Banks must adapt to the new world of decentralized finance in which contracts will be created through crypto technology or risk becoming irrelevant, according to the Société Générale banker who was a driving force behind a recent high-profile digital bond launch.
Jean-Marc Stenger, the head of SocGen’s blockchain technology unit Forge, told Insider that banks face a “Kodak moment” if they do not adapt to decentralized finance or DeFi, referring to the failure of the famous camera company to transition to the digital era.
DeFi is the use of blockchain technology – the same tech that underlies cryptocurrencies – to create financial products.
It replaces the usual middlemen like banks and brokerages and instead lets pieces of digital code called “smart contracts” automatically execute, or control, financial products, taking care of things like interest payments, for example.
Stenger told Insider that SocGen – Europe’s sixth-biggest bank – sees DeFi as a big opportunity for the sector that brings the ability to do things “quicker, cheaper, [and] with more security or transparency for the regulators.”
Although some are skeptical the technology can truly disrupt the giant industry, DeFi’s advocates argue that it will revolutionize finance. DeFi’s fans say it will eliminate the need for intermediaries and central overseers such as clearing houses, and the fees they charge. Instead, a decentralized computer network would keep the contracts and transactions secure.
Stenger acknowledged the DeFi model might pose a threat to some of the ways banks traditionally make money. But he said: “When there is a shift like this in an industry, the financial industry as we speak, obviously it also means that you have to adapt and to change.
“Decentralized finance is certainly a threat to these financial institutions, which will not adapt and embrace this change, that’s for sure. There might be kind of a ‘Kodak effect’, if I may use that term, for some banks or financial institutions which again will not adapt quickly.”
He said banks would still generate returns from providing customers the services they want, which he argues will increasingly be DeFi contracts. “In today’s world, clients are paying for services where they see value-added.”
Uber has been using a complex tax shelter involving around 50 Dutch shell companies to reduce its global tax bill, according to recent research from the Center for International Corporate Tax Accountability and Research.
In 2019, Uber claimed $4.5 billion in global operating losses (excluding the US and China) for tax purposes – in reality, it brought in $5.8 billion in operating revenue, according to CICTAR, an Australia-based research group.
Uber had previously disclosed details about its Dutch tax haven in 2019, when it moved its intellectual property from Bermuda to the Netherlands, but CICTAR’s research sheds more light on how the company has structured its network of shell companies.
“This is the Champions League of tax avoidance,” CICTAR principal analyst Jason Ward told Dutch news magazine De Groene Amsterdammer.
Uber did not immediately respond to a request for comment on this story.
Uber transfered its intellectual property through a $16 billion “loan” from one of its subsidiaries in Singapore that in turn owns one of Uber’s Dutch shell companies, a manuever that grants the company a $1 billion tax break every year for the next 20 years, the researchers found.
“Uber has supercharged their tax avoidance approach,” Ward told Insider, using an intellectual property tax break “to prevent future tax bills, turning it into a much more useful, viable tax structure in the Netherlands.”
CICTAR also found several of Uber’s Dutch subsidiaries hadn’t submitted mandatory financial reports, and in India, Uber paid less than a third of the 6% tax the country imposes on multinational companies, according to the report.
“India is in desperate need of public revenue” to help it combat COVID-19, yet companies like Uber are able to avoid cointributing to that effort through tax avoidance schemes, Ward told Insider.
In Australia, CICTAR found that Uber was underpaying its tax bill by $30.5 million (AUD$39 million), according to Groene Amsterdammer.
Uber’s sophisticated efforts to achieve little or no tax burden on multibillion-dollar global revenues highlights a long-standing challenge governments face in enforcing tax compliance among wealthy corporations and individuals across borders.
In response, some lawmakers around the world, including the US President Joe Biden, have lobbied for a global minimum tax and other measures to reduce tax avoidance, which the Tax Justice Network estimates costs governments $427 billion annually.
The high-flying technology stocks that dominated returns in 2020 have seen their fortunes reverse so far this year amid a “violent rotation” into cyclical stocks, and there could be more downside ahead according to Fundstrat’s Tom Lee.
In a Tuesday note, Lee warned that the tech-heavy Nasdaq 100 could drop as much as 7% to its 200-day moving average if it doesn’t overcome five “wall of worries.” The index’s 200-day moving average currently stands at 12,438.
“Essentially, growth needs favorable outcomes on 5 of 5 ‘wall of worries’ to avoid further downside, [while] epicenter only needs a favorable outcome on 1 of 5 to work,” Lee explained.
Those walls of worries include inflation fears, higher interest rates, regulation from the Biden administration, a reopened US economy, and an increase in the capital gains tax rate.
“The outcome of these 5 events shifts the balance in favor of one group or the other,” Lee said, adding that epicenter stocks only need a few things to work while tech needs all 5 events to work in its favor due to crowded positioning among investment managers.
A rise in inflation, interest rates, and capital gains taxes would benefit epicenter stocks tied to the physical reopening of the economy relative to technology stocks, Lee said. And increased regulation would hurt mega-cap tech stocks. Finally, because most unrealized capital gains are in technology stocks, a hike in the capital gains rate could spur selling as some investors may seek to lock in a lower tax rate.
And if the Nasdaq 100 gravitates to its 200-day moving average, “there will be a panic out of growth stocks,” Lee said. That’s why Lee recommends investors cut their exposure to tech stocks in half relative to the S&P 500.
“In simple terms, we are saying to cut technology holdings in half and allocate this to epicenter sectors,” Lee said, adding that there is urgency to his message. With technology and the FANG mega-cap tech stocks representing 39% of the S&P 500, Lee recommends clients assign just a 19% weight to the sector.
But in the long-term, Lee sees plenty of upside ahead for the tech sector, and believe bargains will be available if the current decline continues.
Lee said in an interview with CNBC on Tuesday that investors should look at companies tied to the supply chain like semi-conductor equipment manufacturers, and believes that the technology sector will ultimately make up 50% of the S&P 500, “if not more” five years from now.
“It made me feel bad. Emotionally bad. Because I think it is misleading to people.” Gurley told The New Yorker. “My issue with Robinhood is, I think their mission and what they say they stand for is not actually true.”
Robinhood is a commission-free trading app popular among first-time investors. The firm’s website said it’s aim is to “democratize finance for all.”
Gurley called for the US Securities and Exchange Commission to ban payment for order flow models during the height of GameStop’s short squeeze. In early 2021, many retail investors, including those in the Reddit group WallStreetBets, pushed the price of GameStop up. Some said it was to burn hedge funds that bet against the stock.
“If the SEC/government wants to “fix the plumbing” the number one thing they should do is ban Payment for Order Flow,” Gurley tweeted in January.
Gurley gained fame through backing Uber in 2011 with $10 million, which brought Benchmark $8 billion. Gurley did not participate in Benchmark’s latest fund, but will remain at the VC firm that he joined in 1999, Insider’s Bani Sapra reported.
Mega-cap tech stocks like Facebook, Apple, Amazon, Microsoft and Alphabet face growing risks as President Joe Biden moves forward with his agenda, according to a Friday note from Goldman Sachs’ David Kostin.
Those five stocks represent more than a fifth of the S&P 500 as measured by market value, and for good reason, according to Kostin. The tech giants posted strong growth amid a global pandemic and their underlying revenue streams remained durable as other businesses struggled.
And while valuations appear stretched for the mega-cap tech stocks, fast growth and low interest rates justify them, according to Kostin.
But there are three big risks that these tech stocks are facing over the next year, which could lead to limited upside ahead from current levels, Kostin said.
1. Higher Taxes
Tax reform plans from the Biden administration could dent profits and spur selling by investors, according to Kostin.
Biden has proposed raising to corporate tax rate to 28%, though has signaled that a compromise around the 25% level is possible. That tax hike could decrease 2022 earnings for the mega-cap tech group by 9% relative to analyst estimates, according to the note.
A higher capital gains tax rate in 2022 could also lead to weakness in the tech stocks, as some investors who are sitting on big gains might sell in 2021 to lock in the lower current tax rate.
“The FAAMG stocks have appreciated by $5 trillion during the last 5 years, accounting for 29% of the S&P 500 market cap increase during that time,” Kostin explained.
2. Higher Interest Rates
Low interest rates have supported the valuation of high growth, long duration stocks for more than a decade as investors have learned to cope with near-zero interest rates.
But the trend of near-zero interest rates could be nearing its end, based on expectations from strategists at Goldman Sachs. The bank expects the yield of the 10-year US Treasury will rise to 1.90% by the end of 2021, representing a cycle-high since the pandemic began.
“All five FAAMG stocks have above-average duration compared with the Russell 1000, meaning they are especially sensitive to moves in long-term interest rates,” Kostin explained.
This dynamic was on full display in late 2020 and earlier this year. When interest rates rose sharply from November through March, FAAMG stocks underperformed the S&P 500 by seven percentage points.
“A similar period of rising rates in 2H 2021 would likely hamper FAAMG returns,” Goldman said.
3. Anti-trust Regulation
“Looking forward, the greatest fundamental risk to the continued market leadership of the five largest companies appears to be the potential intervention of regulators,” Kostin said.
Recent appointments made by the Biden administration suggest there is increased risk of a stricter regulatory regime for the FAAMG stocks, as they “face a laundry list of legal battles and investigations over their market power and competitive practices ranging from commercial litigation to DoJ and FTC antitrust lawsuits to Congressional probes,” the note said.
But investors don’t seem to be worried, as shares of Alphabet and Facebook are both higher since the announcement of higher scrutiny of their business practices.
Goldman said investors could be right, and that any antitrust actions have little to no major impact on the companies, but for now the uncertainty remains a big risk for the companies.
But the digital unit of currency has its drawbacks. Its volatility is widely recognized among many, which has led investors, including Warren Buffet, to criticize it and other cryptocurrencies as “risky” and “worthless.” And now, with the recent rollout of China’s digital currency, discussions about bitcoin’s vulnerability are gaining momentum.
Insider spoke to four experts in the crypto industry about their future predictions.
Brock Pierce, the former ‘Mighty Ducks’ star turned crypto titan
When asked where he sees bitcoin in 10 years’ time, Pierce seemed bullish while also taking a swipe at the US government’s fiscal decisions.
He said: “After seeing the growth of btc in the last 6 months (Mkt cap exceeding $1T) I’m very optimistic about the future growth of this technology. Our government’s poor monetary choices (overprinting, excessive spending, etc…) only work in Bitcoin’s favor – and from what we’ve seen in the last year, there’s no sign of slowing down.”
For Pierce, the crypto landscape has drastically changed since its inception. But according to him, a major attraction of the cryptocurrency is the fact that “every transaction that has ever occurred is put on an open – public ledger making fraudulent applications nearly impossible”. This is why he added, “if you haven’t done research on bitcoin or Blockchain technology – I would urge you to do so!”
James Ledbetter, editor, and publisher of the fintech newsletter, FIN
As fears loom over the effect of China’s newly launched digital yuan on bitcoin, Ledbetter said: “In general, the development of Central Bank Digital Currencies (CBDCs) can be viewed as an encroachment on bitcoin’s territory. If the digital yuan gains wide acceptance, it may discourage some people in China and elsewhere from investing in bitcoin.”
With a new wave of young people investing in the cryptocurrency, he added: “It scares me if people are getting into the bitcoin market because consciously or unconsciously they think it will never go down.”
This is among some of the reasons why people “should never invest more in any given asset than you can afford to lose,” Ledbetter added.
Joey Krug, co-chief investment officer at Pantera Capital
The reason why young people are investing in bitcoin is down to the fact that in general, younger people tend to hold assets farther out on the risk curve than other groups, says Krug.
Young people see the government printing trillions in fiscal stimulus, threatening to rapidly debase the US dollar, Krug explained. Meanwhile, they have an increasingly strong sense that opportunities for socio-economic advancement are becoming fewer and harder to come by. “The result is that far more young people today own bitcoin than they own gold. That trend is not going to reverse,” he added.
Krug laid out three key areas for novices to pay attention to: He said: “First, remember that bitcoin could go down 70% or more. Second, know that it could go up many multiples of that. Third – and in light of #1 and #2 – figure out an investment size that will allow you to hold bitcoin without driving yourself crazy or losing sleep over each short-term price swing.
He added that “if you buy too much relative to your other assets, you will inevitably panic and sell when it does go down. Bitcoin investing is a long game, and it isn’t for the faint of heart.”
Lucy Gazmararian, founder and managing partner at Token Bay Capital
“Today bitcoin is increasingly being viewed as ‘digital gold’ due to its scarcity value as there will only ever be 21 million bitcoins in existence,” according to Gazmararian.
In terms of how she thinks bitcoin will be faring in five-ten years’ time, it’s conceivable that it could become the world’s reserve asset, she said. “There are early signs of this happening today with corporates around the world beginning to add bitcoin to their balance sheets.”
She added that money is set to become “a far more complex payment instrument than it’s ever been before,” with the onset of digital currencies. This is because, in her view, the future looks as though central bank digital currencies, cryptocurrencies, and other digital representations of value will interoperate seamlessly within our digital economy.
When asked about the essential information potential investors should know, Gazmararian highlighted two key points. “Develop your own view on this new technology and get clear on why you are holding it,” she explained.
She also believes “there are distinct operational risks associated with holding bitcoin “as it’s a purely virtual currency and can be stolen from your digital wallet if your private key gets into the hands of a nefarious actor.”
As COVID-19 restrictions ease, companies across the world are starting to reopen their offices to welcome employees back to work and a number have decided to adopt a different working culture to what they had pre-pandemic. Some will give staff the flexibility to work in the office, from home, or another location, otherwise known as hybrid working.
Accounting and professional services firm KPMG is one of the many companies making this transition. The Big Four consultant plans to allow employees to split their time spent in the office, at home, and at client offices, Kevin Hogarth, chief people officer at KPMG UK told Insider.
“We’re clear that we’re not going back to working the way we did prior to the pandemic,” Hogarth said.
He explained that the majority of KPMG’s workforce were comfortable with continuing to work a proportion of their time at home as they had greater flexibility with organising themselves and didn’t have to commute. This gave them a better work-life balance, he said.
Despite this, Hogarth said KPMG staff missed connecting with colleagues so it was clear they wanted to spend some time in the office, but not as much as they did before the pandemic.
It comes as KPMG said that UK employees would get an extra two and a half hours off every week over the summer, plus an additional day off on June 21, when the last of England’s Covid restrictions will be lifted.
Jon Holt, KPMG UK chief executive said that the new way of working would enable staff to design their own working week while offices would be places to collaborate.
“The consequence of the pandemic means we have a whole cohort of people who have never been in the office and never been coached face-to-face - we need to get those connections back,” he added.
A hybrid company culture could spark litigation
Martyn Sakol, managing partner of Organisation Effectiveness Cambridge (OE Cam), a business psychologist firm, told Insider how hybrid working could lead to inequality in the workplace.
“Companies might be sleepwalking into discrimination by adopting a hybrid approach which appears to be more inclusive,” Sakol said.
Employees who work in the office five days a week are unfairly advantaged to connect, evolve, and adapt with each other, according to Sanok. This is because they have access to the boss, are better networked, have more interesting work to do, and could potentially receive an earlier promotion than those working from home more often, he said.
Whereas people at home may not have the same access to technology or working space or privacy compared to staff working in the office, Sanok said. In some cultures, women are more likely to work from home and this could resort to a 1970’s male culture in various offices, he added.
If business leaders aren’t careful, they could be in danger of legal litigation because of the “presence privilege and psychological bias” towards those employees who come into the office more, Sanok said.
Sandeep Mishra, professor at the Lang School of business and economics at the University of Guelph in Ontario, agreed with Sanok. Mishra told Insider that “folks working in the office will be more “present” in the minds of others in the organization,” meaning there won’t be “an even playing field” between those working in the office and remotely.
“That inequality in “face time” will likely inflame common cognitive biases,” he said. Everything from training and development, to collaboration, promotions, and task assignment – remote staff will “likely be disadvantaged without explicit policy to prevent otherwise,” Mishra said.
But Hogarth said KPMG had learnt a lot about its employees working remotely successfully.
“I don’t think hybrid working in itself necessarily increases the risk” of lack of inclusivity, he said.
The KPMG UK executive told Insider how the firm will support its staff through regular check-ins, a buddy scheme, and equipping managers with the right training to look after those working remotely.
“Now, we just need to be a bit more thoughtful about making sure that we’re proactively reaching out and checking in with our people,” Hogarth said.
Denise Rousseau, professor of organizational behavior and public policy at Carnegie Mellon University, told Insider the danger with hybrid working is that managers might assume they can manage the new environment in an old pre-pandemic manner and become “locked into the past.”
Managers might forget about development, the need to build bonds between colleagues and enquiring about information which they wouldn’t usually pick up from someone working remotely, such as problems at home, Rousseau said. Hybrid working filters out those cues, she added.
Managers “should know that if [they] want to be supportive,” she said.
Online real estate company Zillow is also planning to get employees back into the office post-pandemic, but CEO Rich Barton said in February that a hybrid model could create a “two-class system” which negatively impacts remote workers.
“We must ensure a level playing field for all team members, regardless of their physical location,” Barton said.
Hybrid working offers flexibility
Insurance marketplace Lloyd’s of London is also switching to a more hybrid working approach, according to a spokeswoman.
“Flexibility will be key when choosing where and when to work based on the needs of the team – this won’t be a ‘one size fits all’ approach,” she said. Office space will be used for employees to work together, whilst those working alone will do so remotely, she added.
Other employers, such as Amazon and JPMorgan, are more focused on returning to an “office-centric culture” after the pandemic.
A JPMorgan spokesperson pointed Insider towards CEO Jamie Dimon’s annual shareholder letter, which said that most of the bank’s employees would eventually return to the office full time. Dimon said that only some employees would be working under a hybrid model, while 10% of the workforce will be based entirely from home.
In the letter, Dimon mentioned some of the drawbacks of working from home, including video calls slowing down decision-making and interns and new staff members being the most negatively affected.
But the hybrid working trend is happening across a variety of industries. In the tech sector, companies like Google and Microsoft are embracing a more flexible approach to work culture. While in banking, firms such as JPMorgan and Deutsche Bank are also making their return-to-work policies more hybrid.
Bank of America’s Cathy Bessant highlighted the importance of 5G mobile broadband and 3D printing. Her fellow Bank of America tech exec David Reilly also spoke to the importance of 5G for edge cloud computing. See the full story here.
“Allocation via the computer is coming,” said one syndicate banker who works at a bulge-bracket investment bank. “Automation makes allocations for a bond sale more uniform, but it’s scary for bankers that focus solely on execution.” Keep reading here.
Bankers have no choice but to consider ESG when advising on deals, as it’s increasingly becoming a significant part of the market. Here’s what that means for investment banks, according to two top RBC dealmakers.
President Joe Biden promised his Cabinet would be the most diverse in history. Recently released data revealed his progress.
After saying he wanted his administration to “look like America” in December last year, the 78-year-old president has mostly succeeded in his plan to diversify the executive branch, according to an analysis by Insider in February.
As the country tries to emerge from the worst economic crisis since the 1930s, Biden has installed a diverse team to forward his economic and business agenda, which includes tackling entrenched inequities.
Last week marked the first 100 days of the Biden administration. We take a look at some of the actions taken since his January inauguration to promote diversity in business, the workplace and support communities disproportionately affected by the Covid-19 pandemic.
A $2 trillion infrastructure plan that targets funding towards underserved neighborhoods
Biden’s proposed $2 trillion infrastructure bill sets out to repair the country’s dilapidated road and bridge network, expand access to high-speed broadband and accelerate the clean energy transition.
The American Jobs Plan targets infrastructure projects towards historically underserved communities. The plan includes proposals to replace lead pipes that disproportionately harm Black children and a $20 billion investment to “reconnect” previously cut-off areas to affordable public transportation systems.
However, Republicans have opposed the bill, citing its “far-left” priorities and the corporate tax hike Biden has said will finance the plan.
Proposed funding to build a diverse clean-energy workforce, with investments targeted towards historically Black colleges
Biden’s administration is pushing for more solar panels to be installed in communities disproportionately affected by pollution, as part of his American Jobs Plan.
The Department of Energy announced on Tuesday that $15.5 million would go into installing solar panels in underserved communities and training a diverse clean-energy workforce.
The DOE also committed $17.3 million to fund internship and research programs, with a focus on training more students of color in STEM fields. More than $5 million will be directed to 11 colleges, including historically Black universities Howard and Florida A&M.
Historically Black colleges have long been denied equal access to federal funding opportunities, DOE secretary Jennifer Granholm said in a roundtable discussion at Howard University on Monday.
“This administration is really committed to making the transition to clean energy an inclusive transition, offering benefits to every community,” Granholm said.
A plan to introduce 12 weeks of paid family leave – and Biden hopes it will encourage women to stay in the workforce
The plan is estimated to cost $225 billion over 10 years.
The Biden administration hopes that introducing 12-weeks of paid family leave will help mothers to keep working, reduce racial disparities in lost wages, and improve children’s health.
Biden’s plan also commits to providing support for low- and middle-income families to access childcare, ensuring this does not account for more than 7% of their income, and investing in the childcare workforce.
The new order instead advances a “whole-of-government” approach to addressing racial inequities, and asks federal agencies to consider whether their policies and programs create barriers for underserved communities to access their benefits and services.
Targeted Covid-19 relief, including protections for those in insecure work
The landmark $1.9 trillion stimulus package includes funding commitments to help communities that have been disproportionately affected by the pandemic.
In the law, signed in March, $5 billion is provided to farmers of color to invest in their business, buy equipment and repay loans.
“This is a big deal for us,” John Boyd, Jr., president of the National Black Farmers Association, told CBS. “We see this as a great opportunity to help thousands.”
In the package, unemployment insurance for self-employed and gig workers, such as ride-share and takeout delivery drivers, has been extended until September.
In announcing the plan, Biden called on businesses to provide back hazard pay to frontline workers – who are disproportionately Black, Latino and Asian American and Pacific Islander – in retail and grocery sectors. It was employers’ “duty,” the proposal stated, to compensate workers who had risked their lives to keep businesses running.
Biden still faces a challenging road ahead
The president’s administration has taken bold and swift action in its first 100 days, even winning praise from more left-leaning members of his own party. But the impact of Biden’s policies will only be felt in the coming months and years.
Biden still faces an uphill battle to get his Jobs Plan and Families Plan through Congress in the face of Republican opposition and with a razor-thin majority.
Tech stocks jumped on Friday after a weak April jobs report led to a rally in stay-at-home stocks.
April saw an addition of 266,000 jobs, well below the estimates forecast of 1 million.
The April jobs report represented the worst miss since 1998.
Technology stocks soared on Friday and the S&P 500 hit a record high after a weak April jobs report led to investors bidding up popular stay-at-home stocks that have performed well during the pandemic.
April saw an addition of 266,000 jobs, well below the estimated forecast of 1 million. Unemployment rose to 6.1% from 6.0%. Economists had expected the rate to fall to 5.8%. The jobs report represented the worst miss since 1998.
The report likely gave some credence to the Fed’s wait and see approach with regards to raising interest rates and whether rising inflation is transitory or not.
While the Nasdaq 100 jumped following the release of the April jobs report, the Dow Jones moved lower as cyclical stocks tied to a reopened economy were out of favor.
Here’s where US indexes stood at 10:50 a.m. ET on Friday:
Square jumped 6% following its first-quarter earnings report, which surpassed analyst estimates. The company saw its bitcoin revenue jump 1,000% to $3.5 billion, and disclosed that it’s the third-largest corporate holder of the cryptocurrency.