In 1837, the Danish storyteller, Hans Christian Andersen, wrote a tale about an emperor who was persuaded by a couple of smooth-talking types to acquire the most wonderful new clothes which were the best in his realm.  They were also magical so, although his subjects could see them, he could not.  But he was assured they were beautiful and, fearing retribution, anyone the emperor encountered complimented him on his most beautiful outfits. It took a small boy to point out the bleeding obvious; the man was, naturally, naked.  It was all a mirage.

Fast forward to today, and our business environment abounds in conmen who put forward schemes touting impossible returns, products which offer ridiculous benefits.

This month, we are going to take a look at a couple of candidates which, although not in any way the product of criminality, nevertheless challenge the senses in understanding how they can continue.

First cab off the rank is the dreaded crypto stuff.  I hesitate to call it a currency because there is next to nothing you can buy with it.  I know, I know, this is the way of the future, I can’t see the opportunity, if we don’t go in now we will forever be left out, etc. etc. etc.

Recently Bill Gates described crypto as being “100% based on the bigger fool theory”.  He may have a point.  Consider this; crypto does not pay interest or distribute dividends.  Nearly all of them have no asset backing, although so-called stablecoins attempt to match each coin with US$1 to give the feeling of security.  The profit you make from holding crypto comes entirely from the price being driven up by willing sellers and more eager buyers.

The events of the last month or so have provided a spectacular demonstration of what happens when there are willing sellers and hardly any buyers.

When most people think about cryptocurrencies, they think of bitcoin. After all, it remains the most significant. But it may surprise to know that there are over 18,000 cryptocurrencies active. Admittedly many are not traded or there is little interest. There are 193 countries in the world, and, after you take out all those using the euro, oh yes, and El Salvador which endorses bitcoin as the currency of choice, crypto seems dominant.

Except it isn’t.  Bitcoin, which started in 2009, still really has to gain traction apart from being a vehicle for massive profits and losses.  The rest of them demonstrate such volatility that you have to be a true believer to throw your hard-earned savings at them.  Businesses associated with the market, such as crypto brokers and lenders, are dropping like flies as investors abandon the risk in favour of safer havens.  The talk is of a “crypto winter”.  But it could be an Ice Age.

Its probably too early to dismiss crypto and call the end of the market, but the beautiful clothes which held so much promise have been revealed as a mirage.  If crypto comes back, it will need a proper suit.

My second candidate is the “buy now, pay later” sector (BNPL to its friends).  This is a really seductive concept.  “Turn maybe someday into today” is one advertising line.

It’s a simple idea.  You buy a product, delay the payment and the BNPL company pays the seller.  You then pay off your purchase over a few weeks.  For bigger purchases this can be longer.  Instead of interest, you are charged fees.  Not much difference in your eyes, but legally important for the company.

There are quite a few BNPL companies in Australia and business was buoyant. In the financial year to June 2021, Australians spent nearly $12 billion through these companies.  Business was booming, share prices were soaring.  Klarna, a Swedish BNPL and a world leader, has partnered with Commonwealth Bank in Australia to promote its services.

In November 2021, one of the largest accounting/consulting firms in the world, confirmed the positive outlook for BNPL in Australia, subject to the caveat that we needed to see it operate under different economic circumstances to the low inflation and interest regime currently in force.  The authors saw a bright future for this type of disruptive service, challenging the banks and credit card companies for a share of a booming credit market.

The answer came sooner than expected.

Surging inflation has lead investors to take a more cautious approach, stemming the flow of easy money which helped propel the share prices in this sector.  After all, when money is cheap and there is lots of it, you admire the clothes that others tell you are beautiful.

Add to that BNPL companies have been affected as falling discretionary spending, rising defaults, and higher interest rates squeeze already tight margins.  Klarna is a privately held company so share prices are not quoted.  But a year ago, its successful fund-raising efforts pointed to a valuation of US$46 billion.  Its most recent raising now indicates a valuation of US$6.5 billion.  Klarna is now shedding staff to cope with its losses.

In Australia, the BNPL company Zip has seen its share price fall by 95%.  In the US, the listed BNPL provider Affirm which has partnered with Amazon and Walmart has seen similar falls.  That’s serious money which has been lost.  A newspaper article in June carried the line, “the whole market is collapsing”.

Even though there is no regulation in this market, the Australian government has become alarmed by the level of debt default, indicating that people are getting themselves into credit debt which they can’t afford.  BNPL as an unsecured instalment loan for consumers may soon have its days ended.

Again, it may be too soon to call the end of BNPL, but it had had an existential crisis and will take some time to recover.

Cheap money dulls the senses.  The need to grab the latest profit-making venture and be part of the disruptive financial sector revolution is a vanity not unlike our dear friend the Emperor.  Marketwatch is not an investment adviser, for which he is eternally grateful.  But he can advise you before making an investment to make sure you have a firm grip on reality.  Unfortunately, as we can see, many of us are slow learners.

These cold evenings call for a log fire and a quaffable red, two things dear to Marketwatch’s heart.  And what better way to do this but to sit down with two old friends.  he first is Marketwatch’s dear, and long-suffering, spouse.  The second is a bottle of Caravan Petite Syrah 2018.  Not wildly expensive but delicious and worth a try for a wine which is not the standard shiraz or cabernet.  Enjoy.