21st Century Investment and Web 3

The primary influence in the Business Cycle is probably over leveraging. Leveraging more into a venture than it can feasibly return, in a timely manner, of course creates stagnation in the market. It appears to be an inevitability in the stock market; as the principle of the initial offering cannot ever be repaid. This makes investors part owners, as their exit would cripple the company, and put it at risk for liquidation. They are effectively locked in… indefinitely. The bond market has a similar issue; the difference being, the bonds can be shares in an organization or a market, rather than a particular business alone. The root of the Business Cycle appears to be models that allow unreasonable degrees of leverage.

The mortgage bond market is one of the most interesting; in that MBS packages have created a great degree of complexity in the bond market; that hasn’t been met with the required complexity to manage it. Over the past couple of decades it’s shown it’s vulnerabilities in just about every aspect. The manner in which it was addressed showed either confidence in it’s sustainability or lack of concern either way. A general degree of over leveraging in markets, that lead to eventual stagnation is in essence the anatomy of a bubble; and an accurate description of the Business Cycle. The Housing Bubble demonstrated that the mortgage bond market was the best of both worlds for investors. It had the stability of the bond market and the profitability of the stock market. It is a way to trade in an abstraction of the housing market. It should have been clear with the emergence of Collateral Debt Obligations that a great deal of over leveraging had taken place. This made the derivatives that emerged later nothing more than a compounding liability to market liquidity. It was an enormous bubble; and thus a short seller’s market.

The nuts and bolts of an investment model are of course rooted in investment and return; but risk management insists that returns can only result from reasonable investments. This is something that can be learned from lending; which was also unfavorably affected by the Housing Bubble. When the housing market began to stagnate, loans that were known to be risky were approved by lenders. This was allowing the prospective home buyer to over leverage their funds as well; for the sake of increase in the value of mortgage bonds. It was in essence, stimulating unsustainable demand in the market. This is the argument for the probability of lack of concern for the consequences; as the properties were collateral for the lenders, and the investment banks were considered “too big to fail”. The real consequences were to fall on the unsuspecting home buyers.

So, reducing the needs for an investment model must begin with platforms for investment and return and risk management in requisite complexity. The model will probably be a mathematical model; to ease measurement and prove feasibility. Since it’s a relationship between a pool of investors and money making agency, the interests of both need to be considered; to result in a positive sum game. This is not however the case with most of the most successful companies. Rather what tends to happen is turnovers in the CEO position. The investors over leverage in the company and are left to milk it for returns, when public demand for it’s products stagnates. This is all because the CEO could never afford to pay out returns and buy back all of the stocks.

So, measuring feasibility is not only… feasible, but it’s also being done in lending. That is generally a model for investment with a principle that returns in percentage of interest. Lenders are very good at determining how much principle and interest an agent or agency can pay back; and that is determined by how much income and maybe assets the agent or agency has to work with.

The problem with stocks is that the assets for collateral tend to be the business itself. When the CEO fails to produce returns, even in a stagnant market, the investors have no exit, and are left with the company as collateral. This is not only an eventuality, it is a tendency. This model does not appear to protect the interests of the prospective CEO, from the Initial Public Offering; because it allows the investors to over leverage in the venture, ride the venture to market stagnation, and then take the company as collateral… and the CEO exits with a fortune. This seems like a reversal of roles to me; where the CEO is destined to play the role of profiteer, and the investors are destined to run the company. It’s so counter-intuitively bad that it’s quite literally backward.

It may however be that a good investment model is improbable. I hope I’ve clearly described the difficulty in forming one; by comparison with the lending model. It appears that a properly functioning investment model is in essence a lending model; as profits must exceed the principle investment and the returns by enough to fund the company’s functions. This isn’t rarely the case; it’s never the case. The buyback cost of outstanding shares is the market capitalization of the company; therefor, buyback is liquidation. It’s the metric for valuation. It’s systemic.

The financial systems are structured to suit interests; and not so much to be stable. The model is outdated and only holding back hundreds of years of progress. The problem is the lack of organization. The model is one that is totally integrated with itself and uncooperative with everything else. Even in it’s internal structure, there is no separation of the interests of the investor and the producer. It’s all measured with one metric: outstanding shares = market capitalization = notional value of the company

My contention is, solving this problem requires separating the interests of the producer and investor. It first and foremost clearly defines the deal from the start. It’s no longer doing what a 17th century monarch is telling them to do. There is now a platform for negotiation, where they can argue for their interests… like a free world agent. It begins by giving both parties a choice of how their financial relationship develops. The profiteer can make their returns, and exit, or not, and the CEO can continue to run the company. Of course any instance of public trade needs fair organization; but it doesn’t have to be into perpetuity. That’s the issue that appears to be influencing the bulk of issues.

The separation of interests can be expressed in the emergent market models. The deal that negotiation brings about can be tokenized in a smart contract, that is structured similarly to a loan, and the addition coins that aid in distributing notional value. So, it’s separation of the interests of agents and of the business funds and notional value. It’s just an equation that allows for the needed mathematics.

Tokenizing the agreement on the blockchain essentially automates the process with the smart contracts. The coins are very good at measuring notional value with their relationship with the adoption curve. When the adoption curve reaches an asymptote and begins to plateau, there are options for the investor; rather than regulatory force to milk returns from the venture. When the principle investment is repaid those options still exist. The investor can continue to benefit from increase in notional value… if the adoption curve has not plateaued… and if they wish. Whether or not the initial offering is bought back and the adoption curve plateaus, the investor can trade their coins and move on. The smart contract will continue to make payments toward it… until the buyback. This is adding complexity to a model that appeared to lack it.

This model maximizes profit margins without the risks associated with eventual saturation. It allows investors to move on to new ventures for positive effects on GDP. This includes increase of horizontal growth and the resulting market competition. This in theory would promote overall economic growth; and substantially reduce risk of monopolies. This in theory would also promote innovation.

All this model does is reduce the functional aspects of the system, and separate them and the interests of the agents; so that the math can be done on organizing agreement and risk management. This is a model that allows for the agents autonomy in organization. Much study is brought to bear, including but not limited to Ashby’s Law of Requisite Complexity, Self Organizing Systems, Chaos and Emergence, General Systems Theory, Game Theory, Distributed Intelligence and of course Economic Crisis Theory.

This is of course a theoretical model. This requires the attention of more specialized training to organize and implement. There are not only logistical concerns to sort there are also legal concerns to sort. Fortunately, this is also a hybrid model; and much of the organizational knowledge exists and is either implemented or being developed. It appears to be a model that can work in the real world; and if not, there’s always allowing smaller corrections to prevent later market crashes.