Introduction
With the popularity of Opus 10, several people provided follow-up questions and commentary about points I made throughout the piece. I am thrilled by the responses and wanted to offer public-facing responses to some below since a number of these are important concerns to highlight and areas I would like to spend more time exploring. A majority of the commentary fell into the following three buckets: Nationanlizing platforms, cycles, and the fact that many of us are thinking about this new era but can’t do much about it.
Remember, you can reply to the email directly with any questions or comments you may have. I look forward to hearing from you.
Nationalized Platforms
One reader posed the following question:
In your view, in a world where access to capital is no longer a constraint, but access to platforms and distribution channels is, should countries have exclusive control (not necessarily through ownership) of these platforms?
I opened the Opus with the idea of “everything is cyclical” – I think this applies to platforms and distribution, or at least has historically. One has to look back in history at the East India Company, Mississippi Company, and The British railway companies (Midland, Great Western, etc.) to see. These companies controlled the distribution of goods and had near-monopolistic control on their respective markets, whether that was Eastern trade or domestic goods distribution. Sure, us silly VCs can throw around terms like “network effects” and “flywheels” and “marketplaces” which lead to defensive positions, but it is all just new words for age-old business models. Looking back, the East India Trading Co was the most significant shipping line because it had the most buyers and sellers, which allowed it to get more ships, so on and so forth. Today that would be a “logistics marketplace for cross border e-commerce” company raising at 100x revenue! The only difference between that logistics marketplace of 200+ years ago and today’s “Uber Freight” or food delivery companies was that the East India Company owned all its assets. There was no such thing as 1099 workers or “Ship as a Service” (the original SaaS, I guess…). And yes, there is now some software to optimize routing. To top it all off, The East India Co had one of the largest naval militaries in the world at the time, and no moat is better than one looked over by canons.
Back to your main question, both the railroads, trading co’s, and even the large oil co’s (Standard, etc.) had some government involvement in their breakup in the case of the Standard oil example, but also in their longer-term operations like the Dutch government in the east trading co’s. None of them were ever nationalized but had government influence because of their sheer size. This governmental relationship is no different today with the technology companies and their lobbyists.
On the point of “exclusive control (not necessarily through ownership),” – I am not sure what this would look like in practice. Financially, you could do something similar to how the utilities are regulated today on an ROE basis and cap their economic rake on their power grids. This is being discussed right now with Apple’s App Store and their 30% cut on all revenue. Direct control would be tough to implement without some form of nationalization of the ownership. To many Americans, this sounds almost sacrilegious. Zooming out, one must ask if these platforms (The App Store, Google Search, The Amazon Marketplace, The Facebook Attention Network, etc.) are natural monopolies. Therefore, they should not be part of an open network, but instead forced to be one player systems. In Baumol’s words, “An industry in which multi-firm production is more costly than production by a monopoly.” Railroads, telecom hardware, roads, and power grids fall into this definition - hence why you see deep governmental involvement or ownership in these markets. Outside of potentially Amazon, none of the current day giant tech companies operate within naturally monopolistic markets from my perspective.
When all is said and done, I guess I revert to the innovation answer. These technology giants were once tiny startups like the ones I talk to every day, and new ones will come around and disrupt the current giants. We don’t need governments to get rid of giant companies; they do a pretty good job at that themselves.
More succinctly, governments rarely have to involve themselves in the incumbents within any market. If consumers demand other options outside of Amazon, Google, Apple, etc. the market will respond and create those options. Their “network effects” have not created impenetrable business models. With more capital then ever for new businesses, these attacks will only accelerate.
Do Cycles Still Exist?
Another reader asks:
I would be interested in hearing more thoughts around this statement you wrote: “Of course, something must happen before the music stops because the status quo will happily continue to operate.” — What are areas you are paying attention to that could make the house of cards collapse. Or, are we moving beyond cycles with this new paradigm of capital?
I believe in this new era of limitless capital that we have moved beyond capital cycles. This is a bold statement that goes against hundreds of years of history. The recent marriage of fiscal and monetary policymakers creates an intimate bond between the supply and ’ supply and demand sides. You can read all kinds of analysis on MMT and its controversy. Again, much of the argument comes from traditional economists worried about the exaggerated cycles that further indebtedness would create. Monetary policymakers have had no demand driving levers at their disposal - if one thinks QE is demand generative, they are wildly out of touch. Fiscally driven demand, via stimulus checks or other capital infusions, can arguably keep this oversupply of capital in check.
On the other hand, if this new period of monetary and fiscal involvement cannot fend off cycles, there are a few things to pay attention to. Assuming the Fed’s (and other central banks) money creation abilities will be capped, inflation will be their nemesis. If the consumer and corporate stimuli create inflation, then the Fed is between a rock and a hard place. If they raise rates, the corporate debt load will reprice and drive insolvency across zombie companies. At this point, increasing inflation is a feeling that many have forgotten, the Fed has not needed to react to it in over two decades. The credit supracycle shows that inflation is a dying myth that we may never see again in developed markets.
We Are All Thinking This
Finally, a reader that works in my industry of growth investing share the following:
I can’t say I disagree with any of the concerns but we have little to no choice but to keep on keeping on… Almost all private market capital is long only and we can’t stop allocating.
Most people I talk to in my industry immediately nod their heads in agreement about the current investment mania that I explained in Opus 10. But rarely does anyone have active positions acting against the frothiness of the market. It is important to point out the lack of shorting ability within private markets. This absence creates an imbalance in price discovery.
The issue with capital contrarianism is that it operates within a compressed temporal window in addition to its obvious directional window. The carrying costs of a contrarian trade can be literally expensive if you are using margin to short. You have to pay to have a short position and that may become too expensive overtime before things turn your way. If margin is not being utilized in the contrarian trade, the temporal cost can be too expensive emotionally (humans have a tough time holding incorrect opinions for extended periods) and in one’s job security. Almost all institutional capital in the world is not controlled by the capital’s owner but rather a fiduciary (otherwise known as the LP and GP relationship) who must report to the capital owner at the end of the day. The fiduciary may have a contrarian viewpoint but cannot fully exercise it because of poor performance before returning to reality because of their job security. The middle ground between going with the flow and trying to swim upstream against it is never getting into the water. But, capital allocators holding cash, or even completely beta neutral positions, may end up in the same boat as their contrarian counterparts. Investors get fired faster for not making any decisions than they do for making poor decisions because the quality of a investment decision takes time to show itself.