Citigroup Services is a star, anti-tax counselling, AI transforming the physical world, USD for Life and the New Confessions of an Economic Hitman

Greetings, folks, and a warm welcome to the 7th edition of Friday Finance Weekly. Hopefully, my East Coast readers are finding ways to keep cool. Yesterday was the summer solstice – the first day of summer in the northern hemisphere and the longest day of the year. The first human observation of the summer solstice is thought to have taken place in Egypt between 6,000 and 6,500 years ago. So why does this matter? It really doesn’t. Let’s get right to it.

Boring is sexy, at least when it comes to banking. A little-known division at Citigroup, called Citi Services, is one of its five lines of business and is responsible for half of Citi’s total profit. Services include:

• Liquidity management and payments: opening bank accounts, payroll and collections, paying vendors, and cash management.

• Trade finance: offering letters of credit for cross-border transactions, establishing supply chains in new markets, and financing receivables.

• Securities services: securities issuance and general fund management.

If Citi Services were its own business, it would be valued at $90 billion to $120 billion, compared to Citigroup's current market valuation of around $114 billion. Despite an existing annual revenue growth of 8%, the division expects further growth due to the rise in digital payments and supply chain offshoring. During the 2008–09 crisis, even as Citi nearly failed, Citi Services managed to increase deposits by 20%. Cash management is essentially moving money around. Now we understand how 'import-export' businesses transfer money around the world — or launder, as some might say. (Source: WSJ)

Have you heard of anti-tax counseling? Apparently, this was an actual service, and a BC couple earned $1.42M in business income.

• What was their philosophy (I always find that word difficult to spell)? “Income tax was actually a labor tax resulting in a form of slavery which in turn was a crime against humanity,” according to Porisky.

• In his defense, Porisky stated that he did not dispute the assessed amounts because they were based on concepts that did not apply to his situation.

• In 2016, a B.C. Supreme Court judge sentenced Porisky to five years in prison for failing to disclose $1.42M of business income, plus unpaid GST, between 2004 and 2008.

• The judge disagreed, stating the appellants had relied on a flawed understanding of tax legislation and found that Porisky could be held liable for gross negligence.

I have no words to really describe this, but since we are down this rabbit hole, I suggest reading about the Queen of Canada, Romana Didulo (www.thekingdomofcanada.ca). (Source: CBC)

Ray Kurzweil wrote an article in The Economist on how AI will transform the physical world. He is credited with the logic behind how the human brain works and really created a blueprint for modern-day AI.

• Back in 1999, computer scientist Ray Kurzweil predicted that AI would surpass humans at all cognitive tasks, from science to creativity, within the next three decades.

• He now predicts that AI will not only transform the digital world but also the physical world. Three areas with especially profound implications will be energy, manufacturing, and medicine.

• Energy: The laws of physics suggest that massive improvements to battery storage are possible, yet the range of chemical possibilities to explore is so enormous that scientists are slow to make progress. By contrast, AI can efficiently sift through billions of chemistries in simulation – dramatically accelerating the rate of innovation for both photovoltaics and batteries.

  • Leading up to November 2023, humans had discovered roughly 20,000 stable inorganic compounds with technological applications. Google’s GNOME AI managed to increase that figure to 421,000 overnight.

• Manufacturing: The main costs associated with most goods today are energy, labor, and raw materials. AI is on course to vastly lower all three.

  • Cheap and abundant solar energy will be made possible once sufficient improvements are made in the areas of battery storage and PV cost reduction.

  • Strides in robotics will greatly reduce labor costs as well as raw material extraction costs. AI is already finding ways to replace expensive rare earth elements with common ones like zirconium, silicon, and carbon-based graphene.

• Medicine: Through the power of supercomputing, AI can run precise molecular bio simulations, quickly assessing billions of options to find the most promising medicines. In doing so, the expensive, slow, and statistically underpowered clinical trials of today will be replaced. Digital trials will lead to tailored medicines at the individual level.

  • Leading up to 2022, humans had determined the shapes of around 190,000 proteins. In a single year, DeepMind’s AlphaFold 2 discovered over 200 million.

With his original prediction now seeming inevitable, Kurzweil has doubled down – predicting that humans will achieve “longevity escape velocity” by 2029–2035 (i.e., the point where breakthroughs extend human life expectancy by more than one year for each year you remain alive).

I was curious as to why finance wasn’t on the list. It's because finance is a form of art. Yes, I know it's hard to believe, but all those spreadsheets have some pretty imaginative assumptions. Even AI can’t model year-over-year growth of 100%, but I can! (Source: The Economist)

I know what you're thinking: there isn’t much finance today. Well, that’s about to change! I'm sure you’ve heard about the demise of the USD.

Volatile US politics and the persistent threat of a government debt default have eroded confidence in US institutions and led many to expect weakening of the currency. Nevertheless, the gap between the dollar and any putative rival has only grown.

• As the main invoicing and payment currency, at least half of all international trade is denominated in US currency. You know what they say, even God recognizes green.

• Given their availability and consistent demand, the dollar is the principal global reserve currency – representing 59% of foreign exchange reserves held by central banks.

• The greenback also remains the preferred funding currency in global debt markets, including Europe, where two-thirds of securities issued by corporations outside their home countries are denominated in USD.

These preferences create a positive feedback loop, where demand for Treasury securities helps to fund US government borrowing, thereby keeping US interest rates relatively low.

False Prophets: Predictions of the dollar’s demise have greatly exaggerated the currency’s weakness.

• The 2009 eurozone debt crisis exposed economic and political weaknesses of the monetary union, and the euro’s share of global exchange reserves has since fallen from 28% to below 20%.

• In 2015, the Chinese economy faced challenges, leading to capital flight and a depreciation of the renminbi. Since then, the renminbi's use in global trade has increased negligibly, and its share of currency reserves has stagnated (< 3%).

Debunking adamant doomsayers:

• Foreign investors hold more financial assets in the US than American investors hold abroad, making the US a net debtor to the world. Basically, if foreign investors dump the USD, they will only hurt themselves.

• If the world turned away from the dollar and sent its value plummeting, US assets abroad would be worth more in dollars, whereas foreign investors would suffer as they converted their dollar-denominated assets back to their domestic currency.

• Despite the reality of the dollar trap, US foreign liabilities have grown by more than $21 trillion over the last decade – outpacing US asset growth by roughly 2.3 times.

• Another example is the dollar’s increased weighting in the Special Drawing Rights – an artificial currency created by the IMF that serves as a supplemental reserve for member countries.

In short, the dollar's position as the leading international currency is less about the United States’ strength and more about the rest of the world’s weaknesses. Until that disparity changes, there is no compelling reason to believe the dollar will decline. The world ultimately runs on oil, and the Saudi Riyal is pegged to the USD. If that were to change, things might be different, but it seems like the US has patched things up with the Saudis. I can’t find a compelling joke about the Mexican standoff as it pertains to the USD, so here’s a random joke: What did one dollar say to the other? Hey, Bill. (Source: Foreign Affairs)

Book Summary – The New Confessions of an Economic Hit Man

One of my favourite books is the New Confessions of an Economic Hit Man (EHM), this is a follow up to his book, Confession of an Economic Hit Man.

• In his original memoir, John Perkins describes how he was employed to entice resource-rich, developing nations with large loans for infrastructure projects which often resulted in indebtedness to the point of financial crisis. These loans were offered under the guise of fostering economic development but primarily benefited a small group of multinational corporations and political elites.

• In this updated version, Perkins explores how EHM has spread worldwide, how the system has become more treacherous, and how we can save our planet.

• Today’s fundamental EHM methods include manipulating economic data, inflating forecasts, tampering with accounting records, secrecy, deceit, intimidation, bribery, blackmail, unfulfilled promises, debt-induced bondage, and fear. These tactics were previously focused on resource-rich countries but are now used universally so that no one is spared.

• Throughout the book, Perkins reflects on the moral implications of his actions and calls for a more ethical approach to international development that prioritizes environmental sustainability, social justice, and genuine economic development for all people.

• For many decades, we have been engaged in a form of modern slavery, where the enslavers are the corporatocracy – the 1% who control most of the world’s resources. This system has led to a death economy where profit is prioritized over social justice and a sustainable environment.

Keys to switching from a death economy to a life economy:

• The ideas that drive economics must change – we must renew our focus on restoring life to areas that have suffered from the destructive practices of capitalism.

• Replace mindless shopping with meaningful experiences – buy locally and do so with a purpose.

• Campaign for changes and recognize people who are making a positive difference in the world.

• Join forces with like-minded individuals and seek employment with organizations and businesses that resonate with your values and drives.

Think about this as you have your avocado on toast with a Starbucks with an extra hot, sugar free vanilla, 10 pump, iced, upside down Americano.

Have a fantastic long weekend and please don’t hesitate to forward this to friends and family.

Cheers,

Sam