Kilkenomics

Investment Note #21 - 15th November 2024

Kilkenomics

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INTRODUCTION

A slightly different Investment Note this time. The Investment Team were on the road and attended Kilkenomics, the annual comedy and economics festival in Kilkenny. At the event, we got to hear from, amongst others, the following speakers:

• Sony Kapoor, a professor of geoeconomics and finance and a former adviser to the EU, the UN, the World Bank, the OECD, and the IMF.

• Marla Dukharan, a prominent economist focused on Caribbean nations.  

• Edward Chancellor, a financial historian, journalist, investment strategist and author of Devil Take the Hindmost, a history of financial crashes and The Price of Time, a history of interest rates.  

• Katie Martin, markets columnist and member of the FT’s editorial board and host of the excellent FT Unhedged podcast.

• Nassim Taleb, the Lebanese mathematician and author of several influential books on probability (The Black Swan and Fooled by Randomness).

• Mehreen Khan, the economics editor for the UK Times and co-host of the Heroes and Humans of Football podcast (recommended).

We will not directly quote any of the contributors, but we will attempt to provide points of insight or interesting perspectives that we gleaned. Importantly, this does not mean we agree with these views or ideas, but we do believe they merit highlighting.

INSIGHTS

Digital Currencies

• Regardless of your stance on digital currencies like Bitcoin, it’s important to recognise the intellectual proposition they present as an alternative to traditional fiat currencies. Even when approached with scepticism - as with Key Capital’s Investment Team - it’s evident that the underlying technology is innovative and sophisticated. It operates autonomously, with a built-in regulatory mechanism akin to an "IQ" and a memory, ensuring transactional integrity without central oversight.

• Blockchain technology that supports cryptocurrencies has been around since 2009. While its potential to revolutionise is frequently discussed, the question remains: if it is truly transformative, why hasn’t widespread adoption occurred already? For instance, settling a Bitcoin transaction still takes approximately 10 minutes by which time, as one contributor commented, your coffee would be cold.

• Digital currencies hold unique potential for countries with underdeveloped banking infrastructure, a benefit often overlooked by market commentators in developed economies. A compelling anecdote by one speaker illustrated this by referencing that individuals in developing economies frequently face high costs, delays, and limited access when relying on traditional systems for cross-border payments. In contrast, digital currencies enable secure, low-cost and decentralised financial services that bypass these barriers. By eliminating intermediaries and leveraging blockchain technology, these systems empower individuals and businesses to transact efficiently, even in regions where traditional banking is absent or prohibitively expensive.

• The rapid growth of stablecoins is reshaping financial markets, with Tether now among the largest buyers of U.S. Treasuries. Reflecting this momentum, Stripe recently acquired the stablecoin platform Bridge for $1.1 billion, its largest acquisition to date. Bridge provides an interface that enables businesses to accept stablecoins and other cryptocurrencies as payment. In addition, Stripe has resumed accepting cryptocurrency payments on its platform, making it easier for individuals to buy digital currencies with credit or debit cards and driving broader adoption of crypto-based payments.

• The rise of credit-building apps and digital currencies highlights how technology expands financial access. Credit-building apps, which help individuals improve their credit scores by tracking payments, reporting alternative credit data, or offering small, manageable credit lines, aim to support underserved populations, much like digital currencies. However, they also carry risks. These apps often use questionable methods to boost credit scores, potentially giving unsuitable borrowers access to credit and creating instability in financial markets. Adopting new financial technologies can accelerate inclusion but requires careful oversight to prevent long-term harm to traditional systems.

The Economics of Migration

• Globally, migration has become the hot-button issue of the year. Given that 2024 has become a historic year for the number of people voting in elections, it is unsurprising that this was a contentious debate among the panellists. In terms of the economic research, there were two main takeaways from the debate.

• The most significant is that, overall, migration has a net de-minimis effect on the overall economy; some migrants are net detractors while others are net contributors.

• The second was that attitudes to migration are typically highly correlated with perceived quality of life and general economic conditions. It is probably not surprising that as the effects of high levels of inflation globally over the last two years have hit consumers’ pockets, there has been a marked shift in attitudes towards immigrants.

Semiconductors  / Chip War

• Given the association of AI with the semiconductor sector, the panel unsurprisingly discussed AI at some length. The emergence of Údarás na Gaeltachta as an AI innovator in Ireland was a surprising revelation for the Key Capital delegation (which included a Gaelgeoir in its ranks). Údarás has initiated a tender offer for the creation of an Irish language AI tool to allow for real-time speech processing to improve the public’s ability to interact with the State in Irish and improve the Irish language’s cultural context in the digital world.

• Society’s dependence on semiconductors has increased exponentially in recent years, which makes us increasingly dependent on a highly concentrated supply chain with no built-in latency. “The world’s chip industry, as well as the assembly of all the electronic goods chips enable, depends more on the Taiwan Strait and the South China coast than on any other chunk of the world’s territory except Silicon Valley.” – (Chris Miller, Chip War, 2022)

• The semiconductor market has become dangerously concentrated, around three companies in particular. For example, 90% of the world's most advanced computer chips are made in Taiwan by TSMC. TSMC provide NVIDIA with its chips, which have made NVIDIA famous by their use in the AI bull run. The machines used by TSMC to make the chips are made by a company called ASML, which, although Dutch, does have significant operations in Taiwan.

• A geopolitical threat mentioned was that if China were to get to the point of being able to create the technology themselves or feel that annexing Taiwan may lead to the same result, an invasion of Taiwan could be likely. This would be catastrophic for much of the World given the global reliance on semiconductors.

• Society’s increased reliance on semiconductors has, in parallel, been matched by financial markets increased reliance on companies in the tech/semiconductor/AI ecosystem, which have made financial markets more fragile. The ‘Magnificent Seven’ now comprise almost one-third of the S&P 500.

• The US has grabbed the opportunity new technologies present, while Europe has focused on regulating it. This difference has driven top talent from Europe to Silicon Valley. The 41st winner of the BT Young Scientist award, Patrick Collison, went on to build a $65bn fintech company. Noticing this, Peter Thiel launched a $100,000 fellowship to hoover up top pre-university talent from competitions like the BT Young Scientist.

FINAL TAKEAWAY

One general point worth noting is that compared to last year there was, in our opinion, a greater level of tension and disagreement in a number of the discussions between both panel participants and the audience. This may have been a function of the fact that the event started the day after Trump was elected or that Ireland is in a general election countdown phase. Still, it was noticeable especially in the discussions on housing and migration.