New financial industry: FinTech

Are banks withal CB license still able to compete, based on their traditional portfolio of activities

The ability of VCs and PEC firms to trigger a future financial crisis will depend on whether they are systemic in size, crossborder exposure, size of activity, etc

Most VCs are supported by banks and institutional investors, and many of them are insured against losses. So, if they face a crisis, they will be bailed out by the private sector, and the resulting crisis will be contained.

So, it is hard to see why or how the activities of VCs or PEC firms will trigger a full blown financial crisis

I thank you for your enquiry; sorry for the delay in my response. I agree with you that a second GFC is on the horizon. The Global Financial System is highly complex, as you know, and depends on which jurisdiction we need to look at. The shadow banking systems differ enormously from nation to nation. The Chinese control their Commercial and Shadow Banking systems assiduously; they are managed with great precision with the two sectors in lockstep. They came to the rescue in 2008 with massive liquidity infusions into the global markets.

I suppose we need to look at the USA as they effectively control the global financial system. Over the last 10 years, US companies have primarily funded themselves via corporate bond issuance owing to artificially low interest rates under QE. This allows them to pay off any bank loan debt and switch to very low interest rates commercial bonds with long maturities. The majority of bonds, about 80 %, are rated 'Investment Grade' but we know, from 2008, that the ratings agencies are not necessarily correct. Junk Bond issuance is 20 % or less. Many "junk" companies can actually be quite viable with good positive cashflows, so we need to look at that category and analyse it carefully. To set the scene, let's look at the numbers:

Total Corporate Bond issuance is currently about $10 Trillion and Current Total Issuance is around $2 Trillion pa. Total US Bond Market is approximately $50 - $52 Trillion (including Corporate Bonds). Source: https://www.sifma.org/resources/research/fixed-income-chart/

Now, compare the above Total Commercial Bank Loans at $10 Trillion and add Total Mortgages at $17.6 Trillion plus above Bond market and we get an estimated Total Debt at around $80 Trillion

Now compare this to these liquid assets:

Total Housing Market Valuation = $44 Trillion (semi liquid)

Total Stock Market Valuation = $53 Trillion

Total Bond Market Valuation = $50 Trillion

Source: https://siblisresearch.com/data/us-stock-market-value/and https://www.zillow.com/research/us-housing-market-total-value-2021-30615/

We can now deduce a Total Wealth estimate of $150 Trillion, deduct Total Debt and we have in USA a Net Wealth of around $ 70 Trillion.

My colleague at: http://boomfinanceandeconomics.com/#/posted an article recently about Money Supply Expansion via Quantitative Easing Programs: Source: https://www.theburningplatform.com/2021/11/09/central-banks-step-back-luc-montagnier-warning-comparing-yield-curves-11-07-2021/#more-252637

"The central banks that have purchased the most assets over time are the US Federal Reserve, the Bank of Japan and the European Central Bank. Together, they hold around US$ 24.6 Trillion worth of assets (expressed in US Dollar Terms) on their balance sheets. That sounds like a huge amount but it is important to understand that these assets have been accumulated over long periods of time.

It is also important to understand that the assets purchased represent a fairly small portion of total assets available for purchase in their respective economies and they also represent a fairly small part of their cumulative economic activity (GDP) over the time taken in acquisition.

Let’s look at the US, for example. The total assets value available for purchase in the US is estimated to be around US$ 125 Trillion. The Federal Reserve now owns approximately $ 8.5 Trillion of those. This is just 6.8 % of the total. However, if we look at the Fed’s asset holdings compared to cumulative GDP over the last 12 years, then it is half that — (about) 3.4 %.

So, the US central bank has spent funds equivalent to just 3.4 % of cumulative GDP in order to support the US economy during a period of great economic uncertainty and great challenge — firstly, following the Global Financial Crisis of 2008 (when many US banks were on the brink of insolvency) and then following the Global Covid Fear and Panic Crisis of 2020. In BOOM’s opinion, the 3.4 % expended is a very modest sum. So, if the central banks slow or stop their purchases of assets, will it really have much impact? The answer is Yes and No.

Yes, it will have impact in nations where the economy is fragile and unable to generate sufficient fresh new money supply via new bank loan creation. And No, it will not matter in nations where the economy is on a strong pathway to stable growth generated by steady bank loan demand and therefore a growing supply of fresh new money.

When looked at this way, you can see that the central banks have acted fairly prudently over the last 12 years. Many commentators have continually talked about “massive money printing” and “risks of high CPI inflation, even Hyperinflation”. These comments are exaggerated to generate sensation as far as BOOM can see.

Granted, the sums of money involved seem monstrous, even extreme, to most people who are not accustomed to thinking in Billions and Trillions. But when looked at over time and in relation to total cumulative GDP and the total asset situation, they are not so outrageous.

While the QE arguments rage, BOOM concentrates on the shape of the sovereign bond yield curves for each nation. This is a significant indicator of financial stability for the present and for the future."

Thank you for all the replies, comments and information, especially to Peter Underwood. When assessing the stability risks, however, it is not only about the stability of the VC and PEC companies, but also about the stability of the so-called innovative unicorns, which according to leading economists have completely inflated company values ​​and stock market listings. Unlike the commercial banks with their lending against special collateral, the VC and PE companies have a direct influence on corporate policy as shareholders. And in many cases that is more than questionable! Quite apart from the fact that in a world of unicorns and billionaires there is hardly anything like market competition.

Very good points, Hans-Georg and I do agree with your reservations; they aren't really proper companies as I would understand them because I am a 'value investor' anyway and read balance sheets/P&Ls/Cashflow statements etc to get an understanding of the enterprise value. I know that the financial reports are often window-dressed, thus I read with caution and test their claims.

SPACS are the latest craze on Wall Street, equally dumb IMHO and just a scam to get an easy listing. I am sure they will all go down with the Zombies when the chips are down (forgive pun). It's not just gambling per se - it's irresponsible, criminal betting in totally distorted and fantasy markets.

I was caught with 10% of my portfolio in the Dot.com fiasco in 2000. What caused the 2000 stock market crash? The 2000 stock market crash was a direct result of the bursting of the dotcom bubble. It popped when a majority of the technology startups, that raised money and went public, folded when capital went dry. History might not repeat this time but I'm sure it will rhyme.

These two sites might help:

(Aug 2020) https://wolfstreet.com/2020/08/26/the-zombie-companies-are-coming/ and

(Dec 2021) Peloton (PTON – USA), is classic for us traditionalists:

https://adventuresincapitalism.com/2021/12/27/the-problem-with-ponzis/?utm_source=ONTRAPORT-email-broadcast&utm_medium=ONTRAPORT-email-broadcast&utm_term=OWTW+Send&utm_content=%F0%9F%9A%B2++%242%2C000+Coat+Rack+-+OWTW&utm_campaign=20220128

I think the answer is rather no. The venture capital and private equity firms is a limited and relatively small segment of the global financial market and have no potential to trigger a future financial crisis. I agree with your assumptions about pyramid scheme of the unicorns financing, but even collapsing of this scheme is not enough to trigger new GFC. As a example we can look at the dotcom bubble burst in 2000, which has not prompt world financial crisis. I guess, that example can be taken in account as some kind of empirical evidence.

More powerful factors may become triggers of a new crisis is central bank easing policies with it zero rate and pumping the markets by free liquidity.

Thank you for your answer, dear Dr. Vyacheslav Dodonov, which I think is a bit euphemistic though. I wish you were right with your "no". But the early start-ups from Amazon via Google, Facebook, Tesla etc. with their dizzying stock prices reach dimensions that go far beyond many national economies. In addition, they operate a tax minimization by shifting profits to tax havens and contribute nothing to the costs of the infrastructure in the countries of origin of the profits - they do not live up to their social responsibility in any way. At the same time, even under the Covid regime, the assets of their shareholders are growing immeasurably and thus disavowing the market economy system, in which they are causing enormous wealth inequality. The hype about their questionable successes infects the beautiful FinTech world, in which even more unicorns are to be created. Which straw will break the camel's back is a difficult question in a financial sector still dominated by questionable individual interests.

Further proof of the unicorns' completely exaggerated valuations: Klarna, the Swedish payment provider as the most valuable fintech in Europe, lost 85% of its company value in one year.

See: https://www.spiegel.de/wirtschaft/unternehmen/zahlungsanbieter-klarna-verliert-85-prozent-seines-firmenwerts-a-5c02d66d-ee9f-45e3-ad72-a3ae2a624c48

Now it's exciting to see what will happen with Twitter.