On Cantillionaires, Sycophants and Losers

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning”

— Henry Ford

“The ultimate crisis will occur when the situation is so thoroughly perverted that the defenders of the status quo can no longer resurrect confidence in the system”

— Vincent LoCascio, Special Privilege: How the Monetary Elite Benefit at Your Expense

Over several previous blog incarnations I’ve been writing about a couple of core themes. When I started writing about artificially low interest rates and the bad outcomes they would produce, I didn’t even know the economic terms for some of the things I was writing about.

But I knew keeping interest rates artificially low, or even negative would act like a type of event horizon that would be impossible to normalize from. I knew keeping interest rates too low for too long would force fiduciaries and capital allocators out the risk curve in search of yield, and that the most vulnerable among us, such as senior citizens, were the least able to absorb the inevitable drawdowns that would entail.

I also realized early on that hot money and credit expansion would spur an explosion of money losing unicorns, who would suck up all the oxygen in all the markets cannibalizing entire markets at a loss in order to get that Series E or F up-round. That one became apparent to me when I started seeing billboards for one of my largest competitors every 1/4 mile across the entire city of Toronto on my daily commute, and every other place else I ever travelled to in North America. I knew that they were losing about $300,000,000 a year at the time. They also had some pretty kick-ass Super Bowl commercials.

I only learned about Richard Cantillon and his early economic treatise a couple years ago and since then I’ve never been able to shut up about The Cantillon Effect, which is what all this describes and what I think is the single most divisive, corrupting and toxic dynamic shaping our world today.

Max Keiser recently coined the phrase “Cantillionaires”, and that’s an accurate demarcation line between the elites and everybody else. It isn’t “the 1%”, it isn’t white privilege, it isn’t capitalism or managers vs labour.

This helps the trend of ‘taking America private’ in a multi-trillion LBO by a few PE firms.

Before neo-feudalism can begin, the S&P must be delisted and controlled by a few cantillionaires.

Cloaking these PE firms in darkness will speed up the process of neo-feudalism https://t.co/xaIDsUQF4Y

— Max Keiser (@maxkeiser) July 17, 2020

It’s this:

When the Fed, or the ECB or the JCB or any other central bank prints money out of thin air, and then deploys that “liquidity” into the market, are you, or the firm you work for, among the first, second or third order recipients of that fresh injection of money? If so, then you’re a Cantillionaire.

And the rest of us? We’re losers. Remember this old Hugh McLeod ditty? It was priceless….

Let me correct it to depict the capital structure of the world.

An odd kind of reverse alchemy occurs as the newly created “money” flows downward toward the masses.

At the top we have the capstone class, the Cantillionaires, the superrich politicians and the Uber-rich financiers and conglomerators.

After this is the “The Sycophant Class”. In this layer are the spin doctors and support apparatus of the überclass of the Cantillionaires. In his book “The Coming Neo-Feudalism”, Joel Kotkin called them The Clerisy and described them as “the New Legitimizers”. Their job it is to hone the narratives that rationalize why this cap table makes sense for the losers below, as well run the actual infrastructure that perpetuates it.

As the newly created “money” flows down The Global Cap Table, it undergoes that inverse alchemy and the nature of the newly created money experiences a state transition.

The nature of the change is this: After it gets a few iterations out from the money spigot at the top, it stops boosting asset prices and starts raising the cost of living. At the top end of the funnel it makes everybody in proximity wealthier, and then down at ass end of the funnel, where the rabble resides, it makes it more expensive to stay alive.

That’s The Cantillon Effect and I’ve been searching for ways to explain it so more people would understand it for quite some time now. But lately, I came across a pretty stark manifestation of it that should, I hope, finally make this clear.

The epiphany occurred as I was reviewing the Federal Reserve disclosures listing the recipients of the SCCMF Program. The SCCMF is the Secondary Corporate Credit Facility to buy up corporate bonds in an effort to shore up the credit markets:

“The Federal Reserve established the Secondary Corporate Credit Facility (SMCCF) on March 23, 2020, to support credit to employers by providing liquidity to the market for outstanding corporate bonds.”

It later expanded the program to add junk bonds.

The SMCCF is supposed to be some mechanism to preserve jobs in the wake of the economic meltdown, but when you look at the companies whose bonds are being purchased, they don’t exactly look like they were in danger of going under throughout the course of 2020:

Berkshire Hathaway (three seperate entities), Cisco Systems, Exxon Mobile, Fox Corp, Halliburton, Intel, IBM.

All companies that are worth billions, Billions. With “B”s.  You can see a full list is here. 

Then what really got me was seeing Amazon, a company worth over One Trillion Dollars, a company whose business is up so much over 2020 that they had to hire 100,000 more people to keep up with demand, and the Fed is out there using a program justified as a job saver by buying Amazon bonds (some of which actually trade at a lower interest rate than US treasury debt was wrong, it’s narrower spreads – mjr) under the SMCCF?

AMAZON.COM INC Consumer Cyclical 023135BP0 0.400 06/03/2023 4,000,000 $3,994,878

The thing about Amazon that hit home for me, is that among other things, Amazon is also a domain registrar, and Amazon is a DNS provider, which means that Amazon is a direct competitor to my own business, easyDNS.

So not only am I competing, head-to-head, with literally the world’s biggest company, the Fed has to put their thumb on the scale by buying their fucking bonds?

But wait, there’s still more, as I perused the list I found other companies I have to compete with, directly, head to head:

MICROSOFT CORP Technology 594918BA1 2.375 02/12/2022 5,500,000 $5,678,039
MICROSOFT CORP Technology 594918BP8 1.550 08/08/2021 3,000,000 $3,040,837
MICROSOFT CORP Technology 594918BQ6 2.000 08/08/2023 5,000,000 $5,228,349
MICROSOFT CORP Technology 594918BW3 2.400 02/06/2022 3,000,000 $3,098,973
MICROSOFT CORP Technology 594918BX1 2.875 02/06/2024 2,000,000 $2,157,622

easyDNS competes with Microsoft’s Azure. The Fed is buying Microsoft’s bonds.

ORACLE CORP Technology 68389XBB0 2.500 05/15/2022 2,000,000 $2,066,967
ORACLE CORP Technology 68389XBK0 1.900 09/15/2021 8,000,000 $8,133,006
ORACLE CORP Technology 68389XBT1 2.500 04/01/2025 4,000,000 $4,275,958

Oracle owns Dynect, who easyDNS competes with directly again. The Fed is buying Oracle’s bonds.

And from the June 29th disclosure I saw that the Fed was buying Google’s bonds, and Google is also in the DNS and domain registration business, yet another head-to-head competitor.

It’s tough enough running a small business when you have to compete with an 800 lb gorilla in your space. Especially when there’s a half dozen of them now and since everybody else who has to compete with these companies (not a single one with a market cap under 100 billion dollars) doesn’t get propped up by a central bank, printing up money out of thin air, it puts all other companies at a clear competitive disadvantage.

Isn’t this a little bit like picking winners and losers?

One might point out that small businesses were eligible for Federal funds as well. They sure were, they were eligible for loans and although loans and bond issues live on the same side of the balance sheet, the resemblance ends there.

In the US, any PPP loan over 25K is full recourse, and anything over 200K requires a personal guarantee. It’s similar up here in Canada. It means the business owner has to collateralize the loans, most often with his or her principal residence, and they have to be able to demonstrate that their business has been materially impacted by the pandemic.

I doubt Jeff Bezos has to personally guarantee those Amazon bonds, and if the Fed had a similar requirement to demonstrate business impairment to qualify I don’t know how Amazon would be able to make that claim with a straight face having just hired those 100,000 additional workers just to keep up with increased demand.

This is another example of that inverse alchemy we see as the new money trickles down the Global Cap Table:

At the top, it props up non-recourse bond issues and buoys the corporations who issue them. And when those bonds come due they can probably just do what every corporate behemoth does and roll them over.

At the bottom, the small business owner has to pledge his house and his personal assets as collateral and then those loan payments get added straight onto the monthly nut.

Referring back to the Global Cap Table, above The Loser Line megacorps can externalize their bad outcomes and in many cases, literally lose money for a living. Everybody up there makes their money on financial events

Below the loser line reside all the small businesses. The ones every politician says “are the backbone of the economy!” yet they enact policies that make it harder for them to remain open and as we’re exploring here, cultivate policies that make it near impossible to compete.

If all this wasn’t bad enough, everybody knows where this is headed next, once this economic depression asserts itself over the current blow-off top in stocks: eventually the Fed will probably step into the equities markets and prop those up too. So not only is the Fed buying my largest direct competitors bonds now, down the road they’ll be buying up their shares.

…with money they pulled out of their ass.

Does it make a mockery so-called free markets when the smallest businesses have to deal with the vagaries competition while the largest ones get propped up with the full faith and credit of the central banks?

This isn’t capitalism. I used to call it “crapitalism” or you sometimes hear it called “crony capitalism”, but extending Max Keisers’ label of “Cantillionaires”, I finally know what this is and what to call it. What we have here folks, is your good ole fashioned, centrally planned Cantillionism.

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The theme for today’s post is from Scott Galloway’s (@profgalloway on Twitter) “Casper Should Not Go Public” post on Medium, which he wrote in response to the news that Casper, a mattress company I had never heard of, had filed to go public, having lost $73.4 million on $250.9 million revenues in 2017 and another $92.1 million loss on $357.9 million in 2018.

This post isn’t about Casper, the Galloway article is superb in analyzing exactly why anybody dumb enough to buy this IPO deserves to lose the 30% decline in stock price he posits for the first year (which I think is being charitable).

However, Casper will not go public, as it has no business being public. Casper’s numbers are a sign of a frothy economy: firms that should be sold in the private market doing a kabuki dance (“technology” mentioned over 100 times in prospectus), asking people to suspend their disbelief until the founders, VCs, and bankers sell their shares and get their fees. That’s not going to happen. Here too, yogababble won’t cut it: “We believe we are the first company that understands and serves the Sleep Economy in a holistic way.”

The economics work better if Casper sent you a mattress for free, stuffed with $300.

He also compared Casper to other players in their space, and adjacent space, mentioning that Away, is better differentiated in a less competitive space (there are 175 online mattress retailers!), and Warby Parker, who actually looks to be headed toward a successful IPO (because they actually have a real business).

It was a phrase near the end of the post which grabbed me, having  circumscribed almost perfectly the frustration and angst rational economic actors have been feeling these past several years. Said rational economic actors include

• non-VC funded business owners
• people who save money
• people who pay down or pay off their debts
• fiduciaries responsible for investing and allocating capital
• and most anybody with a time horizon longer than the next quarterly earnings report

What he said was this:

Casper is being drowned and likely won’t survive. Away needs to be adopted by someone who will feed, clothe, and protect them. Warby looks to have the muscle and fat to survive an Amazon winter and emerge stronger.

It was that phrase “Amazon winter” that got me. Amazon poses such an existential threat to any sector it enters that even speculation that it may enter a space is enough to tank every public stock in it.

But it isn’t just Amazon that is scouring the economy looking for spaces to disrupt and so-called “value to unlock”, it’s every Amazon wannabe, trying to become the Amazon of their own space, or to lock up a “blue ocean” before somebody like Amazon can move in and eat it.

The end objective of all these players isn’t to have viable businesses, ones that do business the old fashioned way, at a profit.

Instead the end objective is to set in motion a cascading series of financial events at successively higher valuations. That’s the game now, and I’ve decided to call that game Unicorn Bingo. The macro effects of Unicorn Bingo are to usher in Unicorn Winter.

Unicorn Winter is the long, hard slog where credit induced asset bubbles on Wall Street suck up all the oxygen from Main Street.

It’s the Cantillon Effect, when geometrically increasing central bank balance sheets lift up the Unicorns’s valuations while pushing up the cost-of-living for everybody else.

The Unicorn Winter brings central bankers out of hibernation if the stock market pulls back 5%.

“Free markets”

Futures go up -> shorts get smoked

Futures crash -> CME steps in immediately -> Trump makes statement -> Powell capitulates -> Exchanges use circuit breakers -> Plunge protection team steps in -> Media starts doing 24/7 specials about buying the dip

— Quoth the Raven (@QTRResearch) December 5, 2018

The Unicorn Winter isn’t about making money, as in profits. It’s about monetizing what goes on in the mind of people who have no idea they’re being datamined.

Unicorns don’t create jobs. For the most part they create gigs. Temporizing everything from your home, your office, your server space, everything is delivered as-a-service, most likely at-a-loss and if there’s any humans involved in the chain at all it’s as part of somebody’s side hustle. Because that’s all there is now that everything else has been disrupted away in a sweeping tide of financialization.

In the Unicorn Winter even the also-rans get their hallowed exits.

• Adam Neumann became a billionaire for vaporizing WeWork
• Elizabeth Holmes is out seeking funding for her next deal
• And it all started when an entire class of banksters got bailed out for creating a financial crisis…

None of the bailed-out financiers here at #Davos2016 who live in Greenwich & collect Lamborghinis can understand why US voters are unhappy.

— Rudy Havenstein, Comité de salut public. 99.6°F. (@RudyHavenstein) January 21, 2016

But in the Unicorn Winter the people who didn’t want to play Unicorn Bingo don’t get exits. They get shut down, liquidated, foreclosed or stripped out in asset sales.

Ground Hog Day is Coming

We’re now in that part of winter that usually gets to me the most, when it’s cold, wet, miserable. It’s dark in the morning when I walk the dog before I take the kid to school, it’s dark when I walk her again after dinner. It’s always dark, always cold. The dog doesn’t seem to mind. She’s a Siberian Husky who was named “Tenacity” by the rescue folks who found her, all those years ago, chained to a pole in a swamp and left for dead.

During these early dark mornings it feels like it will be like this forever and I can’t even imagine walking her around in shorts and my “Got Hedge?” t-shirt someday in the future. But even though it feels like winter will last forever, I know it won’t.

To rest of us, exiles from game of Unicorn Bingo during the longest and strongest Unicorn Winter on record, we could use a dose of this Tenacity. Owning gold (and silver) is one way to just wait it out. As Bill Fleckenstein opined on a QTR podcast in the fall of ’19 (I think this one), you can argue with the Unicorns, you can try to short them, because they should be shorted and they should come back to earth, someday. 

But it’s usually a disaster because of the Fed put, which looks to keep working until finally, one day, it won’t. There was another podcast I recently listened to with Grant Williams (which I can’t seem to find now), when he talked about his witnessing the end of the Nikkei Bubble from his vantage point in Japan at the time. No crash, no notable day of reckoning, the way he described it, “one day the Nikkei just stopped going up every day. It just started going down”. And it’s been down ever since, for thirty years.

But if you buy gold then everything the central banks do to keep the Unicorn Winter going is actually wind at your back. It feels good not to be endlessly fighting the Fed and doing it without having to actually drink the kool-aid.

If you run a business, like I do, that has to survive the Unicorn Winter, then you need that muscle and fat Galloway ascribes above. You need actual customers for whom you can provide value, not data cows to mine and surveil. If you’ve made it this far without taking on VC, don’t start now.

Connect with other unfunded, real businesses doing actual stuff and start working together: joint ventures, co-branding, white labeling, sell your customers what they want instead of loading up on VC and taunting them with shiny new objects.

If you aren’t already, get involved in the crypto economy.  After the everything bubble pops, I think it will be one of the segments that fills the vacuum.

If you can get your business to the point where you can continue operating in your niche no matter how long the Unicorn Winter lasts, just imagine how things will be when it’s over. I’ve said it before, the two periods where we experienced the most explosive growth at easyDNS were immediately after the bursting of the .com bubble and then again after the GFC.

My latest book: Unassailable: Protect Yourself From Deplatform Attacks, Cancel Culture and other Online Disasters is available now.