By Chan Kung*
The development of the American financial industry is a part of the economic development of the United States. In the long-term development, it has accumulated a lot of wealth and has its value orientation and long-term strategy, which reflects the characteristics of the development as a great power. By observing American finance coldly, we will have a more complete and systematic understanding of the characteristics of the American financial industry.
From 1653 to 1999, the financial industry in the United States developed from Wall Street, initially an ordinary street, to lead the world’s finance today, exerting a decisive influence on the global financial market and the global economy. There are many financial institutions in the U.S., such as banks, insurance, asset management, investment banks, hedge funds, etc. There are also various financial markets, such as foreign exchange, currencies, stocks, bonds, futures, etc. There are also complex laws and regulations and a professional and authoritative regulatory system. This vast and complex system is extraordinarily efficient and productive, but it also tends to erupt into unexpected and costly crises. This is an enviable and frightening financial industry that is often elusive as well.
In the wake of the Covid-19 outbreak, the Federal Reserve has warned that the U.S. is facing serious financial risks. However, with the support of the U.S. dollar monetary policy, the financial market is now rapidly recovering. Many people hope to find some laws from the research and analysis of the American financial industry. In fact, in the accumulation of successes and failures, the financial industry in the United States is still able to continuously repair and reform itself and gradually grow stronger. The reason is that it has a deep foundation and is tied to the economy and society of the United States. Therefore, looking at American finance from a bigger picture allows us to understand its context more clearly. Sometimes, the deeper one studies, the more pointless it is. It is perhaps through observing American finance from a third party’s perspective that we will have a clearer picture of its characteristics.
First, insurance is the foundation of American finance. Insurance has always been the bedrock of American finance. The American financial market does not seem to be short of money. Instead, the market is awash with money and there are billionaires everywhere. Where did the money come from? In actuality, the money of American financial institutions, in addition to the Federal Reserve’s monetary easing, is more the “old money” accumulated over the years, and all of this money goes to the insurance company. Warren Buffett claims to be an investor; in reality he is doing insurance business, and the insurance business provides him with a steady stream of income. When the insurance industry falters, the foundations of the American financial industry will be shaken as well. On this basis, why is the Fed wobbling about negative interest rates? The main reason is that negative interest rates are bad for the insurance industry. Every year, Americans pay a large amount of money to insurance companies as if they were paying taxes, and then the insurance companies dilute the money to various investment classes and links. Such a capital system has always been the basic model of the American financial industry.
Second, the hot spot has created the continuous prosperity of American finance. America’s financial industry is not only good at spotting hot spots in economic activity, it is better at creating them. It can be said that the United States is a hot-spot society. Although all investment institutions have a lot of research reports, they are actually lagging behind the hot spots. Elon Musk’s stock is worth hundreds of dollars, because he is the person who can create hot spots. If you can create hot spots like him, you don’t have to worry about money, someone will promote your project with research reports, and support you with money. The United States is a hot-spot society, politicians will even create hot spots out of thin air to boost their approval ratings. The fourth-pole press in the United States seems to be very independent. In fact, this independence is also based on the creation of hot spots. Once there are hot spots, the news can only be appealing. Hot spots are trends, facts, power, and that seems to be true in the United States. As for how to create hot spots, this requires skills, an understanding of society, and a grasp and sensitivity to American social and economic activities, rather than real knowledge.
Third, sustainable “making money with money”. The financial industry is a service industry. In fact, this era has basically passed, with only a little remnant remains. However, the financial industry in the United States mainly plays the trick of “making money with money”, that is, the virtual economy. So, the financial industry actually serves itself, and there’s a lot of closed-loop movement of money in the financial industry. In this case, as long as there is liquidity, then there will be no major problems. The rules, that is, the law, are the fundamental basis for maintaining this closed-loop system. Whether the game can go on, it depends on whether these rules are broken, otherwise, the game cannot go on. Those who broke the rules did not end well in the United States. For example, former NASDAQ chairman Bernie Madoff was sent to jail for involving in Ponzi schemes. Moreover, the United States now has more and more tools to deal with the modern financial crisis, simply by injecting liquidity. The reason is also the change in the financial industry, which is a virtual economy, where the only resource is money. This means that it can be turned around if liquidity is pumped into it.
Fourth, the multi-level market system. The U.S. stock market looks perfect, but in fact, it is divided into three levels. The first level, stocks worth a few dollars can also be listed, but this belongs to the bottom of the “commoners”. The market can’t do without these myriad small-cap stocks, but these small-cap stocks are actually not decisive. In the past, many established companies such as Ford Motor had such a large market capitalization, and now they are at this level, because they do not have hot spots, yet they can still survive for a while. The second level is stocks that are worth dozens of dollars, which are at mid-level, and they can go up and down, yet they may sink as well. There are a lot of companies at this level, and they also have certain strengths. Many of them are companies that the Chinese are interested in, and are well-known in China, but they are not high level in the United States. The third level, which is the core level, is the hot stocks, which can go for hundreds of dollars. Tesla, Apple, Google, Amazon, and now Microsoft are all at this level. This level is the focus and the real core of the stock trading, which concentrate the capital and enable traders to make money.
Fifth, the “old capital” serves as the supporting pillar. The real pillar of American society is the “old capital” of “old money”. New money pursues hot spot, but it does not hold power. The society is just a big stage, where the pillar is the “old money” and the new money is performing on the stage. But after all, the new money is a “player”, and there is still a long way to go before it becomes “old money”. Bill Gates, for example, used to be new money, but he has become “old money” after he has gone a long way. Moreover, from “new money” to “old money”, there will be changes from mentality to behavior. In this process, the new money no longer plays the “hot spot” as in the past, it began to evolve to the level of mind and art, and began to consider the global issues. Bill Gates used to be like this, he made a splash when he built himself a high-tech home. But he wouldn’t do that now. It’s the same with investing. You start out thinking about making money, then you form a group and become an investment bank, you will start thinking about what “old money” should be thinking about.
The real United States is not what it appears to be. It is a huge country and it is not easy to understand. It takes time and patience, the ability to think in terms of its hierarchy, and of course the ability to understand. Only long-term observation and tracking can we slowly understand this country.
Final analysis conclusion:
The United States is a large country with a high proportion of the virtual economy, and its financial industry is complex and perfect, which is not easy to understand. But with time and sober observation, it is still possible to grasp its core and structure to understand the financial industry and understand the key to the American economy.
*Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.