As someone in the "tech industry", I find it pretty ridiculous that companies in all sorts of markets are all lumped together in "tech". Why is Tesla a "tech" company and not a car company? Isn't Space X an aerospace company? Why would you lump them together with Apple, a consumer electronics company?
Now we have all these "fintech" companies which, without the "tech" suffix, would obviously just be scams. In my opinion, people shouldn't call any company a "tech" company. It's a totally useless adjective. I can buy a bahn mi from my phone, might as well make the bahn mi shop a "tech" company while we're at it!
I see your overall point, but the “tech” part is real software and hardware chops.
Why is Tesla is a tech company rather than an Auto OEM? They make their own Enterprise resource planning software, design their own silicon for chips used in cars and neutral net training, do AI development, own the entire software stack in the car from controllers to infotainment. Software and hardware are differentiators.
By contrast OEM do internal combustion engines, assembly, and marketing. They outsource everything else. The only software is integrating the various third party software that runs the various outsourced parts of the car. Tech is treated as a commodity, engines and marketing are the differentiators.
Same will Apple versus Dell or Sony. Apple has one of the two leading consumer operating systems, designs it’s own chips, runs its own App Store, streaming services, etc. Software and hardware are differentiators.
As for FinTech? I don’t know much about them. I don’t think Robinhood developed its own successful OS or semiconductor designs. Slick apps is probably it. If the tech isn’t the differentiator then it isn’t a tech company, just a company that uses tech.
This may be switching the cause and effect. Startups have every incentive to stretch the "tech" label if it means easier access to capital, as the article points out. So, any company called "tech" gets VC funding.
Everywhere I see the phrases "smart guys" or "smart people" I think "people that spend 50+ hours a week doing this". I'm not at all convinced that the active traders on Wall Street are especially brilliant, they just do this stuff for a living.
No doubt those are very useful, and based on what I saw on Twitter today I'm supposed to mention that they're generally taught to care about slippage, which isn't high on the priority list for the Robinhood set.
That said, I keep thinking of a John List field experiment where he went around offering and trading some novelty items to people. Lots of the random people he met ended up making obviously inefficient/irrational trades, but merchants/traders that bought and sold those items regularly were pretty close to homo economicus-level trading. My takeaway from that has always been that spending a lot of time doing something for profit--where there's a clear incentive not just to satisfice but to maximize--usually ends up pushing people into efficient habits (or drives them out of the job).
It's just not surprising to me that the plumber is better at fixing sinks than I am--he does it all day and time is money. He's not necessarily smarter than I am (totally possible though).
"It’s much easier for the original seller of a token or asset to extract value from retail traders if the asset is in a thin, illiquid market where it’s hard to short-sell. In liquid markets with easy short-selling, the short-sellers can come in and trade against the over-optimistic retail traders and take their money. But when shorting is hard, the price of the asset is set by the most optimistic traders (actually it’s even higher, because of the option value of being able to re-sell it to optimists over and over!), so the original seller of the token can make out like a bandit. That’s why these thin, illiquid crypto token markets are such an attractive way for entrepreneurs to extract value from retail traders."
Oh, this explains so much about property values in metropolitan cities as I'm witnessing firsthand. Not just that, the property market is international and Asians (mostly Chinese) are going around buying stuff everywhere.
I mean, if you keep buying things from someone without ever selling them anything, eventually they'll use that money for something. I get the feeling that a lot of small-medium PRC family enterprises have sequestered a lot of dollars outside China over the years, but you can't spend them in China. What you can do is send your kid to an American college, get them on the H1B-to-endless-green-card-waiting-list train, and buy them a $1M house in Sunnyvale. I'm not even judging. I would absolutely do the same. And if we were just able to build enough new houses here, it wouldn't necessarily be a bad deal - I noted in a previous comment that American generally has a large endowment of buildable land and building resources (aka trees) which can be turned into houses. I'm not sure that overtly describing the trade this way would be very popular, but I think fundamentally people do understand that running a massive trade deficit to obtain cheap goods will come with a price somewhere, they're just hoping they won't have to pay it.
Makes sense. People blame Mainlanders for the high housing prices here in Hong Kong but I don't think that's it. HKers refuse to settle in South China and absolutely love it here and feel convinced that that housing is the best form of investment, I think. They don't generally go for US properties as they can't afford it but have bought up stuff in Australia, Canada, UK and, to a certain extent, Malaysia.
I think this depends on how you view efficient markets. If you take efficient markets as 'the price of any security is always right', then obviously markets are not efficient. If you think of efficient markets as 'it's hard to beat the market using better information' then this column is consistent with efficient markets, because these new trading platforms are not making money because they are so much more knowledgable, but instead because they exploit naive retail investors.
Nail on the head, Noah. And don't forget somewhat similar issues with things like WeWork and Uber where staggering sums were spent on markets that could never repay the investment. Tremendous amounts of capital and talent directed at taking suckers' money - both traders and investors. A bad thing, and the worst parts of it (the crashes) are yet to come.
I wonder though about the hardware and materials engineers who are plugging away outside the substack ecosystem, individuals and small companies immune from the entrepreneurial energy absorbing financial tech world. Their stories are less glamorous but maybe worthy of being told?
I agree. However, I would note that the shine on crypto has been wearing off lately, and most people in tech I talk to have been souring on it for at least the last few years.
Just anecdota but it makes me more optimistic about it. Besides, blockchains are actually cool - maybe by the time the buzz dies down we'll have some real value-adds for them.
What else, except the finanacialization of everything, can we expect when money is so cheap for so long? How else can you stay ahead of the dollar printing press?
Retail isn’t dumb, per se. But they usually don’t have the street-wisdom PHD that is required to protect their wealth from the rug pull that is fiat monetary policy. Is it any wonder that these investors, mounting in dread over the loss of their purchasing power, end up speculating on unwise investments that have the same patina as Bitcoin?
Retail investors are distressed, and therefore easily conned. And by the way, there’s more incentive to be dishonest when the government dishonestly debases the entire world’s savings to pay for everything. If the alternative to a speculative investment is holding fiat dollars marching inexorably downward, why wouldn’t you roll the dice on something that sounds like it will keep you ahead of inflation? DOGE is intensely stupid, but Elon Musk endorsed it, which is good enough for anybody who knows nothing.
I love this article and appreciate the insights from all of it. But contrary to this article, I do not believe this is a series of unfortunate coincidences of capital misallocation. It is systemic, and the dishonesty starts with the fiat printing press. The greedy scammers are just a symptom.
Although, I should add that TaschaLabs’ use cases made me chuckle. There’s definitely some good, old fashioned stupidity out there to complement the “bad capital allocation decisions are disproportionately the fault of easy monetary policy” thesis.
I'm wondering now where airline miles and other long-lasting virtual "currencies" like that fit in all this. I've heard that at various points recently, these rewards programs have been structured as separate corporations that had a market valuation far above the market valuation of the airline itself.
A side question: You mentioned how government support had benefited car companies such as Tesla, but they can be hit-or-miss sometimes (think the big three auto manufacturers). Is there a framework for thinking about governmental subsidies and when they foster innovation and competitiveness?
Oh yes. We should really think of it as early-stage VC. A ton of companies will fail, but a few will succeed so much that they more than make up for all the failures!
Great insights here, although it reinforces my views about the dangers of these financial "innovations". Dining-Kruger is in full effect when it comes to native years.
Great column, and really worrysome. One thing that research typically shows is that retail investors typically lose money through i. picking stocks that lose money, and ii. overtrading and losing money in transaction costs (the latter is also why women tend to be better retail investors: they tend to trade way less). Apps like Robin Hood do as much as they can to encourage overtrading, which really hurts exactly the people it is aimed at: the people that otherwise don't have access to financial markets.
It would be really nice if there were some kind of nudge where people are directed to the types of investments that are typically good for most people: Widely diversified passive index funds or ETFs.
I don't know if the point made can be in gdp and economic terms and be considered as the decline of manufacturing and the growth of financial services with block chain being a very specific type of services.
In the Uk it is the same. Manufacturing has collapsed reflected in the trade deficit but people say but look at our services exports so out trade deficit is not so serious.
Another point is that poor countries like China had no spare cash around to risk on services so their money went into the basics of manufacturing for import substitution first then exports. Only after that do they think of services. Services being more of a luxury product in an economy and indication of lots of saving in an economy.
I suspect the story on drones may have something to do with American lawsuit aversion. Or that their most useful application is military and US military acquisition is very conservative, the big defense makers aren’t interested in $1,000 sales.
But having worked through the dot-com boom and 2008 and etc, I remain unconvinced that 20-25% of VC going to total negative-value bullshit is unusual or any real cause for concern. You learn stuff even when you work on bullshit (one of the things you learn is how to recognize bullshit)
As someone in the "tech industry", I find it pretty ridiculous that companies in all sorts of markets are all lumped together in "tech". Why is Tesla a "tech" company and not a car company? Isn't Space X an aerospace company? Why would you lump them together with Apple, a consumer electronics company?
Now we have all these "fintech" companies which, without the "tech" suffix, would obviously just be scams. In my opinion, people shouldn't call any company a "tech" company. It's a totally useless adjective. I can buy a bahn mi from my phone, might as well make the bahn mi shop a "tech" company while we're at it!
Fair questions!
I see your overall point, but the “tech” part is real software and hardware chops.
Why is Tesla is a tech company rather than an Auto OEM? They make their own Enterprise resource planning software, design their own silicon for chips used in cars and neutral net training, do AI development, own the entire software stack in the car from controllers to infotainment. Software and hardware are differentiators.
By contrast OEM do internal combustion engines, assembly, and marketing. They outsource everything else. The only software is integrating the various third party software that runs the various outsourced parts of the car. Tech is treated as a commodity, engines and marketing are the differentiators.
Same will Apple versus Dell or Sony. Apple has one of the two leading consumer operating systems, designs it’s own chips, runs its own App Store, streaming services, etc. Software and hardware are differentiators.
As for FinTech? I don’t know much about them. I don’t think Robinhood developed its own successful OS or semiconductor designs. Slick apps is probably it. If the tech isn’t the differentiator then it isn’t a tech company, just a company that uses tech.
Any company that gets VC funding is automatically considered a tech company regardless of what industry it's in.
https://slate.com/business/2016/04/sweetgreen-sells-salads-but-calls-itself-a-tech-company-uh.html
This may be switching the cause and effect. Startups have every incentive to stretch the "tech" label if it means easier access to capital, as the article points out. So, any company called "tech" gets VC funding.
I have yet to see an argument that there is a better move for retail investors than “park money in a low-fee index fund and wait”.
https://web3isgoinggreat.com/ is a great way to keep up on the dumpster fire of crypto.
Everywhere I see the phrases "smart guys" or "smart people" I think "people that spend 50+ hours a week doing this". I'm not at all convinced that the active traders on Wall Street are especially brilliant, they just do this stuff for a living.
They are also embedded in effective systems - the data, relationships, technology, operations, efficient leverage, etc are very important.
No doubt those are very useful, and based on what I saw on Twitter today I'm supposed to mention that they're generally taught to care about slippage, which isn't high on the priority list for the Robinhood set.
That said, I keep thinking of a John List field experiment where he went around offering and trading some novelty items to people. Lots of the random people he met ended up making obviously inefficient/irrational trades, but merchants/traders that bought and sold those items regularly were pretty close to homo economicus-level trading. My takeaway from that has always been that spending a lot of time doing something for profit--where there's a clear incentive not just to satisfice but to maximize--usually ends up pushing people into efficient habits (or drives them out of the job).
It's just not surprising to me that the plumber is better at fixing sinks than I am--he does it all day and time is money. He's not necessarily smarter than I am (totally possible though).
"It’s much easier for the original seller of a token or asset to extract value from retail traders if the asset is in a thin, illiquid market where it’s hard to short-sell. In liquid markets with easy short-selling, the short-sellers can come in and trade against the over-optimistic retail traders and take their money. But when shorting is hard, the price of the asset is set by the most optimistic traders (actually it’s even higher, because of the option value of being able to re-sell it to optimists over and over!), so the original seller of the token can make out like a bandit. That’s why these thin, illiquid crypto token markets are such an attractive way for entrepreneurs to extract value from retail traders."
Oh, this explains so much about property values in metropolitan cities as I'm witnessing firsthand. Not just that, the property market is international and Asians (mostly Chinese) are going around buying stuff everywhere.
Yeah, housing markets have this feature for sure. Who can short a condo?
I mean, if you keep buying things from someone without ever selling them anything, eventually they'll use that money for something. I get the feeling that a lot of small-medium PRC family enterprises have sequestered a lot of dollars outside China over the years, but you can't spend them in China. What you can do is send your kid to an American college, get them on the H1B-to-endless-green-card-waiting-list train, and buy them a $1M house in Sunnyvale. I'm not even judging. I would absolutely do the same. And if we were just able to build enough new houses here, it wouldn't necessarily be a bad deal - I noted in a previous comment that American generally has a large endowment of buildable land and building resources (aka trees) which can be turned into houses. I'm not sure that overtly describing the trade this way would be very popular, but I think fundamentally people do understand that running a massive trade deficit to obtain cheap goods will come with a price somewhere, they're just hoping they won't have to pay it.
Makes sense. People blame Mainlanders for the high housing prices here in Hong Kong but I don't think that's it. HKers refuse to settle in South China and absolutely love it here and feel convinced that that housing is the best form of investment, I think. They don't generally go for US properties as they can't afford it but have bought up stuff in Australia, Canada, UK and, to a certain extent, Malaysia.
"The California Association of Realtors estimates that 3 percent of last year’s purchases went to international buyers. " Perhaps more in LA and SF.
https://calmatters.org/housing/2018/03/data-dig-are-foreign-investors-driving-up-real-estate-in-your-california-neighborhood/
I see this as an exceptional opportunity for California to tax foreigners living abroad.
I wonder if this data puts any of the efficient markets theorists to wonder.
Oh I think they kind of vanished into the mists...
I think this depends on how you view efficient markets. If you take efficient markets as 'the price of any security is always right', then obviously markets are not efficient. If you think of efficient markets as 'it's hard to beat the market using better information' then this column is consistent with efficient markets, because these new trading platforms are not making money because they are so much more knowledgable, but instead because they exploit naive retail investors.
And as Noah pointed out, without the ability to short sell you shouldn’t expect EMH to hold.
Nail on the head, Noah. And don't forget somewhat similar issues with things like WeWork and Uber where staggering sums were spent on markets that could never repay the investment. Tremendous amounts of capital and talent directed at taking suckers' money - both traders and investors. A bad thing, and the worst parts of it (the crashes) are yet to come.
I wonder though about the hardware and materials engineers who are plugging away outside the substack ecosystem, individuals and small companies immune from the entrepreneurial energy absorbing financial tech world. Their stories are less glamorous but maybe worthy of being told?
Of course they're worthy of being told! Those are the people we should be highlighting IMO.
I agree. However, I would note that the shine on crypto has been wearing off lately, and most people in tech I talk to have been souring on it for at least the last few years.
Just anecdota but it makes me more optimistic about it. Besides, blockchains are actually cool - maybe by the time the buzz dies down we'll have some real value-adds for them.
Good to hear.
What is the common thread here? Cheap capital.
What else, except the finanacialization of everything, can we expect when money is so cheap for so long? How else can you stay ahead of the dollar printing press?
Retail isn’t dumb, per se. But they usually don’t have the street-wisdom PHD that is required to protect their wealth from the rug pull that is fiat monetary policy. Is it any wonder that these investors, mounting in dread over the loss of their purchasing power, end up speculating on unwise investments that have the same patina as Bitcoin?
Retail investors are distressed, and therefore easily conned. And by the way, there’s more incentive to be dishonest when the government dishonestly debases the entire world’s savings to pay for everything. If the alternative to a speculative investment is holding fiat dollars marching inexorably downward, why wouldn’t you roll the dice on something that sounds like it will keep you ahead of inflation? DOGE is intensely stupid, but Elon Musk endorsed it, which is good enough for anybody who knows nothing.
I love this article and appreciate the insights from all of it. But contrary to this article, I do not believe this is a series of unfortunate coincidences of capital misallocation. It is systemic, and the dishonesty starts with the fiat printing press. The greedy scammers are just a symptom.
Although, I should add that TaschaLabs’ use cases made me chuckle. There’s definitely some good, old fashioned stupidity out there to complement the “bad capital allocation decisions are disproportionately the fault of easy monetary policy” thesis.
So . . . gold?
Come on, make me laugh.
NS: "extracting money from retail traders simply doesn’t strike me as much of a technological achievement."
:-). :-)
I'm wondering now where airline miles and other long-lasting virtual "currencies" like that fit in all this. I've heard that at various points recently, these rewards programs have been structured as separate corporations that had a market valuation far above the market valuation of the airline itself.
Thank you for this piece! It needed to be said.
A side question: You mentioned how government support had benefited car companies such as Tesla, but they can be hit-or-miss sometimes (think the big three auto manufacturers). Is there a framework for thinking about governmental subsidies and when they foster innovation and competitiveness?
Oh yes. We should really think of it as early-stage VC. A ton of companies will fail, but a few will succeed so much that they more than make up for all the failures!
Great insights here, although it reinforces my views about the dangers of these financial "innovations". Dining-Kruger is in full effect when it comes to native years.
Great column, and really worrysome. One thing that research typically shows is that retail investors typically lose money through i. picking stocks that lose money, and ii. overtrading and losing money in transaction costs (the latter is also why women tend to be better retail investors: they tend to trade way less). Apps like Robin Hood do as much as they can to encourage overtrading, which really hurts exactly the people it is aimed at: the people that otherwise don't have access to financial markets.
It would be really nice if there were some kind of nudge where people are directed to the types of investments that are typically good for most people: Widely diversified passive index funds or ETFs.
I don't know if the point made can be in gdp and economic terms and be considered as the decline of manufacturing and the growth of financial services with block chain being a very specific type of services.
In the Uk it is the same. Manufacturing has collapsed reflected in the trade deficit but people say but look at our services exports so out trade deficit is not so serious.
Another point is that poor countries like China had no spare cash around to risk on services so their money went into the basics of manufacturing for import substitution first then exports. Only after that do they think of services. Services being more of a luxury product in an economy and indication of lots of saving in an economy.
I suspect the story on drones may have something to do with American lawsuit aversion. Or that their most useful application is military and US military acquisition is very conservative, the big defense makers aren’t interested in $1,000 sales.
But having worked through the dot-com boom and 2008 and etc, I remain unconvinced that 20-25% of VC going to total negative-value bullshit is unusual or any real cause for concern. You learn stuff even when you work on bullshit (one of the things you learn is how to recognize bullshit)