its benchmark interest rate in October, and lenders tightened borrowing standards.

Asif Abbas Mehdi, a business owner in New Zealand’s Waikato dairy-farming region, said he has been trying to sell a three-bedroom, two bathroom townhouse for four months.

Initially he sought NZ$730,000, or about $450,000, then NZ$680,000, or about $419,000. He is reluctant to go lower than that.

“If nothing happens at 680,000, I might have to pull it off the market,” Mr. Mehdi said.

July 13, 2022July 13, 2022

CRYPTO ROUT DEFLATES SOME WEB3 STARTUPS BUOYED BY PUSH INTO DIGITAL TOKENS

The cryptocurrency rout has spread to startups that offer users digital tokens, pushing down digital asset prices and driving away hordes of users.

The startups—part of what has been called Web3—allowed users to play virtual games and collect digital assets, and the companies’ growth was hinged on interest from people eager to wade into blockchain-based assets. The broader cryptocurrency downturn this year is causing a downturn in users in many Web3 companies, and players and investors are re-evaluating the utility of token-based business models.

“Many crypto companies can only exist by engineering speculation,” said Adam Fisher, a Tel Aviv-based partner at VC firm Bessemer Venture Partners. “The utility of Web3 is not clear at all.”

Investors in 2021 poured more than $4.5 billion into blockchain-based gaming, digital media and commerce companies—popular sectors of Web3 investment—compared with $197 million in 2020, according to data from Crunchbase. The increase mirrored the rise of cryptocurrency investing in Silicon Valley: Last year, venture capitalists invested about $17.9 billion into blockchain-related startups, compared with $2.1 billion in 2020, according to Crunchbase.

Axie Infinity is an online game where users can make money by breeding virtual pets and earning other digital assets on the blockchain, which they can then sell for cash on crypto exchanges. Axie Infinity’s parent company, Vietnam-based Sky Mavis Ltd, along with digital-art creator Yuga Labs and fitness app StepN, offered services they said were part of a new iteration of the internet that distributed ownership and power to users in the form of digital tokens. Venture firms such as Andreessen Horowitz and Paradigm raised billions of dollars in new funds dedicated to crypto startups.

Andreessen Horowitz led a $152 million investment into Sky Mavis in October, valuing it at about $3 billion. General partner Arianna Simpson touted Axie Infinity as part of a “play-to-earn revolution,” saying the ability to own and sell in-game digital assets would drive loyalty to the platform. Daily platform users reached a high of 2.7 million in November, according to data from Sky Mavis.

As the crypto boom has crumpled amid inflationary fears and a broader market downturn, the prices of Axie’s in-game tokens crashed, and Axie users fled the platform. As of July 4, the site had 368,456 daily active users, down 86% from November, a drop that came after hackers stole more than $500 million worth of cryptocurrency from the game in March.

Sky Mavis co-founder Aleksander Larsen said the company is in the process of phasing out the older version of Axie Infinity, so future users will have the option of using digital tokens or playing without them.

Proponents of Web3 say the blockchain is a new way to shift economic power from dominant companies such as Facebook parent Meta Platforms Inc. and institutions like central banks. Over the past few years, it has fueled the rise of sectors such as decentralized finance, where people are able to buy and sell cryptocurrencies validated automatically on the blockchain instead of relying on financial middlemen.

StepN is a fitness app that allows people to earn a token called Green Satoshi based on how much they walk or jog. Users, who earn the tokens after they buy a nonfungible token, or NFT, representing a pair of sneakers, flocked to the platform as the price of the Green Satoshi token increased in the first few months of the year.

In the past two months, the token price has crashed, and the number of monthly active users on the platform dropped more than 30% from May to June, according to data from Dune Analytics. A spokeswoman said the data excludes active users who don’t transfer their tokens for other cryptocurrencies and thus “does not represent the full picture for active users of StepN.” StepN, based in Adelaide, Australia, announced in January it raised $5 million from investors including Sequoia Capital India

Some Web3 companies’ difficulty in keeping users amid the plummeting prices of its tokens has validated some crypto sceptics’ beliefs that there aren’t many instances where consumers have a true use for blockchain-based services.

“What subset of things created in this cycle are going to work? A small subset,” said Haseeb Qureshi, a managing partner at crypto VC firm Dragonfly Capital. “That’s normal,” he said. The role of venture capital “is to try and find a lot of big ideas, and a few of them work and end up changing the world.”

Some well-funded crypto startups have introduced tokens before they have developed the products associated with those sales. The approach led to early revenue as users bought and started to trade the tokens, driving up their value.

One-year-old startup Yuga Labs and its partners, including gaming firm Animoca Brands, made more than $300 million in revenue by selling a collection of NFTs at the end of April representing unique plots of land in virtual world Otherside. Yuga Labs still hasn’t released Otherside to the public. Since the launch, the NFT’s floor price, or the cost of the cheapest NFT available for sale, has declined more than 70%, according to data from CoinGecko.

The declining price of the NFT for Otherside tracks a broader selloff in the market for NFTs, which were held out last year as a new way to own digital items but so far have been a way to buy luxury items popular within the crypto community. OpenSea, the world’s largest marketplace for such assets, saw $697 million in trading volume in June, down from $4.9 billion in trades in January, according to Dune Analytics.

“I believe that many of these NFTs are just temporary fads and are going to disappear,” said Marcos Veremis, a partner at Accolade Partners, which invests in crypto venture funds including Andreessen Horowitz. He thinks it will take time for NFTs to mature but remains optimistic.

“The current washout that’s happening is very healthy,” he said.

July 13, 2022

HAS THE INFLATION GENIE ESCAPED THE BOTTLE?

OPINION

For the past 40 years, inflation in the western world has not triggered any emotion…until now. Naturally, the question we must ask is: What exactly has caused the sudden panic, fear, and obsession with the subject of inflation?

In central banks’ pursuit of taming inflation, we have seen the blunt instrument of raising interest rates being applied worldwide. This has negatively impacted most asset classes, especially property and shares.

Since 1990, the general trajectory of interest rates has been downward, ultimately reaching the floor of a 0.1% p.a. official cash rate in Australia. In other words, “free money”. This led to an unprecedented demand for almost any time type of asset that can store wealth.

It is no surprise that with the onset of rate hikes, as well as wild predictions of the share market and property market falling in excess of 60% and 30% respectively, all types of investors have their eyes and ears fixated on what will happen next in the global economy.

On the topic of interest rates, it must be noted that if rates are raised too quickly, they could trigger a recession. On the other hand, if inflation is unchecked this could lead to deeper and more damaging recessions worldwide. It may take decades to return to normality.

This is undoubtedly the most pressing economic issue of our time.

To understand the origins of inflation and to arrive at possible antidotes, one needs to dust off their economics textbooks from an era that experienced this phenomenon firsthand – the 70s.

As one of my favourite sayings goes – “History doesn’t repeat itself, but it often rhymes.”

What is the True Origin of Inflation?

Milton Friedman is one of the most highly regarded economists of modern times, reinforced by his receiving of the 1976 Nobel Memorial Prize in Economics for his work on the study of inflation. He is the principal architect of modern monetary policies applied by western central banks.

The words Friedman uttered during his era are all the more relevant to today’s economic climate. As he put so simply: “Inflation is a monetary phenomenon. It is made and stopped by central banks.”

In other words, it is the volume of money being printed, which can be economically summarised as an increase in the money supply, that is relevant to the question of inflation.

Increase In The Money Supply

Since the onset of COVID, the increase in money supply has never been more significant in our economic history. We have been paid a raft of various government benefits to sit at home and disrupt normal business and spending habits. At the same time, the RBA increased the money supply to counterbalance the loss of productivity. Central banks were essentially “printing more money” at a rapid pace, while lowering interest rates and allowing the bank to issue more credit.

Also, let us not forget quantitative easing, where the government buys and issues debt, reducing the cost of capital and creating massive liquidity in the financial markets.

According to Friedman, once a rapid increase in money supply occurs, it takes anywhere between 6 to 18 months for inflation to work through the economy. We are seeing this phenomenon firsthand here in Australia and around the world, with inflation rates not seen since the 70s.

Friedman also noted that inflation is not a global phenomenon but a home-grown problem that is caused by central banks and can be remedied by central banks.

Supply/Demand for Goods And Services

In the normal free-market economic system, prices of goods and services adjust according to demand, with businesses either increasing or decreasing production. Over time, this results in new business entrants increasing supply, or businesses leaving the market and decreasing supply.

Counterintuitively, these disruptions do not cause persistent inflation. From the onset of COVID, the stop-and-start nature of the global economy has resulted in supply chain issues and overnight demand for certain services, with employers needing to re-skill and re-tool their businesses to cope with unexpectedly high demand.

Once again, using free-market logic, these issues will eventually resolve themselves over time. Economists often refer to these impacts being ‘transitionary’ impacts of inflation; that is, temporary.

Looking back at the ’70s inflation crisis, many governments around the globe tried to lay blame on the 1973 war in the Middle East that disrupted oil production and increased its price by as much as 400%. Comparisons can be drawn to the Russian-Ukraine War and its effects to supply chains and commodities globally.

Despite this, the teachings of Milton Freidman tell us that these supply shocks provide short-term inflationary pressure. In the long-term, free-market economics will find a way to adjust the demand and supply of these goods.

Future Price Expectations

Perhaps the most ignored and least discussed aspect of inflation is future price expectations.

In the US, Australia and most western economies during the ‘60s, inflation had been unchecked for many years, rising from 1.5% to 5% during the ’60s, and reaching more than 14% in the ‘70s. In addition, wage inflation in Australia for the five years during 1969-1974 went up by 98%.

If businesses and employees are accustomed to long periods of persistent, rising inflation, a natural response to the rising cost of living will be employees demanding an adjustment to their wages, leading to higher prices and higher inflation. In such a situation, inflation becomes embedded in expectation and becomes a self-perpetuating inflationary issue that is commonly referred to as the ‘wage-price inflationary spiral’.

The main lesson to be learnt from the 70s is that we cannot allow unanchored inflation expectations. Central banks must act swiftly to tackle inflation and maintain the status quo of people having anchored expectations of inflation so as to maintain faith in our financial system. This is to avoid inflation becoming uncontrollable and inflicting unnecessary harsher pain to the economy.

This is precisely why despite Labor’s promises to support the market with 5.5% wage inflation, the RBA recommends that it remains capped at 3.5%. Lower wage inflation guards against a wage-price inflationary spiral.

Thus, we reach a conclusion that a short recession is better than losing control of inflation and letting loose future price expectations.

Looking back at our central bank, the current actions taken by the RBA are taken right out of pages in Milton Freidman’s economic textbook. They are acting swiftly and assertively.

We believe the next 6 months will have a heightened level of volatility in both the property and share market until there is evidence that the inflation beast has been tamed. We anticipate that this will only occur towards the end of the year once we receive data reflecting lower inflation.

Investors should expect a short and fast series of interest rate rises over the next four months.

Hopefully, this will be followed by stability with minimal changes to the official cash rate during 2023. This would enable the economy to re-adjust to the psychology of normalised interest rates.

The RBA Governor, Philip Lowe, indicated that an official rate of 2.5% is the correct setting for a neutral monetary policy and money supply. Investors and borrowers should brace for this setting sooner rather than later and prepare for the fact that we will have higher interest rates and softening asset prices.

Australia’s present economic strength is significant with a low base of unemployment, plentiful natural resources and a food-rich economy. Despite this, the sudden increase in interest rates will pose an additional risk. As mortgage managers, we appreciate our risk assessment and are completely cognisant to the downward risk of depreciating property prices.

We assess the risk of properties depreciating by perhaps between 15-20% – maybe even more for some specialised properties as well as regional properties and vacant land. Additionally, some construction projects have a significant risk of delays and cost blowouts that continue to be the predominant risk factor for this type of debt over the next 12 months.

However, with the lack of supply, wage inflation, migration, low levels of unemployment, rental growth and times of inflation, property is naturally seen as an inflation hedge. Thus, property will remain relatively resilient through these inflationary times.

—

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

msqcapital.com

July 13, 2022

PELOTON BACKPEDALS IN RIGHT DIRECTION

Peloton Interactive built its business to delight its customers. Now it must do the same for its shareholders.

Peloton said Tuesday that it will stop producing its own hardware, exiting all owned manufacturing operations and expanding its relationship with its Taiwanese manufacturer, Rexon Industrial Corp. The move comes as Peloton’s new Chief Executive Barry McCarthy works to right the company’s financials, unwinding big, and in hindsight naive, bets co-founder John Foley made during his tenure.

Peloton’s shares, which have lost 92% of their value over the past year, jumped by almost 5% after the market’s open. A shift to outsourced manufacturing came as a relief. The about-face highlights what Mr. Foley got spectacularly wrong: Peloton acquired Taiwan-based manufacturer Tonic Fitness Technology back in 2019—a move Mr. Foley said was meant to help Peloton own the supply chain in an effort to increase scale and capacity, as well as to “delight” its members.

But, as online retailer Stitch Fix, another business currently undergoing major restructuring and suffering a similar stock price implosion also is learning, it is very hard to own every piece of your customers’ experience and grow exponentially without losing your investors. The numbers simply don’t add up.

Customers probably won’t care where their exercise bike is made, and in fact Rexon and other contract manufacturers had already been building some of Peloton’s components and equipment. Apple, a company with a reputation for design and a loyal customer base, outsources its manufacturing, largely to China. That wasn’t always the case, but outsourcing went a long way toward making the company highly profitable, courtesy of current Chief Executive Tim Cook. In Peloton’s case, it is worth noting that Rexon builds the company’s Tread treadmill and built its recalled Tread+, the sales of which are still on hold. As long as there are no more recalls, Peloton users are there for the company’s content, with the pretty hardware just a means to the end.

Mr. Foley wanted Wall Street to see Peloton as a growth company, and that is how it was valued at its peak. Ultimately, though, there are only going to be so many people interested in sweating profusely on an expensive stationary bike alongside kindred endorphin seekers the world over. As BMO analyst Simeon Siegel put it, Peloton is a company with a phenomenal stable of existing users and right now, it should be focused on “bear hugging” those loyalists.

Data from UBS show that adoption levels of Peloton’s cheaper app, which the company views as a key customer acquisition tool toward its more expensive subscription, continued to decline in May and early June. It also showed active users declining since January. YipitData shows subscriber retention for fiscal 2022 has slightly underperformed historical averages and that churn increased in June year over year. More broadly, Similarweb data shows “home fitness” web traffic declining 24% year over year for the most recently tracked two-week period in late June—the largest annual declines logged by the firm this year.

Wall Street will have to wait for Peloton’s fiscal fourth-quarter report for more granular details on how exactly Tuesday’s announcement will impact the company’s cost structure. A Peloton spokesperson confirmed the company would cut about 570 employees in Taiwan, but that 100 employees would remain in that business unit focused on quality control, engineering and research and development. And Peloton will get a new chief financial officer in Liz Coddington—previously of Amazon.com and Netflix—after the company said Jill Woodworth, who had served in that role since 2018, will step down.

The company we once knew as aspirational is quickly becoming a commodity. It will try to prove to its investors that it can at least be a hot one.

July 1, 2022

WILL ‘DECENTRALIZED FINANCE’ BE THE NEXT DISRUPTIVE TECHNOLOGY?

The International Monetary Fund’s (IMF) latest Global Financial Stability Report highlights myriad risks for the global financial system. They include the war in Ukraine, high debt, and soaring inflation.

But the report also warned about the impact of decentralized finance, or DeFi, an emerging set of financial services applications that are based on blockchain and other crypto technologies and don’t involve banks other traditional financial intermediaries

Citing possible systemic risk, the IMF wants governments to impose regulations because, the report says, DeFi results in the “buildup of leverage, and is particularly vulnerable to market, liquidity, and cyber risks.”

DeFi may not be a mainstream vehicle yet, but that doesn’t mean financial advisors don’t need to know about it.

What is DeFi?

It’s a kind of financial application that uses “smart contracts,” to operate on a blockchain platform, usually Ethereum. These software programs allow for fully automated, peer-to-peer financial transactions without intermediaries like banks or brokers, which generally means faster settlements of trades.

“With DeFi, users are able to perform most functions that a bank can,” says Jeremy Almond, founder and CEO of Paystand, a B2B payments platform. “This includes earning interest, borrowing, lending, buying insurance, trading derivatives, and trading assets.”

Supporters of DeFi say it offers the potential to democratize financial services for the unbanked. This is a key reason the Federal Reserve is looking at creating a digital currency.

The world currently has around 1.7 billion people who are unbanked, according to Yubo Ruan, founder and CEO of DeFi provider Parallel Finance. “Some of the reasons include a lack of government-issued IDs, problems with credit history, restrictive bank requirements, or a lack of banking infrastructure within a country.”

How easy is it to use?

It can actually be cumbersome. You need several applications to accomplish what may seem like routine transactions if done at a bank, and the jargon and concepts can get complicated.

“A combination of highly technical requirements, high fees, and confusing user interfaces are putting off potential users,” says Jackie Bona, CEO of Valora, a mobile crypto wallet. “This is making it difficult for people to get started in DeFi, scaring away those who need these apps the most.”

What are the risks?

According to Archie Ravishankar, CEO and founder of mobile banking app Cogni: “Regular consumers in this space lack the regulatory protections they’re accustomed to in traditional finance.” So if you lose money, you have no consumer protection, such as the Federal Deposit Insurance Corp. True, you could bring a lawsuit, but the target DeFi organization may be an offshore entity.

Another issue is volatility. Just look at so-called stablecoins such as Luna. Within a week, its value plunged from $80 to virtually zero, tantamount to a run on the bank.

So should financial advisors suggest clients avoid these applications?

Generally, the answer is yes. DeFi is an emerging category of finance and it can be difficult to perform due diligence on new and decentralized technologies. Even those applications that are backed by venture capitalists have seen breaches.

When it comes to clients, DeFi is for those that have a high tolerance for risk. And if they are interested in investing, they should allocate a small part of their portfolio to it.

Can DeFi disrupt traditional financial services?

Even if it takes only a relatively small portion of the global market, the impact would be substantial.

“DeFi certainly has the potential to disrupt traditional finance across the board, and in some ways it already has—on a small scale so far,” says Liam Kelly, Europe news editor for Decrypt, a cryptocurrency news site. But he adds, “a lot of this hinges on breakthroughs in scalability and cutting reasonable lines between things like centralization and decentralization or opaqueness and transparency. Another possibility is that these technologies simply get absorbed by financial institutions to a point where to the consumer, nothing has changed at your brokerage account, except now on the back end it’s running on Ethereum or another blockchain network.”

July 1, 2022July 1, 2022

THE WORLD HAS 192 PEOPLE WORTH MORE THAN US$10 BILLION, WEALTH-X SAYS

Despite the Covid-19 pandemic, the global billionaire population continued to expand in 2021 for the third year in a row.

There were 3,311 billionaires by the end of last year, up 3.3% from 2020’s 3,204. Their combined wealth surged 17.8% to a record US$11.8 trillion, according to a report released Wednesday by Wealth-X, a global wealth information and insight provider.

Out of the billionaire population, more than half were considered to be “lower end,” which includes those with a wealth between US$1 billion and US$2 billion. About 192 individuals, or 6% of the global billionaire population, each had a net worth in excess of US$10 billion. But this group’s combined wealth, at US$4.8 trillion, accounted for 41% of the total billionaires’ wealth and was just shy of the annual market value of the Japanese economy, the third largest in the world, according to the report.

Around 17% of the total billionaires’ wealth was held by 20 “super-billionaires,” or individuals with a net worth of more than US$50 billion. This exclusive list includes SpaceX’s Elon Musk with an estimated net worth of US$234.5 billion; LVMH’s Bernard Arnault, whose family has more than US$151 billion; and Amazon’s Jeff Bezos, with a net worth of US$142.2 billion.

This trend—wealth increasingly concentrated in the top-tier even of the world’s richest class—has many contributing factors, including the rapid digitalization of the global economy, central bank stimuli, the rise of “big tech,” and real estate growth, according to the report.

“Since 2020, the disruptive impact of the pandemic on the global economy has reinforced many of these trends,” the report said.

Regionally, North America still dominated with 1,035 billionaires, exceeding the 1,000 threshold for the first time. That was a 5.6% increase from 2020.

Europe registered the strongest growth, with its billionaire population rising 6.8% year over year to 954. Asia, not including the Pacific, accounted for 899 billionaires, up 1.8% from a year ago.

At the country level, the U.S. topped the list with 975 billionaires and a combined billionaire wealth of US$4.45 trillion. China (excluding the Hong Kong Special Region) came second with 400 billionaires, down 2.4% from 2020.

Germany, India, and the U.K. completed the top five countries with the largest billionaire populations.

Of note was India, which, with 124 billionaires, jumped four places from a year ago and replaced Russia as the fourth-ranked billionaire country. Russia’s billionaire population shrank 10.8% in 2021 to 107 individuals, landing to the eighth place on the list, according to the report.

India’s billionaire wealth creation “is being supported by a combination of robust economic growth, structural reform, infrastructure development and political patronage,” the report said.

Other key findings in the report include:

New York was the top city for billionaires with 135, followed by Hong Kong (114) and San Francisco (85);
Kuwait City, the capital of Kuwait on the Persian Gulf, was the top-ranked city for billionaire density, with one billionaire for approximately every 33,000 residents; San Francisco and Hong Kong came second and third, respectively;
The banking and finance sector was the dominant primary industry, accounting for more than one-fifth of the global billionaire population. It was followed by industrial conglomerates, real estate, tech, and manufacturing;
The top philanthropic cause among the billionaire class was education, with 65.9% of billionaires giving to this cause. Other top causes included healthcare and medical research (42.7%); art and culture (41.2%); social services (38%); and environmental and animal protection (19.1%);
40% of billionaires were aged 70 and over; 11% were younger than 50, with a median age of 66; Tech billionaires had a median age of 55;
About 13% of billionaires were female.

July 1, 2022

DIVERSIFYING WITH COLLECTIBLES

The collectibles market is booming. During the pandemic, folks with old collections dug them out, new collectors came to market, and trading activity and prices across categories from sports memorabilia to fine wines soared.

“I can’t even count the number of people who contacted us during the pandemic who hadn’t touched their collections in more than 10 years,” says Scott English, executive director of the American Philatelic Society in Bellefonte, Pa., who welcomed attention on stamps when four 1918 Inverted Jenny stamps—so-called because they were printed with an upside down airplane—fetched a record US$4.9 million at Sotheby’s last year.

Sales of global collectibles are expected to grow to US$692 billion from $412 billion over the next 10 years, according to Market Decipher, a Canadian market research firm.

For investors, a long view is advisable, says David Savir, CEO of Element Pointe Advisors, a wealth management firm in Miami. “Many collectibles are at values that may not be sustainable for the next two to three years,” he says. “Anyone buying should be holding them for over a decade and not expect to profit in the short term.”

The highest level of trading activity is in sports collectibles, boosted by the entry of sports-related nonfungible tokens, or NFTs, which exploded to $1 billion in sales last year—bigger than the entire 2020 NFT market—and are expected to reach $2 billion this year, according to the London-based consultancy Deloitte.

The overall NFT market surged to $24.9 billion last year, including digital creations from high-end fine art to collectibles. Sales of popular collectible series haven’t waned: In March, sales of Bored Ape Yacht Club and CryptoPunks hit $257 million and $81 million, respectively, according to CryptoSlam, an aggregator of NFT data.

Tangible sports memorabilia aren’t taking a back seat to NFTs: Sales in the traditional $4 billion arena have been breaking records. Last year, a Dallas Mavericks star Luka Doncic rookie NBA trading card sold for $4.6 million—the most fetched for a basketball card—and a 1952 Mickey Mantle card hit a record for baseball cards, at $5.2 million.

For classic cars, the first quarter of each year is when three of the biggest car auctions take place, says Juan Calle, co-founder and CEO of Classic.com, a site that tracks car market data. This year’s quarter closed with a total sales volume of $1.3 billion, double the same period last year, Calle says.

While other categories have less practical value, they can be attractive diversifiers for investment portfolios.

Consider fine wine’s low correlation to the S&P 500: just 0.3, which is lower than gold, real estate, or any traditional portfolio-balancing asset class, says Anthony Zhang, co-founder and CEO of Vinovest, which runs a portfolio of 500,000 collectible wine bottles stored in custom-built warehouses around the world. “We’ve seen a big uptick in interest from people who you wouldn’t traditionally think of as wine enthusiasts,” he says.

The wine market tends to shrug off factors that send stocks reeling, but has other sensitivities, such as tariffs and even gift-giving policies in authoritarian nations. When China banned gifts to government employees in 2011, popular Bordeaux wine values plummeted, says Robbie Stevens, Americas Territory Manager for London-based Liv-ex, a global marketplace for fine wine.

The broad Liv-ex 1000 index was up 19% in 2021, driven primarily by the popularity of Champagne and Burgundy. In the 12 months through March, Liv-ex’s index for Champagne was up 47.8%, and for Burgundy, 36.8%.

But no category is immune to broad economic trends, says financial advisor Savir. “Collectibles are more vulnerable to price declines in a recession than other assets, given the nonessential nature of many of them.”

This article appeared in the June 2022 issue of Penta magazine.

June 17, 2022June 17, 2022

WHAT IS STAGFLATION?

Stagflation—a toxic cocktail of stagnating growth and rising prices—is generally viewed as a relic of the 1970s. But economists are warning it could make a comeback.

What is stagflation?

The term is broadly defined as sluggish growth tied with rising inflation. Economists haven’t given it much thought since the 1970s, when U.S. consumers lined up to fill their cars with high-price gasoline and the jobless rate hit 9%.

Earlier this week, the World Bank sharply lowered its growth forecast for the global economy this year and warned of several years of high inflation and tepid growth reminiscent of the stagflation of the 1970s.

Stagflation spells trouble for the economy. Rising inflation erodes consumer purchasing power, and weaker demand hurts companies’ profits and causes layoffs.

Stagflation also puts the Federal Reserve in a bind because the central bank’s job is to keep both inflation and unemployment low. The Fed can raise interest rates to curb inflation—a path it has started on and intends to continue this year—but if it moves too aggressively it risks strangling spending and tipping the economy into a recession.

Why is stagflation a risk now?

Inflation is close to a 40-year high, and economists are worried about economic growth because of the war in Ukraine as well as lockdowns in China and supply-chain disruptions related to the Covid-19 pandemic.

Are we in a period of stagflation now?

Not necessarily. Inflation is high, but unemployment remains near a half-century low. The U.S. economy contracted in the first quarter as supply disruptions weighed on output, but most economists expect growth will resume in the second quarter because of strength in consumer and business spending. Stagflation would be a sustained period of both higher inflation and slower growth, not just one quarter.

Stagflation remains a risk to the U.S. economy, and there are similarities between the situation in the 1970s and today. Surging prices for oil and food are pushing up the cost of living, and business executives are voicing concerns about the outlook for the economy.

But the key difference between the situation in the 1970s and today is employment. During the 1970s and early 1980s, the unemployment rate at times was around 10%. It was just 3.6% in May 2022. U.S. layoff announcements, for now, are few and far between.

What is the difference between stagflation and inflation?

Inflation refers to an increase in prices for goods and services. The Fed likes to see a bit of inflation. It targets 2% inflation a year, because that signals healthy demand in the economy. But if inflation rises too quickly, the rapid price increases erode households’ purchasing power. Stagflation is a situation in which prices are rising, but demand is weakening and economic growth is slowing or contracting. As a result, businesses make less money and cut jobs, driving up unemployment. At worst, that pushes the economy into a recession.

Has stagflation happened before?

Yes, stagflation occurred from the early 1970s to the early 1980s, when surging commodity prices and double-digit inflation collided with high unemployment.

British Parliamentarian Iain Macleod is credited with first using the word stagflation in 1965. “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation.”

Its seeds were planted in the late 1960s, when President Lyndon B. Johnson revved up growth with spending on the Vietnam War and his Great Society programs. Fed Chairman William McChesney Martin, meanwhile, failed to tighten monetary policy sufficiently to rein in that growth.

In the early 1970s, President Richard Nixon, with the acquiescence of Fed Chairman Arthur Burns, tried to tame inflation by imposing controls on wage and price increases. The job became harder in 1973 after the Arab oil embargo drastically drove up energy prices, and overall inflation. Mr. Burns persistently underestimated inflation pressure: In part, he didn’t realize that the economy’s potential growth rate had fallen and that an influx of young, inexperienced baby boomers into the workforce had made it harder to get unemployment down to early-1960s levels.

As a result, even when the Fed raised rates, pushing the economy into a severe recession in 1974-75, inflation and unemployment didn’t fall back to the levels of the previous decade.

The stagflation of the 1970s ended painfully. Fed Chairman Paul Volcker drastically boosted interest rates to 20% in 1981, triggering a recession and double-digit unemployment.