Why are high valuations bad? You've heard me talk about how the trend of Fintech bundling, and the unicorn and decacorn valuations led by SoftBank and DST Global, are creating underlying weakness in the private Fintech markets. Of course, they are also creating price compression and consolidation in the public markets (e.g, Schwab/TD, Fiserv/First Data) across sub-sectors. But public companies are at least transparent and deeply analyzed. Private companies have beautiful websites, charismatic leaders, and impressive sounding investors. Often when you look under the hood, it's just a bunch of angry bees trying to find something to sting.
Let's make a collective decision to see the glass as half-full. While physical banking (7,000 US branches gone during 2012-2017) and employment in the sector (425,000 jobs lost since 2013) has been contracting, digital commerce, banking, and investment management have been growing. Even DFA is finally giving in and lowering fees on their $600 billion institutional mutual fund family. Of course, Fintech has been a slow and gradual transformation, not a rapid disruption. We can make a choice to bemoan the loss of the past, or a choice to express an excitement for the future and participate in its making. Which side are you on?
I look at how spending $8 billion can either buy you $3 billion of revenue from Ingenico, or the private valuation of Robinhood and/or Revolut. Would you rather have a massive cash-flow machine, or a venture bet on a Millennial investing meme? To articulate this question in more detail, we walk through the impact behavioral finance has had on economic rational actor theories, and why quantitative financial modeling often similarly fails to capture the underlying tectonic plates of industry. It may not be wrong to bet on Millennials. We talk about what identity economics (ala identity politics) means for market value and how to think about generational change.
I hope that you and yours are OK, socially distanced and stocked on essentials. Whether you feel it yet or not in daily life, the world is bracing for coronovirus impact. In this week's analysis, I look at the difficult trade-offs between health and economy, and try to quantify the impact of the likely slow-down. We look at some grim but useful concepts, like (1) the value of a statistical life, (2) what happened to the Soviet economy and life expectancy after perestroika, and (3) how our financial machines (NYSE, Robinhood, Maker DAO) are cracking at the edges. If you can do one thing -- be kind and gracious with each other as some things inevitably break.
This week, we look at what positive innovations could arise from the pressure cooker of the pandemic. I touch on health care data and privacy, molecular technology, digital work- and play-spaces, and their financial implications. Channeled productively, the next decade could see advances in these fields that we can't yet imagine.
This week, we dive into the social, economic, and financial implications of data in a post-COVID world. As Apple and Google work to build out the government's contact tracing apps to combat pandemic, what Pandora's box are we opening without consideration? As Plaid reaches into payroll data to accelerate small business bailouts, what power do we hand to aggregators? Will dignity-preserving solutions come to market in time? The opportunity for decentralized identity and data storage is clearer than ever. Or will fear drive us to make permanent compromises?
This week I discuss SpaceX, and its Dragon rocket carrying American astronauts to the International Space Station for the first time in 9 years. The 20 year old company is a testament to the incredible iron will and absolute insanity of the most visionary capitalist alive -- Elon Musk. We walk through various attributes of the company and recent launch to derive lessons for the financial industry and the entrepreneurs rebuilding it.
This week, we consider the impact of financial infrastructure collapse and who really gets hurt through the lens of Wirecard, Enron, and Lehman Brothers. Yes, there are investors in the entity that will lose value. But there are also clients and counterparties of Wirecard, like Curve, Revolut, and Crypto.com. In the case of Lehman, there was a $40 trillion derivatives notional amount that took twenty years to wind down. We also consider the most recent $500,000 hacking in DeFi of an automated market maker to see if there are common threads to be drawn between the two worlds.
What we know intuitively, and what the software shows, is that the pixelated image can be expanded into a cone of multiple probable outcomes. The same pixelated face can yield millions of various, uncanny permutations. These mathematical permutations of our human flesh exit in an area which is called “latent space”. The way to pick one out of the many is called “gradient descent”.
Imagine you are standing in an open field, and see many beautiful hills nearby. Or alternately, imagine you are standing on a hill, looking across the rolling valleys. You decide to pick one of these valleys, based on how popular or how close it is. This is gradient descent, and the valley is the generated face. Which way would you go?
Looking into the statistics of gambling is illuminating and depressing. The UK, where gambling is more widely accepted than in the US, sees rates of 40-60% across all adults according to 2016 research. Revenues for casinos are over $100 billion annually, and global gambling revenues, including sports betting and the national lotteries, amount to over $400 billion. That's like the equivalent of the entire software cloud industry. And it asymmetrically addicts and disadvantages the already disadvantaged (see academic research here, here, and here).