On The Age of Financial Nihilism
When nothing has value, anything can have value
I’ve previously used the term “financial nihilism” to explain what’s happening in crypto, meme stocks, and the general speculative fervour gripping markets. The term was coined by Demetri Kofinas, who was a guest on the Grant Williams Podcast earlier this week.
I encourage you to listen to the whole thing, but I wanted to feature a few highlights from the interview (all emphasis is mine).
I’ve always defined financial nihilism as an investment philosophy that views the objects of speculation as though they were intrinsically worthless. And it’s a departure from Karl Popper’s view of reflexivity, later made famous by George Soros, whereby there is some, albeit at times tenuous relationship between price and value. It rejects that entirely and views value entirely as being subjective.
When nothing has value, anything can have value. This is playing out in many areas of the stock market right now, but most obviously in the world of cryptocurrencies. Kofinas has firsthand experience in crypto.
Crypto began as an ideological movement based in a view of bettering the world. It was the solution to the corruption in the aftermath of the great financial crisis. And what has happened is that that is no longer what drives prices in crypto. What drives prices in crypto is the potential for financial returns. And that is something that we increasingly see in other parts of the economy and in society.
Kofinas specifically talks about the Trump meme-coin-type-thing I wrote about a few weeks ago. At the time I focused more on the speculative element of the coin, but there’s something far more insidious happening, and it facilitates corruption on a grand scale, and in broad daylight.
The President of the United States launched his own cryptocurrency as a concession basket that anyone can put money into, post the transaction on the blockchain, or in this case on Solana’s blockchain, and prove that they’ve given the president money. The president’s wife has done the same thing. This is part of a slow evolution towards a more corrupt society. This isn’t some anomaly. We have various forms of corruption that contribute to this kind of nihilism.
Price versus value
Us old school investors have to believe that the things we invest in have an underlying value. That the price of those things is often wrong. And that we can take advantage of that to buy low and sell high. That's the old fashioned view that all of active investment management is based on.
But in many ways, we seem to be in a world where value itself doesn’t matter. Where the only thing that matters is price. I would argue that speculators who focus entirely on price have outperformed those of us who worry about silly things like value over the past two years. This extended disconnect between value and price solidifies the perception that we exist in a world of financial nihilism.
In my mind, there is a danger to this. In the absence of a link between price and value, we are increasingly at risk of misallocating resources, ultimately leading to the destruction of wealth.
The spark that lit this fire can likely be traced back to the Covid bailouts that took place throughout the developed world. Businesses were paid to close. Workers were paid to stay home.
What happens when the effort required to create wealth is divorced from the wealth itself? What happens when wealth accrues to people who benefit from being insiders, having privileged access to the halls of power, or are just simply crooks and swindlers, organizing an infinite number of legalized pyramid schemes?
Price is the thing that matters to us. That’s what we’re all coalescing around. And it’s money. It’s ultimately the worshipping of money. And our society has become so corrupt and so wealth obsessed that the target has become money and not progress, not growth, not moral excellence, not something else that could result in the betterment of society and a sustainable path towards the future. And that’s what I find so alarming.
The loss of trust
The cynics and conspiracy theorists have an uncomfortably successful prediction record over the past few years. And so the population becomes jaded. And so our standards fall. And so, we barely flinch when the President grants his name to a pyramid scheme on the weekend before his inauguration.
Again, this issuance of a cryptocurrency meme coin is significant, not because it signifies necessarily a meaningful increase in the amount of corruption in society, but in the form that that corruption takes, moving from a clandestine form of corruption where we’ve always assumed that corruption has existed, but there’s always been an attempt to hide it, to now where it’s a open larceny. And that is indicative of a banana republic. And in banana republics, there is no trust.
But this isn’t just about the Trump meme coin.
I think that what people who haven’t lived in low trust societies don’t necessarily realize is that when you lose trust, when you lose faith in institutions and you hand over power to populist demagogues and increasingly rely on figures to lead you, whoever those figures may be, you can’t get that back. Once the institutions are broken, you can’t just fix it again.
As a Canadian, this quote hits hard. Because this is a country that has been a high trust society for as long as it has been in existence. The current government has cynically taken advantage of that trust to enrich the connected class, all while the general population’s standard of living has stagnated (and arguably, has fallen significantly for many). Those of us born and raised in Canada have never lived in a low trust society, and are far too trusting of our institutions. We have become blind to the theft happening right before our eyes.
The casino
When money becomes free, the economy and the financial markets come to resemble more of a casino, and that’s I think partly what we’ve seen. I told you before we got on here, I got a notification from Coinbase about, like there’s still a chance to enter, make a trade for a chance to win. And this is a brokerage app.
Robinhood was doing the same thing. It’s the gamification of investing. So part of it’s just that, again, that’s the debauchery, that’s the… again, what is the term of affection in crypto? Degen. But I think there’s also something else that’s important here, which is there’s this… we all are familiar with the concept of exit liquidity, and what we’ve seen is that this idea of exit liquidity has elevated itself to this idea of exiting the system overall, that whether it’s Bitcoin, whether it’s some other cryptocurrency, whether it’s some meme coin, whatever it is if you can just make enough, you can exit.
Financial markets are a reflection of what’s going on in the rest of society. People feel like they can’t win if they play by the rules. And they’re probably not part of the connected class that can profit directly from the grift. But what they can do is gamble.
Once we have separated wealth from the effort required to create the wealth, there’s no point in working hard to build. Instead, the working class is incentivized to cheat the system, look for loopholes to exploit, and of course, to roll the dice on a big payday.
"Winning”
Over the years, people that made so much money win financial gains, contributing nothing to society that they basically exited… they’re unhappy, because money didn’t fill the hole.
Money wasn’t the thing that they thought it was. And when they got it, that’s when the depression began to set in. I think that more and more people experienced that today, because that call option has been available to more people, as we’ve sucked capital out of a bigger part of the pyramid at the base and allocated it up to the Keystone.
My experience, and I think this is relevant again to this idea of nihilism, because these gains were in crypto, my experience of realizing these gains left me feeling empty. And empty is not quite the word, actually.
Yeah, a little bit empty, but it didn’t feel the way I expected it to feel. And it also felt bad, because I felt that I was dumping on other people. I didn’t feel that I was making money and being rewarded for my contribution to the allocation of capital. I felt that I was making money in a pyramid scheme and I was taking other people’s money.
I don’t mean to harp on crypto here, but it’s just such a unique experience to be in an industry where everyone who’s smart, that I know who’s in it, who’s made money, knows that almost all of it is a scam, that almost all of it is a pyramid scheme, rather.
That’s a better way to put it, that it’s almost all pyramid driven. If you’ve been in crypto long enough, you remember what it was like when people actually believed that most of this stuff was going to do something. Now maybe it eventually will. You throw enough money at something, you get enough government regulation to support it. There are ways to use blockchain and other DLTs to certainly do certain things in finance, but the amount of capital, the amount of wealth that’s been generated in my opinion, it just doesn’t justify. And I worry about, and I have worried, and I’ve been open about this, I worry for in the long term, what does that mean for the success of our economy?
Misallocating capital
At the core of all of this is the idea that instead of wealth accruing to people who build things that move society forward and improve the lives of others, the economy is based on making a quick buck and getting out while the getting is good.
Kofinas does a much better job articulating this idea than I did.
We are in a phase where we are just focused on financial gains at the expense of everything else. Our capital model is broken, the capital isn’t going to the places where it needs to go in order to address some of these deeper social inequities, some of the bigger strategic needs that we have. And the launch of Trump’s meme coin, I think was especially disturbing, because Trump was elected on a certain platform that had to do with national rejuvenation. So when he came into office, and the first thing he did on an inauguration day was to launch a meme coin….
….You’re President of the United States. This used to be the most glorious office in the world, an incredible privilege to sit in the Oval Office, an opportunity to make change. You’re in your 70s, to have an impact, to have a legacy, to change people’s lives for the better. And you’re launching a meme coin.
It doesn’t make any sense. It shows you how depraved the morality in our society is.
And it’s not just about allocating capital as much as it is about the values we hold as a society.
It’s deeply concerning, what kind of world are we building? What are we speeding forwards towards? Do we even want this? Because we can’t have a conversation between ourselves, because we’ve lost a sense of common identity, there’s no place or way for us to have that conversation. And so, what ends up filling that vacuum are populists, demagogues and oligarchs, and that’s what we’re seeing in America today. It’s a free-for-all among people with power who are looking to use the system to advantage themselves. And nowhere is there a conversation about the public interest. And I hope, I pray, I’m still waiting for some kind of critical threshold to be reached, where we see people stand up and take a stand.
If you like what you’ve read here, I really recommend listening to the whole thing. It covers a lot of ground - AI, politics, religion, and a view of what awaits us as a society if nothing changes. It’s a great, thought-provoking listen.