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  • Raghav Sand

Spectacular Speculations

Risk and reward have been a part of human existence since time immemorial. In past couple of decades, the horizon period has shortened due to the penetration of internet. A few centuries ago, higher the risk a person/community was ready to take, the reward for all the bravado translated into better access to natural resources and trade routes. During the early days of industrialization, entrepreneurs put their heart and soul in developing and manufacturing products. Most ventures were bootstrapped and raising both equity and debt capital was a cumbersome process.

The level of national, corporate, and individual debt has scaled astronomical heights. Falling revenues combined with costly pandemic relief measures have increased global debt by $20 trillion since the third quarter of 2019. By the end of 2020, economists forecasted the global debt to reach $277 trillion, or 365% of world GDP. United States is the biggest economy in the world. The level of debt in U.S. has been rising at an alarming pace since 1994. There has been little or no gains in productivity metrices, but living beyond means has become a way of life.

Even after all the excesses and inefficiencies, individuals and nations are blindly following the U.S. model. The world is full of irresponsible speculators and fiscal practices are burdening future generations. Value addition and basic prudence are no longer counted as life goals. All the emerging markets (EM) crave for foreign portfolio and direct investment. These dollars are allocated to EM due to near zero interest rates at home. Investing for the sake of it has made the availability of money easy and it seldom has long term viability as one of the goals.

Data: U.S. Federal Reserve

New Age Pied Pipers

How does an activity become a trend? Nowadays, there are many ways by which trends catch up, but legacy and social media have made them more pervasive. There are ways by which an individual can set their finances in order; having a basic education and discipline are time tested ways to achieve the means.

If you are reading this article, it is safe to say that you know Elon Musk – the billionaire maverick who is best known for his electric car Tesla and space rockets company SpaceX. Musk has been playing the pied piper for some of the cryptocurrencies and his ardent fans are following suit. Microsoft co-founder Bill Gates has a polite advice for those who are trying to ride the crypto wave. Gates said, “Elon has tons of money and he is very sophisticated. If you have less money than Elon, you should probably watch out”.

U.S. Treasury Secretary and former U.S. Fed Chairperson, Janet Yellen is also critical of crypto currencies. “Bitcoin is an extremely inefficient way of conducting transactions and the amount of energy that’s consumed in processing those transactions is staggering,” Yellen said at the 2021 DealBook DC Policy Project.

The New Normal

In a recently published report, titled ‘The future of work after COVID-19’, McKinsey Global Institute has made some interesting claims. One of the key findings are: “In the computer-based office work arena, 70 percent of time could be spent working remotely without losing effectiveness, compared to most other arenas, where as little as 5 to ten percent of work could be done remotely.” The share of workforce in manufacturing and agriculture has been coming down sharply since the 1980’s and much of this workforce has found support in the services sector.

When a person is working remotely, he/she has more time on hand after efficiently working on deliverables. This free time can be used in more ways than one and one option is taking a plunge in highly speculative financial instrument trading. Few others work on upskilling and work on their overall well-being. Contemporary abbreviations such as FOMO – Fear of missing out – and YOLO – You live only once – have fueled the speculative start-up ecosystem. As more and more people get employed in the service sector, time and money will be in abundant supply for speculative pursuits. In 2019, the share of workforce engaged in the service sector crossed the 50% mark for the first time.

Data: WEF and ILO. Chart: The Know-How Journal

A Simple Yes or No

Futures and options (F&O) are derivates which can be bought and sold in the stock market. Hedge funds and other financial institutions trade in F&O on the basis of their sophisticated algorithm and gut feeling. Whichever way one looks at F&O, it is betting – and the stakes are high, very high. An online-trading start-up, Kalshi Inc. has raised $30 million from prominent investors including venture firm Sequoia Capital and Charles R. Schwab. Kalshi hopes to commence operations in March. Users will be able to bet on yes or no replies to questions; the questions will range from weather, economy and other everyday questions. For the time being, it will not venture in sports and elections.

Kalshi’s latest funding round has come after it won approval from the Commodity Futures Trading Commission in November to run a derivatives exchange.

In an interview to The Wall Street Journal, Kalshi co-founder Tarek Mansour, a former researcher at the Massachusetts Institute of Technology, shed light on the companies plan and the prospects. “A lot of trading activity today stems from an opinion about a future event,” he said. “You form an opinion about a certain future event, and then you figure out, ‘OK, how can I trade on that opinion?’…What Kalshi allows you to do is get the exact hedge, or exposure, that an individual or a business or an institution is looking to get, because they can trade in yes-or-no contracts.”

Risk Appetite and Portfolio

Extremely volatile assets may be included in small proportion in the investment portfolio. One should restrain from investing debt capital or retirement savings in high-risk financial instruments. Quants and billion-dollar hedge funds have mastered the art of playing the market. Losing a few million dollars over a week will not affect their going concern status, but wild correction in the market will certainly be a cause of concern for the average retail investor.

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