Bhuvan

A few fragmented thoughts on AI

Sat, 15 Nov 2025 00:00:00 GMT

I'm reliably told that we are in the age of artificial intelligence. I've also been informed that nobody gives a shit whether you think these systems are artificial or whether they are intelligent. I've also been told that these are debates for philosophers, linguists, and other people with way too much time on their hands. I'm not saying they're jobless, but there's a certain horniness for these debates among these people. Look, regardless of what you call them (artificial intelligence, generative AI, or just large language models) and whether you agree or disagree that they are intelligent, the fact is that in a vast majority of domains, these models are much better than human beings. That's just the reality. You may not like it, and you may not accept it—that's fine. All I can say is that facts don't give a shit about your feelings. The other fundamental reality is that not thinking about generative AI is a luxury that very few people can afford. Not thinking about how it affects our profession, our lives, our world, and what it means for our personal trajectory is a costly mistake. Now, there is no shortage of commentary about generative AI: hot takes, idiotic views, and loud opinions. While it's good to listen to "smart" people and their views about AI, the best way to have a reasonable opinion about these technologies is to actually use them. I understand the temptation of listening to a couple of loudmouths and passing off their opinions as yours or forming opinions that conform to your priors, especially if AI threatens your job, identity, or sense of self. But that's not a good idea. So instead of adding to the noise with another full-fledged post or hot take, I thought I'd just jot down a few fragmented thoughts about generative AI. Now, my default model for thinking about my beliefs is to consider them as tentative. I'm stupid, trying to be less stupid. These are beliefs and opinions I have based on the evidence I have as of today, and I can change my mind tomorrow if I come across new evidence or frames of thinking. So, please keep this caveat in mind and make up your own damn mind. Don't believe everything I say. --- ### 1 There is no shortage of hot and loud takes about AI. It's easy to read and listen to all these people and delude yourself into thinking you have a "constructive view" about this technology. But you're not just being intellectually dishonest; you're also being downright stupid. No matter where you end up on the spectrum of whether AI is useful, hyped up, useless, or a civilization killer, not using it and having an opinion about it is disingenuous. If you haven't used it, you're lying to yourself. ### 2 In October 2024, [Tyler Cowen tweeted](https://x.com/tylercowen/status/1845656495737745816): > I've grown not to entirely trust people who are not at least slightly demoralized by some of the more recent AI achievements. I read that in [this post](https://wisdomofcrowds.live/p/the-future-of-sentimental-attachments), and I couldn't agree more. After using these tools for close to two years for different use cases, I've made peace with the fact that these tools are simply better than me in pretty much everything I do. In fact, I feel liberated. If you aren't at least a little demoralized by what large language models can do, you're not thinking straight and you're just burying your head in the sand. ### 3 Even the oldest LLM models still know more than you'll ever know. I keep using this phrase: large language models have the collective knowledge of humanity that's on the internet. Maybe that's a slight overstatement, but directionally it's true. Which means while people argue about imagined sci-fi futures like AGI, ASI, or whatever stupid term they're concocting, the reality is that for normal people like you and me, **artificial general intelligence is already here in a practical sense**. It's in your pocket right now. It knows more about everything than you possibly ever will. If that's not artificial general intelligence, I don't know what is. The problem is that as soon as something magical arrives, we get used to it, and then it ceases to be magic. The same thing is happening with ChatGPT, Claude, and Gemini. We're normalizing the extraordinary. Wretched creatures we are. ### 4 Unless you are in the top 5–10% of your profession, if your conclusion is anything other than "these AI models are better than me in a range of tasks," you clearly haven't used them or thought about them well enough. #Cope ### 5 I think this is a golden age for hobbies, side projects, and following your peculiar passions. These models are brilliant at coding, and it's now possible to build almost any weird, wacky, wonderful idea you've ever wanted. Unless you're building a complicated CRM or an enterprise product, AI coding tools are good enough. For example, I don't know a lick of coding, and I built simple websites like [dhwani.ink](https://dhwani.ink), [paperlanterns.ink](https://paperlanterns.ink), [rabbitholes.garden](https://rabbitholes.garden), [fromthedumpsterfire.com](https://fromthedumpsterfire.com) and redesigned [bebhuvan.com](https://bebhuvan.com), all with AI's help. Without tools like OpenAI's Codex and Claude Code, I might have done them through WordPress or Substack, but they'd never have been this good. AI has become a force multiplier, helping me create and curate far more than I could before. My gut says we're entering a golden age of side projects in which we'll see small, weird, and wonderful things, reminiscent of the early days of the internet. A lot of them will be slop and useless, but that's a good thing. ### 6 In many cases, I've realized that the biggest block to using these AI tools, apart from the fear of being displaced by them, is a fundamental lack of imagination. I think that there's an epidemic of unthinking in society. Most people would rather do anything than think, like swipe reels. So when they're given a tool with the collective knowledge of humanity at its disposal (a capable butler that can do a hundred things), they end up plagiarizing essays or writing shitty LinkedIn posts instead of doing something fun or useful. That's a profound tragedy. Dumb and wretched creatures we are. ### 7 Here's another use case most people miss: AI as a reading companion for difficult texts. Whenever I'm reading something challenging, I'll pause and ask Claude or ChatGPT for context. It's like having an expert sitting next to you while you read. For example, I was recently reading Audrey Truschke's [*India: 5000 Years*](https://www.amazon.in/India-000-Years-History-Subcontinent/dp/0691221227), and I started asking Google Gemini a series of questions like, "Where did the first Indians actually come from? What trade links did the Indus Valley Civilization have with Mesopotamia? How do we know what we know?" These weren't questions I could easily Google because they required context, synthesis, and connecting dots across different fields. Thanks to Gemini, my reading experience became richer and deeper. This is the opposite of intellectual laziness. It's using AI to go deeper into material you're already engaging with. ### 8 A while back, I wrote a post called [*Who Are You Without a Job?*](https://bhuvan.substack.com/p/who-are-you-without-a-job) For most people, their identities revolve around their work. Jobs mediate everything from marriage to where you live, what you buy, and what you value. So imagine a scenario where your job gets automated and there's no alternative career. Who are you then? What do you do with your eight to ten hours a day? Most people are wedded to their jobs and have little to no life outside them. On balance, I think a lot of jobs will go away not because of AGI or sci-fi nonsense, but because even if AI progress stops today, large language models can already automate a majority of knowledge jobs. That's a fundamental reality people don't want to face. ### 9 You can be a pundit who says things like "LLMs are bad; they hallucinate; they can't count strawberries," or you can actually use them to build useful things for others or for yourself. They can be both useless and useful at the same time and this breaks people brains. As flawed as LLMs are, they are better than most normal people at a range of digital tasks. And most of us are normal. They've helped me build ideas I've had for years. So if you think they just hallucinate or vomit mediocrity, you're not talking from your mouth but from the hind part of your lower abdomen. ### 10 Sure, as things stand today, AIs are best used as assistants rather than autonomous agents in *all* domains because they can't yet do everything due to organizational, legal, and knowledge constraints. But if you aren't at least imagining a scenario where they can do things autonomously, you're in for a rude surprise. ### 11 AI might hallucinate, but don't make the mistake of thinking that you're smart just because it hallucinates. The average human hallucinates more than AI. Just listen to the average person around you. The opening in the hind part of their lower abdomen does more talking than the mouth. ### 12 You think AI-generated writing and art may be slop? If yes, please do remember that you aren't fucking Da Vinci, Michelangelo, Mozart, Hemingway, or Picasso. So calm the fuck down, bro. ### 13 Yes, there's a lot of junk that AI generates. But to label everything AI produces as slop is a terrible mistake. Used thoughtfully, AI can produce excellent writing across a range of topics, far better than most journalists, bloggers, or "thought leaders." Imagine someone who's brilliant in their field but terrible at writing. With AI, they now have the best stenographer, editor, and publisher at their fingertips for $20 a month. It's not that AI is bad at writing; it's that you don't know how to use it. ### 14 As things stand today (and this will quickly become irrelevant with each new model release), I think of AI as a creative partner, a fantastic butler, a stenographer, and an editor. It takes over the grunt work, saves time, and helps me do more. I could do most of these things without AI, but now I can do many more of them, and better. ### 15 Going back to my first point: unless you're using AI deeply (pushing it hard, testing its limits, finding its weaknesses), you're not using it right. If your opinions come from superficial use and you conclude that "AI is mediocre" or "it hallucinates too much," you're just another loudmouth. AI is helping me write differently. I hate typing but love writing. Now I dump my raw voice notes and let AI organize, edit, and structure them. Every thought and example is mine. AI is just the editor. It's helping me find a new tone, a new rhythm, and most importantly, it's helping me write more. I think edit the posts to shape them up and get rid of the mistakes and the fluff and filler that AI adds. I wrote this post the same way. ### 16 There's an uncomfortable mental prompt worth keeping always running in the background of your mind. It never gives you a clean answer, but you have to keep asking it: **What are these tools doing to my cognitive abilities?** For example, if you use AI to write more, is it sharpening your edge or dulling your ability to write in the absence of AI? Or is it genuinely enhancing your capabilities as a writer—adding something to your style, your range, and the types of writing you can do? Are you genuinely protecting something precious by not letting AI touch your writing? That's fine if it's a deliberate choice. But you have to keep asking: What would I do in the absence of AI? How do I want to use this? As a partner, an editor, a co-creator, or a full creator? In what contexts does AI's role change? I don't have settled answers. The line shifts depending on the task, the day, and what I'm trying to do. But **not asking the question**? That's where the real danger is. --- *These are working notes and questions I have at the moment. I'm sure I'll change my mind tomorrow.* John Maynard Keynes said: > "When the facts change, I change my mind - what do you do, sir?" I annoy people by writing about it on Substack. --- *Image: [The Nightmare](https://en.wikipedia.org/wiki/The_Nightmare) by Johann Heinrich Füssli*

Escalate your reading

Sat, 08 Nov 2025 00:00:00 GMT

Everybody wants to read more books. Well, not everybody. There are a certain few people who prefer that their brain remain in a mushy, smoothie-like, and semi-comatose state, but most people want to read. But to read more, you need to want to read. Otherwise you'll just end up reading articles on how to read more books or books on how to read more books. Much like the other posts I write, this post is the result of a long and persistent bother with the kind of books people read around me. When I get bothered, I must bother other people about my bothers—it's a rule. A disturbing pattern I've noticed in the choice of books that people read around me, in the groups that I am part of, and on social media feeds is that people are reading all the same superficial, fluffy bullshit books that you don't want sensible people to know you're reading. The books that you hide from your smarter friends. The books you read by smuggling them to read in the Odonil-scented environs of your Indian-style toilet. After seeing this disturbing pattern over and over again, one fine day, a phrase popped into my other genius and philosophically inclined magnificent brain, and this was "escalate your reading." Why? Think about the absurdity of what's happening. People are avoiding reading harder books by reading easy books, but it takes roughly the same amount of time and effort to read a 300-page emotional fluffer or a 300-page business book. Don't be a pedantic math guy trying to poke holes in my otherwise bulletproof logic, but you get what I'm saying. People are doing hard things to do easy things. Despite me having an underdeveloped brain and being bad at math, this logic of reading more easy stuff to avoid reading hard stuff makes no bloody sense to me. ---------- Reading should be like taking a hostage. Imagine you've taken someone hostage to make money—which I wouldn't recommend, by the way. There are far easier ways to make money, like writing a book titled _How to Make Money_, _How to Make Money in 21 Days_, _The Subtle Art of Being Rich Quickly_, or _Be Rich Now, Poor Later_. Writing such books is far easier than actually taking somebody hostage, holding them at gunpoint, negotiating with cops, and successfully escaping. But assume you take a hostage. You don't just keep the hostage and make no demands, right? That would be stupid. It's like reading a self-help book without actually helping yourself. You'd be the worst hostage taker in the history of hostage taking. What you have to do once you've taken a hostage is steadily escalate to get what you want. Until you get what you want, you can probably kill one or two old people because what good are old people? They're easier on your conscience to kill—which again, I wouldn't recommend. But if you do want to kill people, I'd recommend old people and McKinsey consultants. Other people—it's bad to kill. **Reading should be like that. You have to escalate steadily.** This leads to an important question: why even read? If you'd asked me this question a year ago, I would have said some crap like reading makes you better, smarter, wiser, empathetic, or some shit like that. But I've become a little smarter since then because some of my underdeveloped brain regions have started getting a bit more oxygen. My default answer whenever this question comes up now is: reading is an individual pursuit, and everybody gets something out of a book. Reading is like alchemy, a mad chemistry experiment. As Carl Sagan put it: > "What an astonishing thing a book is. It's a flat object made from a tree with flexible parts on which are imprinted lots of funny dark squiggles. But one glance at it and you're inside the mind of another person, maybe somebody dead for thousands of years. Across the millennia, an author is speaking clearly and silently inside your head, directly to you. Writing is perhaps the greatest of human inventions, binding together people who never knew each other, citizens of distant epochs. Books break the shackles of time. A book is proof that humans are capable of working magic." > > ― Carl Sagan, Cosmos Think about what reading is. All you see when you open a book are squiggly lines arranged in a particular sequence. That's it. But these squiggly lines arranged in a particular sequence have the ability to unleash the most delightful thoughts and reveries, lead you to time travel to distant lands, and evoke the full spectrum of human emotions in you. Words are like very unstable chemical compounds; when they come in contact with your sense of self, your beliefs, values, ethics, morals, fears, hopes, dreams, and insecurities, you get violent and unpredictable chemical thought reactions. What you get out of a book will be deeply personal, and it won't be the same as what other people get out of it. Unless it's a book about 35 ways to sit on a toilet for smooth and successful evacuation of bodily effluvia. For example, I just finished reading Fredrik Backman's [_My Grandmother Sends Her Regards and Apologises_](https://www.amazon.in/Grandmother-Sends-Her-Regards-Apologises-ebook/dp/B00TE3HF9S). It's a wonderful story of an eight-year-old girl called Elsa who loses her grandmother and learns about grief, love, friendship, and herself in the process. It's a breezy read, and I actually started thinking about my grandparents differently after reading it. But I can imagine a certain kind of person reading this heartwarming novel and then deciding that grandmothers are disgusting and then becoming a psychopathic serial killer going on a grandmother-killing spree. So reading doesn't always make you better. There are a lot of weirdos out there. At the very least, reading holds a mirror to yourself and helps you see the shape of your ignorance. And if you read widely, you can be a little less dumb in life, and that's the best one can hope for. Good books take you to places you couldn't have imagined, to meet people you otherwise wouldn't have, and to have conversations you would have never dreamt of. At the very least, books are enablers. They give you permission to discover new things. I keep going back to the Heraclitus quote: _No man crosses the same river twice, for he's not the same man and it's not the same river._ Reading is like that. Every time you pick up a book—hell, even if it's the first time—you're a different person than you were yesterday. Good books can speak for themselves. They don't need some random idiot like me to extol their virtues. You just have to open them. But this is only possible when you escalate your reading. ---------- Earlier in the post, I shat heavily on self-helpy, fluffy airport toilet bestseller books, but please don't get me wrong—I don't have anything against the 8 billionth book with the title _The Art of How to Shit Well_. I really don't. In fact, we need garbage books that otherwise wouldn't even be fit to be used as makeshift tissue paper to wipe your ass. Because it would be an insult to both your hands, your butt, and the stuff coming out of it. Traditional self-help books, breezy young adult romantic novels, and superficial spiritual bullshit books—they all have utility value. They're like gateway drugs. ![Self-help books](/blog-images/self-help-books-joe-hovde.webp) ![Self-help books](/blog-images/self-help-books-joe-hovde-1.webp) These images are from this [insightful post](https://residualthoughts.substack.com/p/a-statistical-guide-to-the-most-life) by Joe Hovde. Lest you misunderstand drug addicts, becoming a drug addict takes a lot of learning and hard work. You don't just wake up one day and start shooting heroin. It takes work and planning; you need to learn chemistry. It's far harder than people realize. Drug addicts are a little misunderstood for their innate knowledge of chemistry, neurochemistry, and neurobiology. To become a serious drug user, you start with something simple, like weed. You smoke weed for the first time and cough like somebody poisoned you. But over time, you get used to it. You have your dozy trips, then you escalate to hash, maybe ecstasy, a bit of LSD, shrooms, then coke, meth, heroin, and so on and so forth. And then you start to realize there's a lot of time being wasted between you ingesting a substance and getting high. You start learning biology and realize the gap between your mouth or nose and your digestive system is too long. It's delaying your high. And then you discover you can take drugs directly up your butt. So instead of snorting coke from your nose, you can snort it from your butt. The logistics of ensuring the drugs enter your butt and reach the headquarters where the reactions are processed—whether you use a spoon or a holi pichkari—is up to you. It's personal, and I don't want to comment on it. Reading is similar. You start with self-help books. You read 28 of them and then realize it's called _self_-help. Not _other people will help_. Which means at some point you actually have to start helping yourself. Some people go through their entire life not having that realization, but you are smart. You figure out it's self-help. As an aside, how many fucking books will it take for you to help yourself—the _self_ in self-help—to know that you have to wake up in the morning, take a shit, not forget to wash your ass, that you have to fold your bedsheet, be grateful, think positive, believe in yourself, be authentic, live in the moment, and that you have to follow your passion, regardless of whatever it is, even if it means becoming an incompetent serial killer, a burger flipper at McDonald's, a shitty poet, or a terrible farmer? You just have to follow your passion. And most importantly, you can do it. Do what? Nobody knows. But you can just do it. It doesn't really matter what, where, how, or when. None of that shit. How many more religious and spiritual books do you need to know that all you have to do in life is do fewer bad things and more good things? I mean, all of religion can be boiled down and summarized to that. What's the point of reading 25 spirituality books? Unless it has very specific instructions on lying naked next to a goat—not really doing anything untoward, but in the hopes that this lying naked with a goat might appease certain spirits and unlock certain spiritual energies that might lead you to becoming one of the richest people on the planet. Then you beat yourself up for wasting 5,000 rupees on 30 self-help books. You immediately start having thoughts about going to your terrace, taking a shit, and using these books for cleaning purposes. Because keeping them on your shelf where other people can see them is not really good for your reputation. And then you slowly start reading moderately challenging books. And your reading life becomes much more wonderful. Look at the data. Most popular books tend to fall into health, self-help, or spiritual and religious categories. Not that all books in those categories are bad, but most of them are written by disingenuous grifters. If you read the Mahabharata or the Bible or the Quran, you'll probably get more out of it than reading some idiot who got fired, became a monk, and wrote some idiotic book. The self-help, spiritual, and religious books are gateway drugs. You need to let your addiction deepen. You need to crave stronger substances. You can either be a guy who smokes weed for the rest of your life or be the guy who becomes a hardcore drug addict who snorts coke from his butt. Reading should be a little like that. There are genuinely wonderful books that can help you learn new things, make sense of the world, and, perhaps more importantly, help you ask better questions. I don't think we can expect anything more from books than that, because that is the ultimate gift books can give us. It still blows my mind that ultimately words are just squiggly symbols, squiggly lines that we have given meaning to, and that certain arrangements of these symbols can shatter our delusions, unmoor us, and push us to think differently. If you don't let this happen, then what you're doing is depriving yourself of the greatest gift that books can give you. ---------- I'm not writing this because I only read Tolstoys, Dostoevskys, Hemingways, Shakespeares, Chaucers, and Baudelaires. I have many of the same airport bestsellers collecting dust on my bookshelf. I started from the same place. But what ended up happening is I realized there's only so much those books can give, and there are better books to be read—define "better" however you want. How does that happen? I like the metaphor of going down weird and wonderful rabbit holes. And to go down those rabbit holes, you need to **pay attention to** [**the ripples**](https://bebhuvan.com/blog/2025-09-27-a-ripple-and-then-a-rabbit-hole/) **in your inner universe**. A ripple is a split-second opening in your psyche and imagination where your brain stops craving certainty, stability, and a preference for things as they are. There's an opening where it's okay with you exploring new things, and you need to pay attention. **A ripple is nothing but an invitation for resonance.** It's a marker for attention, a sign from your brain telling you, "Ooh, _that's interesting_." It's an invitation to open new doors and go tumbling down different rabbit holes. Whenever you read something, pay attention to the ripples. Pay attention to where the most interesting thing resonates with you. Follow those threads as they unspool, and you'll end up going down the most delightful and rewarding rabbit holes. You need to have an open mind and pay attention to the ripples because that's where the good stuff meets your intent and interests. Wonderful things happen when you notice the ripples inside your head and then chase them to the ends of their circumference. I've pretty much read random things throughout my life. I used to read novels like Dan Brown whenever I could afford them, but that's all I could afford for a long time. Somewhere along the way, I even lost that. It took me years before I realized not reading books was making me dumber and stupider. I only realized it because the stupid pandemic (I think it was during this time; my memory is hazy) forced humanity as a whole to stop running on the hedonic treadmill and take a break from constantly saying "synergy" and "circle back." That's when we were forced, for the first time in a long time, to look inward and see the creatures that we all had become. This revelation that I had stopped reading scared me. So I started ordering all sorts of random books that famous people were recommending, books from bestseller lists, and Amazon's algorithmic recommendations. Some of these books were genuinely terrible, but nonetheless. In that chaos, I picked up an introductory philosophy book, which awakened an interest in philosophy. That was a ripple. It led me to discovering Stoicism, which led me down the path of learning what the Stoics had to give. Which led me to discover Seneca's letters, which led me to build a website to [showcase them](https://seneca.ink/). Similarly, in my random online sojourns, I discovered Shaun Usher's brilliant website, [Letters of Note](https://news.lettersofnote.com/), which awakened interest in historical correspondence. I'd long wanted to create a site to discover letters on my own and post them online, which led me to create [Paper Lanterns](https://paperlanterns.ink/). Reading about finance awakened an interest in behavioral finance, and I've been tumbling down that rabbit hole ever since. I was reading Gaston Bachelard's [_The Poetics of Space_](https://www.amazon.in/Poetics-Space-Gaston-Bachelard/dp/0143107526) and came across one line from the poet Marceline Desbordes-Valmore, which, along with [this interview of poet laureate Tracy K. Smith](https://open.spotify.com/episode/4YrvEFsremGCXQbfDwnpWL), led me to start reading poetry. > Emmenez-moi, chemins! . . . > > (Carry me along, oh roads . . .) > > wrote Marceline Desbordes-Valmore, recalling her native Flanders (_Un ruisseau de la Scarpe_). And what a dynamic, handsome object is a path! How precise the familiar hill paths remain for our muscular consciousness! > > — > > Poetry is the language that sits really close to feelings that defy language. Poetry nudges some of our feelings of joy or confusion or desire toward feelings that we can recognize and describe. I take solace in the fact that it's poems that we turn to in big moments of change — like the loss of someone or a marriage or the birth of a child — because poems are resourceful for finding terms that remind us of what we live with but don't always bring into speech. — Tracy K. Smith It's truly been one of the most fulfilling things I've done because I can sense this desperate need for poetic sensibility in all of us, and it can only come from reading poetry—it can't come from anything else. A random visit to my local bookstore led me to notice Salman Rushdie's book [_Knife_](https://www.amazon.in/Knife-Salman-Rushdie/dp/0670099589/), which led me to buy all the books he's written, and it's something I intend to read. During one of my random doomscrolling sessions on Substack, I came across a post about a [year-long read-along of Leo Tolstoy's _War and Peace_](https://footnotesandtangents.substack.com/p/welcome-to-war-and-peace-2025), and it truly is one of the best books I've ever read in my life. I'm pretty sure I'll say that on my deathbed. This awakened an interest in the literary classics. Similarly, Henry Oliver's [posts and notes on _Middlemarch_](https://www.commonreader.co.uk/p/middlemarch-is-a-novel-about-sympathising?utm_source=publication-search) led me to buy that book. After this awakening about just how phenomenally good the classics are, I've bought a bunch of classics. I intend to make 2026 the year of reading all the classics, for my own pleasure. Perhaps the best recent example of how a ripple can lead to a rabbit hole starts with my discovery of the concept of public domain. In trying to read more, I came across the concept of public domain, i.e., that literary works after a certain period go out of copyright. This was new to me. As I started thinking of reading more classics, I discovered a lot of them are available for free on places like [Project Gutenberg](http://gutenberg.org/) and [Archive.org](http://archive.org/). This shocked me. I couldn't get my head around the fact that the vast majority of humanity's collective knowledge is freely available in the public domain, without any copyright restrictions. One thing led to the other, and I developed an immense sense of respect and gratitude for all the works in the public domain. Much to my dismay, I discovered that despite being one of the oldest civilizations, India suffered from a deep and disturbing sense of cultural apathy. All our works in the public domain are more or less neglected. There's very little work being done to preserve them and make them easily accessible online. One thing led to the other, and I ended up building a website called [Dhwani](http://dhwani.ink/) to gather links to all the Indian works in the public domain and make them easily discoverable. This is another example of my resonance meeting a ripple. In all of these cases, these were ripples I paid attention to. ---------- There's no real use to reading the same superficial bullshit that most people read and recommend. What makes reading complicated in the 21st century is that there's never been a greater supply of distractions to steal, pilfer, and filch your time and attention than at any point in history. The lame and ironic tragedy is that sitting in a quiet corner of your house with a book, throwing your phone aside, and getting lost in a wonderful book almost seems like a revolutionary act. These digital platforms have also distorted some of the incentives we have for reading. Pay attention to how people share what they're reading. Reading has almost become a performance. In most corners of the internet, there is absolutely no difference between a stripper twerking and a person sharing the cover of the book they're reading. Both are performances. The stripper makes money, and the performative bookstripper gets paid in attention, likes, retweets, whatever nonsense. What a tragedy. ---------- To read is to escalate. You can't keep the hostage without making demands. You can't stay on weed forever and call yourself a serious drug addict. You can't read the same superficial books and expect to discover new worlds. Pay attention to the ripples. Follow the resonance. Escalate your reading. Because if you don't, you're depriving yourself of the greatest gift that books can give you—the ability to shatter your delusions and push you to a better place. That's all reading asks of you. Pay attention. Escalate. And let the squiggly lines work their magic. What's the point of living life if you don't read the great epics—be it the Western canon or the great Indian classics? What's the point if you're never moved by the euphonies of Keats or the sonnets of Shakespeare, if you're never stirred by the fragmented despair of T.S. Eliot or shaken by the blood-dimmed prophecies of Yeats, or if your jaw never drops in awe at Coleridge's opium-induced visions? What's the point if you don't feel the dissonance in Dickinson's verse or leap with joy into Wordsworthian reveries, if you never discover the multitudes within you after reading Whitman, if you never wrestle with the grim existential torment of the Russian masters? What's the point if you never encounter the great philosophies of the Greek Stoics, the Epicureans, the Buddhas, and the Zen masters? What's the point if you never go back in history to know your story and meet your people, if you never commune in sorrow with your great forefathers? What's the point if you never let the Romantics move you or the cynics unsettle you? What's the point if you never dive deep into the human self and marvel at its strangeness, if you never gawk at the mysteries of the universe, if you never open a book and enter another world entirely? What's the point if the poet in you never awakens? ---------- What do you think? --- Featured image: ["The Bookworm" by Carl Spitzweg](https://en.wikipedia.org/wiki/The_Bookworm_(Spitzweg))

Introducing Dhwani: A directory of Indian public domain works

Sun, 02 Nov 2025 00:00:00 GMT

It took me a while, but [Dhwani](https://dhwani.ink/) is finally live. It's a directory I built to collect links to Indian public domain works. I wasn't sure anyone would care, but here's why I made it anyway. In doing all the random things I do on the internet, at some point I came across the concept of the public domain. I don't have a clear recollection of the exact moment, and I don't think I really appreciated what the public domain actually meant right away. But in the last four to five years, as I read more than I wrote, and as I progressively got a little less stupid in life (which is more or less a function of age and not really the improvement of my mental faculties), I had a long, drawn-out aha moment. As I read more books, I slowly started to appreciate that some of the greatest books ever written are free of copyright. They're in the public domain. And it's very weird, right? Shakespeare, Tolstoy, the Bhagavad Gita, Einstein's papers. Freely available for other people to access. It felt strange, but in a wonderful way. Of course, this has always been the case. It becomes less aha-worthy if you think about the fact that modern copyright is only about 300 years old, and for most of human history before that, there was really no such thing. But anyway, it took me a while for my feeble and underdeveloped brain to appreciate the beauty and value of public domain works. The fact that humanity's accumulated knowledge and creativity are more or less free of copyright (for other people to remix, translate, adapt, and create new things from) is not an easy concept for somebody with very feeble mental capabilities to appreciate. But once I did, my entire worldview changed a little when it came to how I think about reading, writing, and creativity. ## The Discovery I started reading beyond the airport bestsellers and the books that only deserve to be read in bathroom stalls with your brain shut off. Through the infinite rabbit-hole portal that is Google, I discovered that some of the books I wanted to read were available for free on sites like [Project Gutenberg](https://www.gutenberg.org/). I could just download them on my phone or e-reader. My feeble brain couldn't comprehend that. As I started thinking more about the public domain, a thought struck me: India has thousands of years of civilization behind it. Not just history—actual civilizational output. Mathematics, astronomy, medicine, philosophy, literature, and religious thought that influenced half the world. Millennia of accumulated knowledge. All of it is sitting in the public domain. But why is it not easily available, just like books are on Project Gutenberg? Why is there no Project Gutenberg equivalent for India? This started bothering me. The more I thought about it, my first impulse was, "What would it take to build it?" And I immediately realized that my skills, apart from drinking and appreciating filter coffee (and musing about it philosophically like René Descartes), were limited. The only other useful skills I had were using the SUM function in Microsoft Excel and the accurate use of the water pressure gun to get the job done—like a sniper in the commode. It remained an afterthought. Since I had no technical skills to speak of, building it was out of the question. I didn't really know what it would take, technologically speaking, to build something of that magnitude. So the thought just rattled at the back of my feeble brain as I continued musing on the metaphysical and ontological implications of a good cup of filter coffee. ## The unwelcome guest Then suddenly, in November 2022, ChatGPT arrived—like your dad barging into an unlocked bathroom. Embarrassing and unwelcome. It was pretty dumb for the first year or so. But then it became ridiculously good, to the point where collective humanity is now the bitch of this thing. And if you harbor even a faint delusion that you have some quality it can't imitate, you're toast. But anyway, these AI tools progressively got better. Soon we had tools like Claude Code and Codex, where you could just treat them like slaves and tell them what to build using plain English. Like magic, they would build whatever simple piece of software you wanted: apps, websites, you name it. Even as I'm sending this post, I'm using this thing to transcribe my notes and turn them into a blog. I'm not really typing; I'm just using voice typing. It's kind of crazy if you think about it. These things were so good that the only programming language you needed to know was plain English. And suddenly, the thought of building a Project Gutenberg for India came back to the forefront of my mind. I still didn't really know the technical complexity of building a full-fledged digital library, and it became obvious that replicating Project Gutenberg was beyond the reach of a person like me. Then somehow, I had a thought: okay, if extracting text from all the historical and literary works of India wasn't possible, why not at least create a simple directory? Something that aggregates links to all Indian works in the public domain that are already on sites like Gutenberg and [Archive.org](https://archive.org/). And then, I went to my immediate overlord, Claude Code, and said, 'Why don't you build me a website for this?' And then I kind of had another aha moment: pretty much every historical and literary work has already been digitized and uploaded to Archive.org. Lakhs of works. The sheer manual effort involved in this is mind-boggling. Various people, including government agencies and individuals, had done all the hard work of digitizing important, civilization-defining texts and uploading them. I was not only mind-blown but also profoundly grateful for all those who had spent countless hours doing this work. So my job became a little easier because all I had to do was find the links and organize them properly. Initially, I did it manually. Right now, as I'm sending this blog post out, I've listed close to 500 works on the site. For the first couple hundred, I manually Googled every work, verified its public domain status, collected all the reference links from Wikipedia, Open Library, Wikisource, etc., and uploaded them to the site. But soon I figured, why not ask my overlords (Claude Code and Codex) to help me? And then the process became much faster. I would just tell them: go to Archive, find Indian public domain works, pull the URLs, add the reference links, and upload them. It still takes time because these tools run into limits, but it's far easier now. That's the backstory of this site. ### Why Dhwani? As for the name, I had various options, but for some reason, the word "Dhwani" stuck in my head. In Kannada, "[Dhwani (ಧ್ವನಿ)](https://alar.ink/dictionary/kannada/english/%E0%B2%A7%E0%B3%8D%E0%B2%B5%E0%B2%A8%E0%B2%BF)" means "sound" or "voice." And what I'm trying to do here is collect links to the works of all the greatest voices across time. That's how this humble site came to be. ### **Why do this?** I don't know. The simplest answer is: this should exist. My hope is that even if 10–15 people find it useful and discover one book they'd like to read, it'll be worth the time and effort it took to build this site. My bigger hope is that in the future, I'll have the resources to make these works easily readable by turning them into text and creating readable editions similar to Project Gutenberg. Right now, I don't have the technical or financial resources to pull something like that off. Extracting text from thousands of files, ensuring accuracy, fixing issues, and making them accessible online requires skills and money I don't have. But I haven't given up on that idea. As technology gets better, I sincerely hope it becomes easier for individuals like me to do this, because these works represent our history. And if our history is neglected and consigned to the digital wayside, the future will be nothing but a shittier remake of the past. I don't live under the delusion that even if all these books were easily readable online, hundreds or thousands would read them. I know the apathy toward our cultural artifacts is nauseating. But one can only hope that if I manage to extract and make even some of these works accessible, they'll serve as raw material for writers and scholars working on different things. That's the hope. It's not about making money. How many people even give a shit about such things? But if it becomes useful to someone, that's good enough for me. Well worth the effort. I'll slowly keep adding new works as I find them, and hopefully this becomes something people can actually use.

On having a philosophy of money

Sat, 25 Oct 2025 00:00:00 GMT

_This post was more stream of consciousness than deliberately structured, but I'm publishing it to stake out a thinking space. This is a topic I intend to return to in the future._ --- Our ability to do stupid things is only exceeded by our ability to rationalize that stupidity. The reason for saying this was a spectacularly dumb conversation I had with somebody about money. Now, the fact that people do dumb shit with money is not news. Reading this post about financial idiocy, you might reasonably ask, “And the sun rises in the west—what’s new?” But once in a while you come across something so spectacularly dumb that it takes your breath away. Not in the way a great work of art or a beautiful sunset takes your breath away, but something that makes you regret life on planet earth. Something that makes you question whether humans deserve their place on this planet instead of some other, more deserving creature. Something so spectacularly dumb that if it were an art installation, it would fetch a couple of million dollars at Christie’s or Sotheby’s. I work in finance, which means I have a front-row seat to a beautifully choreographed sequence of financial stupidity on a regular basis. Imagine a spectacular fireworks display, but for idiocy. Despite working in this industry for a decade, there are still moments of utter stupidity that blow me away, and I had one such conversation a few weeks ago. One of the side effects of working in finance is that I’m occasionally subjected against my will to conversations about trading and investing with people who don’t know their ass from their mouth. In this case, I was forced to speak to a retiree who had ironically retired after selling financial products. He politely asked to meet me. I said, “Why?” He was hesitant, but I prodded, and he said he wanted to learn more about trading futures and options (F&O). Mind you, this person is 65 years old and had been trading futures and options for a while. I’m 100% sure he would’ve lost money. How am I 100% sure? Because most people who trade F&O lose money. It’s mathematical certainty. This has nothing to do with my confidence or expertise—it’s numeracy. To deny that he’s losing money would be like saying the earth is shaped like a coffee saucer. Now, I don’t want to judge this person. It’s entirely possible he just trades for thrills with small amounts. To which, again, a reasonable person with a reasonably sound mind—a person who hasn’t been watching too many reels, whose brain hasn’t shriveled into a dried husk, whose grey matter hasn’t turned to dust contained within the skull only because there’s no outlet for escape—would retort: I only do coke on the weekends for mental health reasons. This depressing phone call got me thinking about why people do dumb shit with their money. And of course, this isn't a secret, and we all know why. We have tons of books, podcasts with bloviating hosts, and those idiotic personal finance books with authors standing with arms folded, grinning. The same smile that hostages held by the Taliban and ISIS put on when forced to smile for international media. We know the usual list: overconfidence, greed, illusion of control, ego, dopamine-chasing, social contagion, and a hundred biases— (which [I disagree with](https://zerodha.com/z-connect/subtext/investing-is-a-problem-that-has-been-solved)—that list of 300 biases is stupid, but nonetheless, we are "flawed"). But here’s my theory, and it’s not a grand revelation: **people do dumb shit with their money because they lack a philosophy of money.** As soon as you see the word “philosophy,” you might think, “Oh, here goes another content writer who has read way too many pop treatments of serious issues and is using the word ‘philosophy’ with the same reckless abandon that a kid who hasn’t been potty trained shits on a couch.” I get it. Philosophy has become a douchey word. Using “philosophy” in conversation is the surest way of getting labeled a snob. But here’s the thing: philosophy literally means “the love of wisdom.” Its original meaning was far from snobbishness. It represented a genuine desire to learn how to live a better life. No matter how douchey you find my usage of the word, we all have a philosophy of life, whether consciously or unconsciously. I don’t mean philosophy in some grand metaphysical or ontological sense (I just wanted to use those words—I still don’t know what they mean). I use philosophy in the colloquial sense: a shorthand for our beliefs, values, ethics, morals, and frameworks. Most people have an unconscious philosophy borrowed from others—a thin philosophy that doesn't stand up to scrutiny. We imitate what we see in real life and movies, allowing ourselves to be shackled by the expectations of society, friends, family, and culture. As Oscar Wilde said: > "Most people are other people. Their thoughts are someone else's opinions, their lives a mimicry, their passions a quotation." ― Oscar Wilde, De Profundis But some people deliberately create a philosophy of life. This philosophy is like—to use computer parlance—your operating system, the foundational layer that all your thoughts and decisions run on. It’s etched on your soul. This is what you rely on whenever you face a tricky moment, a deliberate moment, or a contemplative moment. But some people deliberately construct a philosophy of life. Think of it as your operating system—the foundational layer running beneath all your thoughts and decisions. When you face a tricky moment, when a decision actually matters, this is what you reach for. We all have one—whether borrowed from society or deliberately constructed. A philosophy should be a living organism, changing as we grow, as circumstances change, and as our values evolve. The same way we evolved from single-cell organisms into complex creatures capable of spending 70,000 rupees on silk underwear that retains moisture and makes your balls itch. Here’s the paradox: people develop complex philosophies of life, but when it comes to money, they have nothing. No framework, no principles. They spend more time choosing underwear than thinking about what to do with their money. They research the fabric, its comfort, its performance across seasons, its moisture-absorbing capabilities, and whether the antibacterial claims are real. We mentally run simulations on how the fabric would feel down south and up north—maybe northeast and northwest too. We think about its elasticity and the attendant downstream effects on certain critical organs. We think about the aerodynamics of the underwear. And if the advertisement claims antimicrobial properties, we simulate different pathways for microbes to enter our critical regions, our headquarters, running mental stress tests to see if the fabric can stand up to the invading microbial barbarians. The research we do in our heads about a particular undergarment is nothing short of taking a car for a test drive. Only in this case, it’s mental. And it’s down south. But when it comes to money? Unless you’re born with a silver spoon, most of us spend years busting our asses to earn it. Decades in offices with miserable managers who say “synergy” and “circle back”—feeling like hostages. Then we make stupid decisions in an instant, without a second thought. We invest because some moron recommended something. We ask what to do with our life savings on public forums filled with idiots who have the financial literacy of a potted plant. We get bullied into decisions because parents or relatives apparently know better than experts. The sheer stupidity of how we make financial decisions never ceases to amaze me. Let me put this another way. If you have a kid, would you beat the shit out of him and break his legs? No. Why? It’s ethically wrong. We know right from wrong. But say you’re a parent who works your ass off to save for your kid’s college, their wedding, a comfortable life—whatever it is. Then, based on some misguided notion, you gamble it all away in the stock market or on a gaming app. And don’t assume these stories aren’t common; they’re far more common than you realize. Isn’t this the same as beating the shit out of a kid and kneecapping their future? It’s the exact same thing. But just because you don’t inflict physical violence, the act of inflicting financial violence somehow becomes reasonably acceptable. The sheer irony and the sheer absurdity of how people make money decisions are ridiculous. And yes, one might easily retort, “Oh, it’s only uneducated people who make these mistakes.” Nothing could be farther from the truth. In my experience, there’s absolutely no correlation between financial success and formal education. Some people I consider financial role models, including my mom, have only primary school education. Financial stupidity is also not limited by age either. Anybody is capable of doing spectacularly stupid things—whether you're a 65-year-old retiree, a rocket scientist, or a 27-year-old working on artificial intelligence. ## So what does a philosophy of money look like? Simple: your financial philosophy should be an extension of your life philosophy. Your values about money should mirror your values about life. If you’re deliberate about life, be deliberate about money. If ethics matter to you in life, they should matter in money decisions.” Having a philosophy of money takes work because we have a tricky relationship with money. Though money is value-neutral, it gets tainted with all our hopes, fears, greed, past trauma, and childhood scarcities. Money is never just paper or zeros and ones. It’s a container for all our emotions, hopes, fears, and desires. These emotional aspects don’t play well with logic and rationality. Realizing that is the first step toward a good financial philosophy.” Just like we carefully think about doing more good than harm in life, the same framework should apply to money. Why go out of your way to do dumb things with money just to chase cheap thrills when you wouldn’t do it with other ethical decisions? How can the same person spend days thinking about what’s right in one situation but act on pure impulse with money? The gravity of the outcomes is the same. I know my continued use of “philosophy of money” is making this sound harder than it is. But a philosophy is just a set of rules that help you avoid the worst possible future. In fact, it can be as simple as spending less, saving more, not murdering your finances, and not murdering your future self. Acts of financial self-sabotage surprise me because we have such high opinions of ourselves. We think we can philosophize, do great things, treat people kindly, and be magnanimous. All the stories we tell ourselves. But weirdly, none of this maps onto how we treat our own finances. This paradox bothers me—even though it’s obvious why. We’re operating in the 21st century with Stone Age brains. I get that money is abstract. I get that it seems complicated, that some decisions are hard, that financial complexity has increased, and that there’s endless noise and ever-proliferating products. I get that with money there’s always a dance between fear and greed, and our logical faculties get compromised. But it’s the same with many aspects of life. Those forces operate everywhere. It’s just in other areas we tend to be more careful. But ultimately, everything in finance more or less boils down to a small checklist. In fact, it boils down to just one item: spend less, save more. But I get that might seem unhelpful. So here’s a simple expanded checklist. Think of this as a basic financial philosophy. If you stick to it like grim death, you end up better than 80% of other people. **1\. Think carefully about what money is to you.** This is at the heart of your financial philosophy. Just like an engine is necessary for a car to go forward, you need this to go forward. Think carefully about how you treat money, how you spend it, how you earn it, and how it interacts with the people around you. What ideas about money are your own? What ideas about money are inherited from your friends and from your family? What are your money values? Understand what money is to you, what you want it to be, what you want it to do for you, and where you want it to take you. This is a bit like financial therapy for the self, where you are both the therapist and the patient. **2\. Know the source.** People waste countless hours trying to maximize returns without realizing the biggest return comes from their human capital—a fancy, dehumanizing term for your future earnings potential. Your earning capacity is your biggest asset. It’s the single most important thing you need to nourish, protect, and improve. Because the money you get from that—whether it’s a salary, your own business, or even charity work—that’s what enables you to save and invest. Protect the source. Understand the causality. Beyond a point, any time spent trying to “optimize” and “maximize returns” is a giant waste of time better spent watching that rat eating pizza video on YouTube. **3\. Learn the basics.** Benjamin Franklin said an investment in knowledge pays the best interest. Learning a bit about finance is probably one of the highest ROI investments you can make. And to learn finance, you don’t need Greek and Latin symbols. Just pick up a decent personal finance book. Or have a good long conversation with ChatGPT and ask it to teach you the basics. But you need to know _some_ basics. Without understanding what you’re doing, you can’t do the thing. It’s like jumping into a pool to learn swimming—it might work for one in a hundred people, but more often you’ll just drown. The second reason: we live in a complex financial ecosystem. To judge good from bad, you need basics. Even if someone asks you to do X, how do you judge whether X is good or bad? You need some foundation. I keep stressing “basics” because basics are all you need. You don’t need quantitative theory or modern portfolio theory. You don’t need research papers. Just the basics. A good personal finance book or a well-prompted ChatGPT session is more than enough. Here are a few resources: 1. [Varsity](https://zerodha.com/varsity/) 2. [Freefincal](https://freefincal.com/) If you don't want to learn, get a financial advisor. How do you get one? Tricky, but there are good directories with people who charge a small fee to take care of your finances. Here are a few links: 1. [Fee-only India](https://www.feeonlyindia.com/) 2. [The Financialist](https://thefinancialist.co/) **4\. Pay off costly debt.** This should be your top priority. Most people forget that the interest on their loans is far higher than any potential return from the stock market. An average personal loan runs north of 15%. Credit card debt is worse—up to 49%. And there’s no fucking way you’re generating 49% returns by investing in the stock market long-term. That shit doesn’t happen.” **5\. Defense first, offense later.** I’m talking about insurance. Get adequate life and health insurance. Not those garbage LIC policies, ULIPs, or bank-sold insurance products. Pure term life insurance and good health insurance for you and your loved ones if you have dependents. Term life is like bike insurance. You pay premiums. You die, someone gets the money. Otherwise you get nothing. You might think that's a waste, but all those policies that promise both insurance and returns are scams masquerading as financial products. They give you lower returns than fixed deposits while offering horribly low coverage. You're neither protected nor earning returns. It's just a bad scam. [Speak to these guys](https://joinditto.in/). **6\. Set aside money for emergencies.** Life throws curveballs. Everything from a flat tire to a broken tailpipe to a friend in a pinch who needs money. Always have liquid cash set aside. Put it in a savings account, a fixed deposit, or a liquid fund. Doesn’t matter. The goal isn’t to maximize returns but to have it instantly available when emergencies strike. How much? Whatever lets you sleep at night. Two months, six months, a year. This is a psychological number, not a mathematical one. You can even ask ChatGPT to pick a number and go with it. **7\. Invest for your long term.** Know your goals. Simple rule: the shorter your financial goal, the safer your money should be. The longer your goal—like retirement—the more risk you can take. Don’t ask me to quantify risk. That’s deeply personal. But here’s the thing: all you need are 4 to 5 funds. All of them should be index funds because there’s no point in picking actively managed mutual funds. They’ll charge you a bomb and then underperform. Active mutual funds are like a friend who talks a lot but can’t do shit. The gap between what they say they can do and what they deliver is big enough to drive a train through. Pick simple index funds. A mix of Nifty 50 and Nifty Midcap 150 low-cost index funds is good enough. Add a government bond fund for diversification. If you think gold is a good investment, add some gold. How much to invest in each? This is as much a psychological number as a mathematical one. You can run a mean variance optimizer, an efficient frontier, and a hundred other things. But ultimately, pick a combination between stocks, bonds, and gold that [lets you sleep well at night](https://zerodha.com/varsity/chapter/asset-allocation-an-introduction/). Start with 50-50 or 50-40-10 or 50-30-20, whatever works. Optimize later. You’ll constantly be tempted to buy “higher yielding” products. People will constantly tell you index funds are bad, that they can generate better returns, and that they can beat Jim Simons and Warren Buffett and make them look like street dogs. They’re trying to scam you. **8\. Avoiding stupidity is more important than seeking brilliance.** Charlie Munger said this, and he’s right. Avoiding financial disasters will generate higher returns than anything else I’ve mentioned. What does this mean? The biggest disaster today is getting scammed—and scams can be witting or unwitting. Witting scams: falling for stupid shit that friends, colleagues, relatives, or family tell you. You buy land and end up in litigation. You buy a scammy financial product. You join an MLM scheme. You actually think someone can generate 1-2% returns every month. You listen to your colleague, who’s supposedly a great trader who makes Jim Simons look like he just got lucky. Unwitting scams are more insidious: crypto scams, WhatsApp group tips, and phishing links that compromise your bank account. Basically, any financial fraud. Avoiding these generates maximum returns. Even if you keep all your money in a fixed deposit your entire life but obsessively avoid scams, you’re still ahead. I wouldn’t recommend that, but you get the point. **Your financial philosophy is not static. It’s dynamic.** Your financial philosophy isn’t static. It’s dynamic. It has to evolve with your life circumstances. Things change constantly, and your philosophy must accommodate those shifting realities. This doesn’t mean the basics change—just that they need tweaking. Never stop learning, never stop being curious. But most people avoid books like a smooch from a COVID patient. **Give. Give if you can. Be generous.** We’re relational creatures. We get so much from other people—time, help, kindness. It’s only ethical that we give back. Give to causes that matter to you, regardless of tax benefits. Give because it’s good for your soul. Give because it’s right. \## What this looks like in practice Let me give you one example of what a financial philosophy actually looks like. In my case: **resilience first.** In my case: resilience first. I come from a typical middle-class Indian family, which means money was always a source of problems and deprivations. So for me, avoiding financial shocks carries more weight than generating “maximum returns.” Being financially bulletproof became core to my philosophy—whether I realized it or not. My first priority was always resilience rather than wealth. They might seem like the same thing, but being financially resilient means being able to absorb shocks first and foremost—to survive all the random, chaotic things life throws at you. Jared Diamond calls this "[constructive paranoia](https://www.youtube.com/results?search_query=jared+diamond+world+knowlede+forum)": > "I'm paranoid. I think of everything that could go wrong, but I try to benefit from it." That's exactly it. Constantly thinking about the worst that could happen and being prepared for most of it is what makes me, ironically, peaceful. Another core aspect of my philosophy is to “sandbox” money. In technical terms, a sandbox is an environment where you test code without worrying about damage to other systems. For me, money is a means to an end. It enables me to do things and gives me freedom to think about things other than money. It’s an enabler—not an end, but a means. But money is like acid—corrosive. If you don’t sandbox it, if you don’t cordon it off mentally, it leaks out slowly and starts affecting other things that add enormous meaning to life. Money is elastic. It’s not just physical—it’s imaginary, mental, and elastic. It can expand forever, shrinking the scope of everything else in your mind and occupying every waking moment if you’re not careful. What scares me most is thinking about everything important in terms of money—putting a rupee value on everything. That frankly scares the shit out of me. Having a philosophy shrinks the scope of money in my head. It reduces the mental space money occupies and leaves room for other things that matter—things that improve the odds of thinking about what it means to be human and to live a meaningful life the way I define it. Maybe it's a miserable way to live. That's fine. We never have a perfectly calibrated philosophy of life. These philosophies evolve and have to evolve. As Heraclitus said: > "No man ever steps in the same river twice, for it's not the same river and he's not the same man." The same applies to a philosophy of money. --- Your philosophy won't look like mine. It shouldn't. But having _something_—some coherent framework that extends from how you think about life to how you think about money—is what separates deliberate financial decisions from spectacularly dumb ones. Because the alternative is what I witnessed on that phone call: a 65-year-old person gambling away years of work because he never stopped to think about what money actually means to him. And that’s a tragedy that’s entirely preventable. * * * Image: ["The Banker and His Wife" by Marinus van Reymerswaele (1538)](https://en.wikipedia.org/wiki/Marinus_van_Reymerswaele)

Who are you without a job?

Sat, 04 Oct 2025 00:00:00 GMT

Premeditatio malorum or negative visualization is a Stoic practice of imagining potential misfortunes and setbacks. The purpose isn’t to make oneself miserable but to build resilience by mentally [rehearsing](https://en.wikipedia.org/wiki/Negative_visualization) adversity and preparing for life’s inevitable challenges. They should’ve called it ‘make yourself depressed deliberately’ but no one would want to be Stoic then I guess. As artificial intelligence continues to get better, the gap between man and machine has narrowed. In numerous domains, AI have either caught up to human capabilities or bettered them. You might ask me what’s my evidence for making such grandiose claims. Here are some charts: ![](/blog-images/ai-capabilities-vs-human-performance-our-world-in-data.webp) ![](/blog-images/ai-benchmarks-saturation-over-time-epoch.webp) ![](/blog-images/ai-progress-biology-benchmarks-epoch.webp) ![](/blog-images/ai-progress-software-engineering-benchmarks-epoch.webp) ![](/blog-images/ai-performance-frontiermath-accuracy-epoch-chart.webp) ![](/blog-images/four-reasons-ai-agents-viable-thinking-scaling.webp) One can reasonably say that these benchmark charts are useless and that what ultimately matters is whether AI is actually eliminating jobs. On that question, the data is contradictory. For example, here’s data from a [recent study](https://www.brookings.edu/articles/new-data-show-no-ai-jobs-apocalypse-for-now/) by Brookings and Yale Budget Lab on how AI has affected the labor market in the US: ![](/blog-images/workers-occupations-ai-exposure-groups-chart.webp) ![](/blog-images/occupational-mix-changes-technological-periods-ai-computers-internet.webp) > Generative AI has followed a similar trajectory in its first few years. We compared the pace of occupational change since ChatGPT’s launch to similar periods of change following the introduction of computers and the internet. We found that the occupational mix has changed marginally faster during the early ChatGPT era compared to previous technological shifts. However, these changes predate ChatGPT’s launch, suggesting AI may not be the primary driver. Here’s a study by [Brynjolfsson et al. (2025)](https://www.nber.org/papers/w31161) showing how AI is affecting young workers with jobs highly exposed to AI. Paradoxically, other cohorts with jobs exposed to AI have [not been affected](https://www.noahpinion.blog/p/ai-and-jobs-again). ![](/blog-images/employment-growth-age-band-ai-exposure-decomposition.webp) Looking at all the graphs above, you can reasonably object saying that benchmarks are flawed and no benchmark can reflect the true complexity of a real world task. That’s a fair objection. To bridge this gap between benchmark tests and the complexity of real-world tasks, [OpenAI ran a study](https://openai.com/index/gdpval/) where they recruited experts with an average experience of 14 years from a variety of fields like real estate, manufacturing, professional services, health care, and finance to design real world tasks with real deliverables and evaluate the performance of large language models (LLMs). The results are either sobering or exciting depending on whether you are an AI boomer or doomer. Frontier models are approaching industry-expert quality in terms of the work output quality. ![](/blog-images/gdpval-ai-model-performance-economically-valuable-tasks.webp) ![](/blog-images/gdpval-openai-frontier-model-performance-timeline.webp) ![](/blog-images/gdpval-ai-expert-preferences-by-sector.webp) Despite the flaws in the design of the study, at this moment, I’m in the camp that AI models will soon better humans in a vast range of tasks. I also think this is inevitable, even if AI progress were to dramatically slow down. This is my current prior based on the best available evidence, anecdotes and generous linear extrapolation and I’ll update it when I come across evidence that disproves my prior. Before I say anything, I want to be clear what I mean by AI. When I say AI, I don’t mean some sentient godlike technological entity that is all seeing, all knowing, and can do anything. No. At this stage, when I say AI, I am talking about large language models like ChatGPT and Claude. Those median statistical bullshitters that we all so love-hatingly use every day. Writing in [the Free Press](https://www.thefp.com/p/ai-will-change-what-it-is-to-be-human), economist Tyler Cowen and Anthropic Chief of Staff Avital Balwit frame the defining question of our time: > We stand at the threshold of perhaps the most profound identity crisis humanity has ever faced. As AI systems increasingly match or exceed our cognitive abilities, we’re witnessing the twilight of human intellectual supremacy—a position we’ve held unchallenged for our entire existence. **This transformation won’t arrive in some distant future; it’s unfolding now, reshaping not just our economy but our very understanding of what it means to be human beings.** Nearly 2500 years ago, Greek philosopher Socrates said “the unexamined life is not worth living” and exhorted his fellow Athenians to think critically about the life they lived. Today, as LLMs continue to get better, I think we all need to think about what it means to be human in a world where machines are better at most things, regardless of whether that reality comes to pass. This is not a simple question—its dimensions are vast and touch various aspects of our lives: what does it mean to work, learn, provide, create, share and perhaps most importantly, what’s one’s place in the world. If you are thinking that this idiot is being unnecessarily melodramatic or causing petty panic, think about how far we have come since 2022 when ChatGPT launched: In 2021 you had to Google to find something. In 2025 the collective knowledge of humanity is a prompt away. I don’t know about you, but that’s wild to me. Me asking you to think about these hard questions has nothing to do with the impending arrival of artificial general intelligence (AGI) or artificial super intelligence (ASI) or some other imagined sci-fi future. No. I think that even if progress on LLMs stops today, vast swathes of knowledge work and bullshit jobs can be automated away and that doesn’t bode well for society. ## **The time to be pessimistic is now!** Set aside your views on whether you think LLMs are good or if they are just regurgitators of the median mediocrity of humans. One of the hallmarks of being intellectually rigorous is to think critically about the range of potential future outcomes. Engaging in this visualization doesn’t help you predict things but it helps you shrink the space for surprises and force you to prepare for whatever comes. You can’t predict but you can prepare and that’s the best we all can hope for. As LLMs continue to get better, they are encroaching on things that give humans meaning in life. With each model update, the question of what it means to be human in an age of machine intelligence is getting harder and harder to answer. I don’t know if LLMs will continue to get better at the same exponential rate. As things stand today, they are pretty close to human capabilities in many areas. I think it’s time for all of us to think about a future in which they are better than us at most things, if not all things, regardless of whether that will come true or not. Even if LLMs can’t do what you can do today, there’s a non-trivial probability that they soon might. Here I’ll be honest and admit that I am making that assertion based on simple linear extrapolation. You might think that I’m an innumerate idiot but my model is still better than most experts as AI researcher Julian Schrittwieser pointed out [in a recent blog](https://www.julian.ac/blog/2025/09/27/failing-to-understand-the-exponential-again/). ## **Bullshit jobs** I started reading [_Bullshit Jobs_](https://www.amazon.in/Bullshit-Jobs-David-Graeber/dp/0141983477) by David Graeber a week ago and here’s an excerpt from the preface: > But rather than allowing a massive reduction of working hours to free the world’s population to pursue their own projects, pleasures, visions, and ideas, we have seen the ballooning not even so much of the “service” sector as of the administrative sector, up to and including the creation of whole new industries like financial services or telemarketing, or the unprecedented expansion of sectors like corporate law, academic and health administration, human resources, and public relations. > > And these numbers do not even reflect all those people whose job is to provide administrative, technical, or security support for these industries, or, for that matter, the whole host of ancillary industries (dog washers, all-night pizza deliverymen) that only exist because everyone else is spending so much of their time working in all the other ones. > > These are what I propose to call “bullshit jobs.” It’s as if someone were out there making up pointless jobs just for the sake of keeping us all working. Jobs like administrative tasks, report generation, sending emails, scheduling, basic data analysis, corporate communications and the like are classic examples of bullshit jobs. If there was ever a category of jobs tailor-made to be automated by LLMs, it’s [bullshit jobs](https://en.wikipedia.org/wiki/Bullshit_Jobs). Nobody wants to think that their jobs are bullshit no matter how true it is. A corporate communications manager doesn’t wake up thinking “I do meaningless work.” They have a title, a salary, a sense of purpose, and a place in the social hierarchy. Their identity is wrapped up in that job, bullshit or not. Ok, now assume I am right and think for a second what would happen to your sense of what it means to be a productive human if these bullshit jobs were to vanish. Most people not only underestimate the number of bullshit jobs out there but also delude themselves into thinking their job isn’t one. But I think deep down, a lot of people [know that](https://thestillwandering.substack.com/p/the-death-of-the-corporate-job) their jobs are bullshit jobs. All it takes is a couple of drinks for them to admit. So when I say LLMs can automate bullshit jobs, I’m not celebrating the liberation of human potential. It’s frankly depressing given that millions of jobs fall under this category. I’m scared that they are ripe for being taken over by LLMs and most people are oblivious to this risk. What this does to people’s sense of self is a depressing question to ponder. If LLMs can do the bullshit jobs—the rote, administrative, box-checking work—what makes you think they can’t eventually do the meaningful knowledge work too? Now put your hand on your heart and ask yourself these questions: 1. Is your job a bullshit job? 2. If it’s not, how long do you think you have before an LLM can do it better than you can? I can immediately imagine a person of great purpose leaping like a Leopard to mentally kick me in the proverbial nutsack and educate me with the following factoids: 1. Every generation thinks that big technological shifts are disruptive. From electricity, cars, computers, to the internet, people have been screaming this time is different for ages. 2. New technologies always create more jobs than they destroy. Automation creates adjacent opportunities we can’t even imagine yet. For example look at all the internet industries created by the internet that nobody predicted. 3. LLMs are just sophisticated autocomplete. They can’t do physical labor, can’t think strategically, and lack true understanding. They’re tools, not replacements. 4. This is a bubble. Remember the dot-com crash? Everyone thought the internet would change everything overnight. The hype will die down and we’ll realize AI is just another tool. 5. Scaling has clearly hit a wall. They’re running out of data, running out of compute, and the improvements are plateauing. This exponential growth narrative is falling apart. 6. Humans will always be needed in the loop. You can’t just deploy AI without human oversight, judgment, and accountability. Regulations alone will slow adoption to a crawl. 7. AI hallucinates constantly and makes stupid mistakes. No company will trust mission-critical work to something that confidently tells you 2+2=5. 8. We’ll adapt like we always have. Humans are resilient. New forms of work will emerge. Society has survived every technological disruption and this won’t be different. Scott Alexander captures why these conversations go so badly in a [brilliant post](https://www.astralcodexten.com/p/why-not-slow-ai-progress): > Some people give an example of a past prediction failing, as if this were proof that all predictions must always fail, and get flabbergasted and confused if you remind them that other past predictions have succeeded. > > * * * > > Why do these discussions go so badly? I am [usually against psychoanalyzing my opponents](https://slatestarcodex.com/2019/07/17/caution-on-bias-arguments/), but I will ask forgiveness of the [rationalist saints](https://www.astralcodexten.com/p/lives-of-the-rationalist-saints) and present a theory. > > I think it’s because, if it’s true, it changes everything. But it’s not _obviously_ true, and it would be inconvenient for it to change everything. Therefore, it must not be true. > > And since most people refuse to use this snappy and elegant formulation, they search for the closest thing in reasoning-space that feels like it gets at this justification, and end up with things like “well you need to prove all of your statements mathematically”. I could argue that AI isn’t a narrow technology like electricity and that it can replace cognitive tasks at scale or that its possibilities are limited only by human imagination or that this time _can_ be different but leave that aside. **What I am asking you to do is to imagine for a moment that most, if not all the predictions about AI are true. What will that do to your sense of what it means to be a human in this world?** ## **Who are you without a job?** Let me re-frame that question. Today, for better or worse, most people’s identity is deeply tied to the work they do. The most terrifying question for a lot of people is “who are you outside your job?” But a job is about far more than income or identity, as important as those are. A job is a societal marker and signals if a person is a productive member of society. Employment status affects everything from visa applications to mortgage approvals. In countries without universal healthcare, losing one’s job can mean losing health insurance. Even where benefits exist, employment determines one’s access to credit, housing, and social standing. Jobs structure the entire architecture of a person’s life. A lot of people meet their romantic partners at work. Having a job also influences a person’s decision to get married, have kids, buy a house, and the choice of where to live. A job isn’t just what someone does from 9 to 5—it’s the organizing principle around which modern life is built. It shapes one’s conception of the present and the future. Now, assume that there’s a very real threat that LLMs can automate entire swathes of jobs and other AI advancements—if and when they happen—can make this worse. If AI does become really good, what happens to the broken identities of people? What happens when the organizing principle of society simply... vanishes? Regardless of what your view about AI is, if you aren’t thinking about this question, you are not being intellectually honest. You are just burying your head in the sand and hoping for the best. Let me be clear: I have no idea if AI will continue its current rate of progress and how it will affect the world, whether it will automate a lot of jobs. Neither does anyone. I also don’t want to be misunderstood as predicting the wholesale collapse of society. This is why I half-jokingly coined [Bhuvan’s law](https://bhuvan.substack.com/p/introducing-bhuvans-law) and it applies to everything I’ve said so far: > “Any discourse about artificial intelligence is indistinguishable from talking out of your ass.” It could very well be that most people like me are thinking about the downsides of AI and not enough about the upside because of [loss aversion](https://hybridhorizons.substack.com/p/everyones-pretending-ai-isnt-changing) but nobody knows what tomorrow holds except for two people—god and a liar. AI could very well turn out to be a bubble like crypto, railroads or the dot-com bubble. It could also just unleash a brave new world that leads to the flourishing of the human race or it could turn out to be a dud. What possibility would you bet on? When the future is uncertain, the least you can do is to visualize the potential futures both good and bad. There’s no point in thinking about the worst when you are dealing with small scale changes but that’s not the case today. The fact that LLMs (even before “more advanced AI”) can do so many things shows that we are dealing with a paradigm shift and not an incremental change. If the paradigm shift threatens to shatter all conceptions you have about what it means to be human, how can you avoid thinking about the hard question, which is what does it mean to be a person in the shadow of AI? ## **The time to imagine the worst is now** This brings us back to the Stoics. Premeditatio malorum wasn’t about pessimism or doom-mongering. It was about mental preparation. By imagining loss, hardship, and change, the Stoics built psychological resilience. They didn’t predict the future—they prepared for multiple versions of it. That’s what I’m asking you to do. Not to panic, not to despair, but to sit with the uncomfortable questions: * If your job disappeared tomorrow, who would you be? * If machines could do most cognitive work, what would give your life meaning? * If work is no longer the primary organizing principle of society, what comes next? These aren’t hypotheticals from some distant sci-fi future. These are questions you should be wrestling with now, because the answers will shape how you navigate the next decade. The Stoics understood something fundamental: you can’t control what happens to you, but you can control how prepared you are to face it. You can’t stop AI from advancing. You can’t prevent the disruption that’s coming. But you can do the hard work of imagining what that disruption looks like, and you can start asking yourself the questions that matter. Because when the future arrives—and it will—the people who’ve done this work won’t be caught flat-footed. They’ll have already wrestled with their fears, examined their identities, and thought deeply about what it means to be human when machines can think. That’s not pessimism. That’s preparation. The worst case is that this entire thing becomes a pointless thought excerisise. What do you have to lose? * * * Image: [Claude Monet: Gare Saint-Lazare, 1877, National Gallery](https://en.wikipedia.org/wiki/Arrival_of_the_Normandy_Train,_Gare_Saint-Lazare)

A ripple and then a rabbit hole

Sat, 27 Sep 2025 00:00:00 GMT

“Rabbit hole” What a wonderful term—thinking about it gives me a warm and fuzzy feeling. The literal meaning, of course, is a rabbit’s burrow, but it’s the figurative meaning that truly captivates me. “Rabbit hole” carries many connotations, both positive and negative. In colloquial use, “going down a rabbit hole” means being so absorbed by something that time flies and you end up in places you couldn’t have imagined before. In its positive sense, it’s a rewarding experience where you learn or discover something new. In its negative sense, it’s wasting time learning about disturbing, fringe, or conspiratorial ideas. The credit for popularizing the phrase “down the rabbit hole” goes to [Lewis Carroll](https://en.wikipedia.org/wiki/Lewis_Carroll), the author of [_Alice’s Adventures in Wonderland_](https://www.gutenberg.org/ebooks/11). “Down the Rabbit Hole” is the title of the first chapter, and this is how it begins: > Alice was beginning to get very tired of sitting by her sister on the bank, and of having nothing to do: once or twice she had peeped into the book her sister was reading, but it had no pictures or conversations in it, “and what is the use of a book,” thought Alice “without pictures or conversations?” > > So she was considering in her own mind (as well as she could, for the hot day made her feel very sleepy and stupid), whether the pleasure of making a daisy-chain would be worth the trouble of getting up and picking the daisies, when suddenly a White Rabbit with pink eyes ran close by her. > > There was nothing so _very_ remarkable in that; nor did Alice think it so _very_ much out of the way to hear the Rabbit say to itself, “Oh dear! Oh dear! I shall be late!” (when she thought it over afterwards, it occurred to her that she ought to have wondered at this, but at the time it all seemed quite natural); but when the Rabbit actually _took a watch out of its waistcoat-pocket_, and looked at it, and then hurried on, Alice started to her feet, for it flashed across her mind that she had never before seen a rabbit with either a waistcoat-pocket, or a watch to take out of it, and burning with curiosity, she ran across the field after it, and fortunately was just in time to see it pop down a large rabbit-hole under the hedge. > > In another moment down went Alice after it, never once considering how in the world she was to get out again. > > The rabbit-hole went straight on like a tunnel for some way, and then dipped suddenly down, so suddenly that Alice had not a moment to think about stopping herself before she found herself falling down a very deep well. Delightful, isn’t it? I came across this quote by the French poet Stéphane Mallarmé some time ago, and it became etched in my memory: > “Everything in the world exists in order to end up as a book.” If I were to paraphrase this quote, I’d say: > “Everything in the world exists in order to end up as a rabbit hole.” This is what I believe, and each passing month continues to strengthen that conviction. Put another way: how can you live without wanting to know something? How is that a good way to live? You might question the point of knowing random things. To which I ask: what’s the point of living if you don’t want to know random things and give in to that urge? If you don’t go tumbling down a thousand rabbit holes, time travel to distant lands and universes from the comfort of your home, and come back transformed, have you even truly lived? It is in those distant places and times that we find the tools and ideas that allow us to create the meaning we all desperately crave, whether we realize it or not. Whatever we’re seeking in life, whether conscious of it or not, lies down one rabbit hole or another. Viewed this way, diving down weird and wonderful rabbit holes isn’t just a deliberate activity but is the very essence of being and living. Why? I don’t have some sophisticated answer. I like knowing things for their own sake. Goalless exploration is fun. Why pollute the fun of random discovery with ulterior motives? Whoever said that you need a reason for everything? The best things in life are the result of randomness, and that applies to both our real lives and our intellectual lives. A good life is one that allows serendipity to find you, say hello, and then slap the shit out of you. I’m a misguided romantic that way, and [I like being that way](https://bhuvan.substack.com/p/in-praise-of-dilettantism). So how do you find rabbit holes to tumble down? You don’t. I won’t offer some platitude like “the rabbit holes find you.” The necessary precondition for finding a rabbit hole is a ripple. Think of a ripple as a sign, a mental buoy, a North Star, or a mental gravitational tug on your attention. Ripples direct your attention toward something, and rabbit holes are downstream of that. That means you need to direct your attention at something, and for that you need ripples that catch your attention. Though the word has been overused, I believe curiosity is an essential element of a life well-lived. Curiosity suffers from imprecise definition. To me, curiosity isn’t the mechanical acquisition of knowledge but rather an orienting force, like gravity, pushing you toward where “good things” await discovery. Several months ago, I had read [this post](https://thebasecamp.substack.com/p/attention-is-first-philosophy) by the thoughtful Adam Robbert , in which he calls attention “first philosophy.” It landed with the force of a nuclear bomb in my mind, and I haven’t stopped thinking about it since. > **Attention is first philosophy—** > Philosophy is not only a system of thought but a mode of attentiveness, an _exercised openness_ to what exceeds us yet calls us to deeper participation. Its systematic aspects are downstream of this attentiveness, and can certainly become a scaffolding by which others can train their own attention, but it is at its root a mode of cultivated attention. After reading it, I initially wanted to argue that curiosity, not attention, is first philosophy. But I was wrong. Curiosity doesn’t emerge in isolation. To be curious, you must first notice things—ripples—so attention truly is the foundational philosophy. So what you need to notice about ripples are two things: 1. You need to do things that create ripples in the vast universe of your mind. That means the first thing you need to do is do things and be in places that can create ripples in your head. So unless there’s some randomness in the way you learn, there won’t be any ripples. 2. Once there are ripples, you need to pay attention, and that’s where the next transformative rabbit hole awaits. To [paraphrase](https://www.goodreads.com/quotes/117526-no-man-ever-steps-in-the-same-river-twice-for) the Greek philosopher Heraclitus: “No one falls down the same rabbit hole twice, for it’s not the same rabbit hole, and they’re not the same person.” First comes a ripple, then a rabbit hole. Every possibility for wonderful things happening in your life flows downstream from a ripple. The right ripple can lead you to learn and experience things your imagination could never have conceived. Let me share a few examples from my experience. [This post](https://footnotesandtangents.substack.com/p/welcome-to-war-and-peace-2025) led me to read _War and Peace,_ and it’s the best book I’ve read so far in my life. I was playing around with AI coding tools like Claude Code, and I built [this site](https://paperlanterns.ink/) for a passion project I’d always dreamed of creating: collecting great historical letters in the public domain. That urge in itself was due to another ripple—reading [Shaun Usher’s newsletter](https://news.lettersofnote.com/). Building this site led me to discover Seneca’s letters, which were so good that I built a [simple site](https://seneca.ink/) to make them easily readable. Just one beautiful line in [_Poetics of Space_](https://bhuvan.substack.com/p/carry-me-along-oh-roads) inspired me to start [reading poetry](https://www.rabbitholes.garden/tags/Poetry/) again, and it’s been a profoundly rewarding experience. These are just a few examples, and I can keep going. The best thing I’ve done in the past few years is to build rituals and follow people who can create ripples. For instance, whenever I read [Maria Popova](https://www.themarginalian.org/), it’s impossible to read just one of her posts; I inevitably tumble down multiple rabbit holes. The Substack app feed has become another place for discovering amazing rabbit holes. Just this morning, I came across Nicholas Gruen ’s post, and I found [two new rabbit holes](https://nicholasgruen.substack.com/p/democracy-the-three-legged-stool)—a podcast about Hannah Arendt and a quote by W.B. Yeats. Then there are other sites like [Aeon](https://aeon.co/), LRB, and even Twitter, for that matter, that always have something fascinating on offer. Perhaps one of the most delightful side effects of going down rabbit holes is that they force me to write. I can’t help but write about whatever fascinating thing I discover in a week. Rabbit holes help me discover things worth writing about, and writing helps me discover things worth reading—it’s a virtuous loop. Naturally, all this leads to questions like going deep vs. wide, what to focus on and what not to, information diets, _optimizing_ your reading (whatever that means), and so on. I love being indiscriminate about the rabbit holes I pursue. I don’t know if that’s a good thing or a bad thing, but it works for me. More importantly, it’s fun, and it never feels like a chore. One annoying thing about the Substack feed is the deluge of posts claiming to teach you how to read more, optimize your information intake, become smart in 87 seconds, read like René Descartes, or think like a philosopher. Whenever I’m feeling insecure, I end up clicking some of these posts, and I always feel like shit because I feel inadequate. Then I realize most such content is clickbait nonsense, and I go back to scrolling for my next link. Optimize for ripples. Everything else is gas. * * * Image: [Giuseppe Arcimboldo, _The Librarian_, c. 1566, oil on canvas, Skokloster Castle, Sweden.](https://en.wikipedia.org/wiki/The_Librarian_$Arcimboldo$)

Philosophy of life and Seneca’s letters

Sun, 21 Sep 2025 00:00:00 GMT

Philosophy—such a loaded word, isn’t it? The phrase “philosophy of life” is even more loaded. As loaded as your stomach after demolishing a special veg paratha and paneer paratha back-to-back. What’s not widely appreciated is the original meaning of the word philosophy: > The word “philosophy” comes from ancient Greek, combining two elements: > > **φίλος (philos)** - meaning “loving” or “friend of” > **σοφία (sophia)** - meaning “wisdom” > > So “philosophy” literally means “love of wisdom” or “friend of wisdom.” > > The term is traditionally attributed to the ancient Greek thinker Pythagoras (6th century BCE), who allegedly coined it to distinguish himself from the “sophists” - those who claimed to possess wisdom. Instead of claiming to be wise, Pythagoras described himself as a “philosophos” - someone who loves or seeks wisdom. — _Claude_ Love of wisdom. Once you know the etymology of the word “philosophy,” it acquires a different feeling altogether. It does for me, at least. In colloquial use, however, when people use the term “philosophy,” they mean different things. The word is a stand-in for principles, beliefs, a framework, an abstract meta idea, or a general worldview or a broad fuzzy idea, belief, or feeling that’s hard to describe. One peculiarity that fascinates me is the reaction people often have to the use of the word “philosophy.” A lot of times, the people who use it sound like douches to me, and I probably sound the same to other people when I use it. I don’t know why. Maybe because the term is often overused to the point of being banal and meaningless. Hearing it often induces my eyes to execute an involuntary somersault. Why all this rambling about the term “philosophy,” you wonder? The reason why I’m talking about the term “philosophy” is to explore the idea of philosophy of life. This is how the philosopher and writer A. C. Grayling starts his book [_Philosophy and Life: Exploring the Great Questions of How to Live_](https://www.amazon.in/Philosophy-Life-Exploring-Great-Questions/dp/024152380X)_,_ a book that has resisted my attempts to read it thrice: > 'There is a question everyone has to ask and answer – in fact, has to keep on asking and keep on answering. It is ‘How should I live my life?’, meaning ‘What values shall I live by? What sort of person should I be? What shall I aim for?’ The great majority of people do not ask this question, they merely answer it unthinkingly, by adopting conventional views of life and what matters in it, and moving along with the crowds of unasking, unthinking answerers in the direction that the crowds take them. > > I call this question the ‘Socratic Question’ because it was Socrates who, at least in philosophy’s recorded history, was the first thinker we know who systematically asked it to prompt a search for reasoned answers – that is, answers formulated independently of some antecedent traditional or religious viewpoint. > > To say that in our time, as in Socrates’ time – indeed in all times – the great majority of people do not ask themselves his question but answer it unthinkingly, is to say that whereas everyone has a philosophy of life, the great majority of people are not aware of having one. The philosophy of life they have is adopted from the society around them, and shared with most other people. They acquired it from parents, school, friends, television, social media, church or mosque, society at large, absorbing it unconsciously. Indeed they work hard – also in largely unconscious ways – to be as like other people as possible, and to behave in ways acceptable to them. Almost everyone copies everyone else in their social circles, and cleaves to the values and aims held in common there, reinforcing the shared philosophy of life they thus adopt. As Oscar Wilde observed, ‘Most people are other people. Their thoughts are someone else’s opinions, their lives a mimicry, their passions a quotation.’ > > And yet there are times in most lives when something – a feeling of confusion, a sense of unformulated questions pushing at the back of one’s mind, perhaps moments of depression, illness, grief, failure – suddenly forces a halt, a pause, and prompts one to think, giving one a desire to make sense of things. And at those times the unconsciously acquired philosophy one lives by does not seem enough.’ Brilliant, isn’t it? I wholeheartedly agree. We all have a lot of philosophies about life—some considered, but the vast majority of them unconsidered. If you aren’t going through the motions of life like a zombie, then a large part of living is discovering one’s unconsidered philosophies and ruthlessly murdering them. To live is to be born in ignorance and walk toward fuzzy clarity. As for all that talk about enlightenment, I’ll leave that to people wearing loincloths preferring the company of banyan trees to an OnlyFans subscription. Loincloths are also itchy, man. Regardless of what we mean when we use the term “philosophy,” we all have philosophies for different areas and aspects of life. Life becomes more fun and fulfilling when we try to have considered philosophies, and that involves engaging with the words of people who’ve lived and wrestled with these questions. More often than not, we call these people philosophers. I don’t know about you, but these philosophers are impossible to understand. I mean, why can’t they speak like normal people? They all sound and write like they’re tripping on a bad batch of acid and mushrooms after binge-watching _Keeping Up With the Kardashians_ while being hungry. It takes some work to understand a lot of what passes for philosophy. It’s still worth engaging with these maddening philosophers and their intractable texts because it’s abundantly clear, even to someone who’s as feeble-minded as me, that there’s value to derive from them. The other reason is that when we have existential crises, we all look in different places and to different people to find our bearings. It could be religion, spirituality, money, fitness, men, women, substances, and a hundred other things. What seems clear to me is that philosophy has many answers to offer. In the preface of the same book, Grayling writes that academic philosophy is solely concerned with the study of aspects such as reality, knowledge, truth, and reason. While these are important aspects whose study has led to great human progress, the other half of philosophy, which is how to live a good life in a complicated world, has vanished from study. He then goes on to write: > 'But the important point I seek to make is that in this ‘other half of philosophy’ – the philosophy of life – the philosophers, the philosophes, are not just philosophers or philosophes as such, they are also the novelists, historians, dramatists, essayists, poets and scientists whose explorations and thoughts are likewise about life and how we do, and should, live it. This is because reflection on life, exploring its complexities and possibilities, seeking routes to survival at least and flourishing at best – finding the good that is in things bad and wrestling with the bad that is in things good, and deciding what really matters in the end – is everywhere the business of intelligent minds when they apply themselves, whether directly or indirectly, to answering for themselves the Socratic Question. > > The period in the history of Western philosophy when the question of how to live was most actively pursued – and the results applied in life itself – was the Hellenistic and Roman period in which Stoicism, Epicureanism and other approaches took their classic form: between the fourth century BCE and the fourth century CE.’ Again, I agree. The reason why I am writing this post is because I’ve been playing around with AI coding tools, and I’m having a ton of fun. These tools are so good that I can now build all the side projects I ever wanted to build on my own without knowing a lick of coding. All it takes to be a coder now is the ability to double-click an icon and then type English sentences. Wild times. Anyway, one thing I always wanted to build is a site similar to Project Gutenberg but for India. Even with AI coding tools, this is complex. So I figured I’d start small. One other thing I wanted to do was collect and publish letters, speeches, essays, and lectures from the public domain, inspired by [Shaun Usher](https://open.substack.com/users/1508639-shaun-usher?utm_source=mentions) of [Letters of Note](https://news.lettersofnote.com/) fame. Claude Code is so good that it helped me build a site for it in no time, and that’s how [Paper Lanterns](https://paperlanterns.ink/) was born. Once the site was ready, I started scouring the web for good letters to share, and that’s when I came across [this collection of letters](https://en.wikisource.org/wiki/Moral_letters_to_Lucilius) by the famous Stoic Seneca to his friend Lucilius. I read the first couple of letters and didn’t think much of them. Maybe because I was sleep-deprived, I thought, “Eh, another white Roman guy with abs from having a stick up his ass, trying hard to say prophetic stuff to pander to his ancient Roman Instagram audience.” I posted a few random letters on Paper Lanterns and quickly forgot about them. After a few weeks, I came across the letters again for reasons I can’t remember and started reading them again. This time I was paying full attention. I was floored by the second letter at how good these letters were. The practical wisdom, the timelessness of the advice, and the clarity with which old man Seneca writes about issues of practical significance in everyday life are, well, I can’t think of any other word than beautiful. At their heart, the letters are about what it means to live a good life, what it takes, and how. By the end of the second letter, I had this strong urge to get as many people as I could to read them. Then, as [Eminem](https://www.eminem.com/song/lose-yourself-soundtrack-version/) once said, I _snapped back to reality_ and realized that all those people are swiping reels. But I still figured there might be other people who would love the letters if they were easily accessible and readable, like I did. These letters are in the public domain and are easy to [read and download](https://en.wikisource.org/wiki/Moral_letters_to_Lucilius) on WikiSource, but they still felt a bit unreadable to me there. So I downloaded all the letters and built this [simple site](https://seneca.ink/) to make it easy to discover and read the letters. Please do check it out. I hope you like reading the letters as much as I do right now. Along with that, I started reading the letters and bought [this translation](https://www.amazon.in/Letters-Ethics-Lucilius-Complete-Annaeus-ebook/dp/B017P31O3G/ref=tmm_kin_swatch_0) of the letters by Margaret Graver and A. A. Long, and I highly recommend it. The introduction is brilliant and helped me get a sense of who Seneca was and why his letters are so popular. Lucius Annaeus Seneca, more commonly known as Seneca the Younger, was a prominent figure in ancient Rome. He was quite the polymath—a Stoic philosopher, statesman, dramatist, and satirist. He is perhaps most famous for being the tutor and advisor to the tyrannical emperor Nero, who later was responsible for Seneca committing suicide. Seneca, alongside Epictetus and Marcus Aurelius, is one of the most popular Stoic philosophers. Stoicism is undergoing somewhat of a revival and has become the go-to philosophy of everyone from [Silicon Valley bros](https://www.theguardian.com/books/2024/oct/28/the-stoicism-secret-how-ryan-holiday-became-a-silicon-valley-guru) to influencers and “content creators” who produce bite-sized Stoic philosophical content with the ease and nuance of a diarrheal discharge. My own journey with philosophy started just a few years ago with the reading of [this book](https://www.amazon.in/Socrates-Sartre-Philosophic-Quest/dp/0553251619), and that’s how I discovered Stoicism. It immediately had a certain appeal to me. Attracted to the Stoic style of thought, I wanted to learn more and bought a few books about Stoicism by [Massimo Pigliucci](https://www.amazon.in/stores/Massimo-Pigliucci/author/B001IU0D3K?ref=sr_ntt_srch_lnk_1&qid=1757767256&sr=8-1&isDramIntegrated=true&shoppingPortalEnabled=true)—which, naturally, I haven’t read yet. Like the content creators of the diarrheal discharge variety, I have a superficial understanding of Stoicism, which is some version of “stop bitching, shut up, and accept things.” There’s a universe of nuance there, and that’s what I intend to discover over the coming years. Another reason why I’m starting to like philosophy is because of the nature of the Stoic characters. Marcus Aurelius was an emperor who knew power like no other but preached about the unimportance of external things. Seneca wrote extensively about the virtues of simple living while being one of the richest men in Rome, with wealth estimated at 300 million sesterces. Then there’s Epictetus, my favorite Stoic. He was born into slavery, earned his freedom, and taught people to focus on what is in one’s control and to ignore the rest. I’m particularly drawn to Epictetus because of bangers like this: > _I have to die. If it is now, well then I die now; if later, then now I will take my lunch, since the hour for lunch has arrived - and dying I will tend to later._ In his letters, Seneca writes about important aspects such as moral progress, wise use of time, fear of death, managing emotions, friendship, integrity, and mutual aid. You would expect that a man who preaches the importance of living a virtuous life would be beyond reproach, but that doesn’t seem to be the case. Like all of us, Seneca was deeply human and full of contradictions. From the introduction of [this book](https://www.amazon.in/Letters-Ethics-Lucilius-Complete-Annaeus-ebook/dp/B017P31O3G/ref=tmm_kin_swatch_0): > Many historians, ancient and modern, feel that this early part of Nero’s reign, moderated by Seneca and Burrus, represented a period of comparative good rule and harmony (the “quinquennium Neronis”). The decline started in 59 CE with Nero’s murder of Agrippina, after which Seneca wrote the emperor’s speech of self-exculpation—perhaps the most famous example of how the philosopher found himself increasingly compromised in his position as Nero’s chief counsel. Certainly as a Stoic, Seneca cuts an ambiguous figure next to the others who made their opposition to Nero clear, such as Thrasea Paetus and Helvidius Priscus. His participation in court politics probably led him to believe that he could do more good from where he stood than by abandoning Nero to his own devices—if he even had this choice. > > Because of his ethical writings, Seneca fared well with the early Christians—hence the later forging of a fake correspondence with St. Paul—but already in antiquity he had his fair share of critics, the main charge arising from the apparent contradiction between his Stoic teachings on the unimportance of “externals” and his own amassing of huge wealth. Perhaps for this reason he never gained the respect accorded the “Roman Socrates,” the Stoic C. Musonius Rufus, banished by Nero in 65, even though Seneca’s writings have had far more influence over the centuries. > > In Seneca’s own lifetime one P. Suillius attacked him on the grounds that, since Nero’s rise to power, he had piled up some 300 million sesterces by charging high interest on loans in Italy and the provinces—though Suillius himself was no angel and was banished to the Balearic Islands for being an embezzler and informant. In Seneca’s defense, he seems to have engaged in ascetic habits throughout his life and despite his wealth. In fact, his essay On the Happy Life (De vita beata) takes the position that a philosopher may be rich as long as his wealth is properly gained and spent and his attitude to it is appropriately detached. Where Seneca finally ranks in our estimation may rest on our ability to tolerate the various contradictions posed by the life of this philosopher in politics. Seneca is also aware of the difficulty in attaining the lofty ideals preached by Stoicism: > Like earlier Stoics, Seneca does not doubt that such advantages as health, financial security, and physical comfort are in accordance with our nature and worth pursuing, but he does insist that such things are not intrinsically desirable. Knowledge is an absolute: it is a limit, like the straightness of a straight line, and the virtues are in essence forms of ethical knowledge (66, 71). From this it would seem to follow that the human good is virtually unattainable, and Seneca concedes that actually to attain the ideal is at least extremely rare (42). But even ordinary, very imperfect people can make progress toward that goal (52, 75). > > —Lucius Annaeus Seneca; translated by Margaret Graver and A. A. Long, “Seneca: Letters on Ethics To Lucilius” The reason why I am reading the Stoics is because I don’t think I’m built to accept one philosophy of life like Stoicism and call myself a Stoic or whatever. I like the DIY approach to building a philosophy of life, and for this reason, I prefer the honeybee approach, which Seneca himself advocates in one of his letters: > But I must not be led astray into another subject than that which we are discussing. We also, I say, ought to copy these bees, and sift whatever we have gathered from a varied course of reading, for such things are better preserved if they are kept separate; then, by applying the supervising care with which our nature has endowed us,—in other words, our natural gifts,—we should so blend those several flavours into one delicious compound that, even though it betrays its origin, yet it nevertheless is clearly a different thing from that whence it came. This is what we see nature doing in our own bodies without any labour on our part; > > the food we have eaten, as long as it retains its original quality and floats in our stomachs as an undiluted mass, is a burden; but it passes into tissue and blood only when it has been changed from its original form. So it is with the food which nourishes our higher nature,—we should see to it that whatever we have absorbed should not be allowed to remain unchanged, or it will be no part of us. > > We must digest it; otherwise it will merely enter the memory and not the reasoning power. Let us loyally welcome such foods and make them our own, so that something that is one may be formed out of many elements, just as one number is formed of several elements whenever, by our reckoning, lesser sums, each different from the others, are brought together. This is what our mind should do: it should hide away all the materials by which it has been aided, and bring to light only what it has made of them. With that said, by the second letter it became abundantly clear to me that these letters have a wealth of wisdom to impart. What you get out of them depends on when you read them, the stage of life you’re reading them in, your mental state, and overall life context. * * * _Check out_ [_Seneca’s Letters_](https://seneca.ink/) _and_ [_Paper Lanterns_](https://paperlanterns.ink/) _for more philosophical and literary treasures from the public domain._

The heart wants what it wants

Sun, 31 Aug 2025 00:00:00 GMT

I learned that the famous line "The heart wants what it wants" is from a famous letter by Emily Dickinson and not Woody Allen. The full line: > Dear Mary - > > When the Best is gone - I know that other things are not of consequence - The Heart wants what it wants - or else it does not care - > > You wonder why I write - so - Because I cannot help - I like to have you know some care - so when your life gets faint for it’s other life - you can lean on us - We wont break, Mary. We look very small - but the Reed can carry weight. [Read the letter here.](https://paperlanterns.ink/letter/dickinson-mary-bowles-1862/)

Speculation is like water—it always finds a way

Sat, 30 Aug 2025 00:00:00 GMT

We saw a spectacular explosion in speculative activities in the aftermath of the COVID lockdowns, the likes of which we have never seen in our lifetimes. Old-timers in the markets tell me there were a few crazy phases in the 90s, but we're talking analog craziness, not digital craziness—that's an apples-to-Paragon-slippers comparison. ![](/blog-images/post-covid-speculation.jpg) In the years since COVID, there's been a great deal of concern, debate, and shrill noise about speculative activities and their societal impact in India. These debates have reached fever pitch in the last couple of years, so much so that politicians have gotten in on the action. As someone who spent a decade in a brokerage company with a front-row seat to the evolution of Indian capital markets, I have some things to say. I've been meaning to write about this issue for a couple of years but have been too lazy to. However, the recent [ban of gaming and betting apps](https://thedailybrief.zerodha.com/p/in-india-all-online-bets-are-off) by the government has rekindled the debate over the real damage caused by speculative activities and what the right approach is to regulating them. So I figured now is as good a time as any to share my opinions nobody asked for. Instead of sharing a hot take on the betting apps ban, I want to approach this issue from my experience of working in a broking company and watching the transformation of Indian capital markets. The reason is that, much like the concern around the detrimental effects of gaming and betting apps, there was a similar concern over the popularity of derivatives (F&O) among retail investors in capital markets. The concerns around betting apps and F&O came to the fore around the same time and follow a similar narrative arc because both became popular after COVID. You can trace the popularity of betting apps alongside the popularity of trading and investing apps. ![](/blog-images/post-covid-gambling-speculation.jpg) The factors that enabled the popularity of both these speculative avenues are the same. In watching the Indian stock market transform, I've also followed the evolution of the very nature of speculation both in capital markets and outside. ### The prelude I joined Zerodha around 2017, right when all the factors that enabled the popularity of trading, investing, and betting apps were going live. The first and perhaps most important trigger was Aadhaar and eSign, which made investing fully online. Then UPI made payments instant and free, and finally Reliance Jio brought millions of Indians online with its cheap data plans. Along with all of this, the generous non-80C donations by VCs to fintech companies across investing, payments, gaming, and lending played a massive but underappreciated role in popularizing trading and investing. All of these factors were making the markets popular, but at the same time, they were helping expand the surface area of speculation. Coincidentally, many gaming and betting apps were raising funding around the time VCs had a hard-on for stockbroking companies. By 2020, all the pieces needed to enable speculation and gambling to go mainstream were in place. As an aside, I'm choosing to distinguish between speculation and gambling. The semantic similarities aside, in speculative activities like trading and investing, you can manage your risk to an extent and have a sense of the potential payoffs. In many cases, you can even define your risk-reward payoffs, and to a large extent, that's not possible with gambling. Ultimately though, there's a large degree of chance and luck involved in anything where the future has a role to play, as is the case with both speculation and gambling. Everything from your career, marriage, or taking a flight has both characteristics. I asked Claude for the difference between speculation and gambling: ![](/blog-images/speculation-vs-gambling.png) ### The COVID catalyst The trigger that unleashed the ravenous desire to speculate among millions of Indians was ironically made in China, probably in a lab or in the stomach of that fellow who ate that undercooked bat or pangolin or the unholy lovechild of a muskrat and pangolin—COVID-19. When COVID hit and lockdowns began, Matt Levine's "[boredom market hypothesis](https://acquirersmultiple.com/2021/05/matt-levine-the-boredom-markets-hypothesis/)" took over. Normally people had numerous options to have fun because they weren't locked in their homes. They could go out and do a hundred things to enjoy some cheap thrills. After COVID, going out was no longer an option, and the only outlet for people to get some cheap thrills was through their phones. As the world was locking down, all the pieces needed for people to find a release for their boredom were in place. Cheap internet thanks to Jio. Instant account opening. Seamless payments. Everything was digital. Because of these same innovations, borrowing money had become instant too, adding fuel to people's speculative urges. The final recipe in this heady mix was the extreme [lack of friction](https://www.strangeloopcanon.com/p/notes-on-friction) in the apps. This was a potent mix that led to a spectacular explosion in speculative activity that India had probably never seen at this scale. This speculative activity was spread across the stock market derivatives, gaming apps, betting apps, crypto trading, fantasy sports, and God knows what else. We've had speculative episodes before—the dot-com bubble, the Harshad Mehta bull run, pre-2008, and so on. But those were all pre-internet and always localized. The post-COVID period was the first time speculation spread across everything and everywhere. Even today, I don't think we've really understood [how dramatic](https://zerodha.com/z-connect/subtext/the-dramatic-transformation-of-the-indian-stock-market) this post-COVID phase has been or how speculative activity spread across capital markets and other areas. ### **The water always finds its way** This explosion in speculation and gambling freaked people out. Politicians, regulators, and commentators were worried about people gambling away their life savings in F&O, gaming and betting apps, crypto, and so on. There was a steady increase in people committing suicide because they had borrowed to speculate and gamble. This added narrative fuel to the fire. Not only were people in power and the commentariat worried, but they also wanted to save people. This led to a minor miracle, which created more Jesus-like figures since, well, Jesus's apostles. There were serious…ish efforts to curtail speculative activity in the stock market, crypto space, and gaming apps. Many regulations were passed, some good, some bad, but mostly ineffective. Trying to curtail speculative and gambling instincts without careful thought about regulatory design is like playing a game of whack-a-mole while being blindfolded and high on local ganja. In watching all these interventions to reduce speculation and gambling, I realized something: **speculation is like water, it always flows downhill.** Humans have gambled as long as they've been on this planet and will continue to do so. Who knows, once the robots replace us, maybe they'll also gamble? The reality is that people will gamble in legal ways when possible and illegal ways when not. The urge to speculate, to chase cheap thrills, is biologically ingrained in us. Until scientists figure out an affordable way to rewire or surgically remove the prefrontal cortex of 8 billion people, there will always be a gambling instinct. The gambling instinct is fundamental human nature. You can find it everywhere. The earliest evidence of gambling dates back to ancient Mesopotamia around 3000 BCE. Knucklebones, a game believed to be the precursor of dice, was played using ankle bones of sheep and other animals. Lottery-type games were played in China as far back as 2300 BCE. The dice game between the Pandavas and Kauravas is central to the Indian epic Mahabharata. Hell, pick any religious text, and the gods are regularly rolling dice, just with much higher stakes, like the fate of the entire bloody universe. I recently learned that in the late 1800s, [Indians gambled on rain](https://the-ken.com/the-nutgraf/the-fall-killed-real-money-gaming/). Yes, bloody rain. That watery thing that falls from the sky when you don't want it and ruins a laundry day. > On 20 March, 1897, the Bengal Legislative Council introduced a bill calling for the specific banning of a practice called “rain gambling”. > > Rain gambling, also known as _Barsat ka Satta_, was a form of speculation where people would place bets over future rainfall, i.e., the quantity and duration of rain during a window of time, when the monsoon would arrive, and how long it would last. This form of betting was especially popular with the Marwari community, who brought it with them from Rajasthan as they emigrated to various parts of India… including Bengal. > > You’d think that betting on rainfall would be a random pastime activity, but it was anything but. In fact, it got so popular that the British colonial government got quite concerned, going so far as to even amend laws to ban the practice in Bombay (now Mumbai). Some of our most foundational discoveries are the result of gambles. Every startup is basically a bet on an unproven idea. Drug companies spend billions gambling on compounds that mostly fail. Venture capital is literally betting on entrepreneurs with nothing but a pitch deck. Columbus gambled on a western route to Asia. Even insurance is just betting against disasters. It’s gambles all the way [down](https://en.wikipedia.org/wiki/Turtles_all_the_way_down), brah! Of course, there are good gambles and bad gambles. Bad gambles sometimes teach people useful things about risk and probability. Hell, I'd argue that gambling in stock markets has taught more people about finance than all the financial literacy programs combined. True story. But here's the thing: **speculation is like water, it always flows downhill. Regulators can build dams and barriers, but the water just finds new channels.** ### **Exhibit A: where the action goes** Take derivatives. In the post-COVID period, there was a spectacular increase in derivatives trading. There was a massive influx of uninformed retail investors, and [90% of them lost money](https://www.sebi.gov.in/media-and-notifications/press-releases/sep-2024/updated-sebi-study-reveals-93-of-individual-traders-incurred-losses-in-equity-fando-between-fy22-and-fy24-aggregate-losses-exceed-1-8-lakh-crores-over-three-years_86906.html) in F&O. ![](/blog-images/derivatives-turnover-india-1.png) [Capital Markets Yearbook](https://zerodha.com/z-connect/updates/the-capital-markets-yearbook) Given the speculative fervor and losses among retail investors, SEBI became concerned and implemented a [series](https://zerodha.com/z-connect/kite/a-short-brief-on-the-new-sebi-measures-for-the-fo-space) of [measures](https://zerodha.com/z-connect/business-updates/reviewing-2024-a-year-of-transitions) in the last couple of years to make trading F&O unattractive. In a sense they worked, and F&O volumes are down significantly. However, the urge to speculate is like water, and it always finds an outlet. After it became unattractive for many traders to trade F&O, crypto derivatives have become popular in the last year or so. Now, crypto derivatives exist in a legal vacuum, and without any oversight, they're openly advertising leverages of [100-200X](https://www.delta.exchange/contracts#XRPUSD). ![](/blog-images/delta-exchange.png) ![](/blog-images/coindcx.png) Where there are gamblers, there are dealers. It's not just crypto derivatives, but a whole host of shady forex platforms are trying to attract the traders who want lower margins and higher leverage. The regulatory vacuum around crypto derivatives has created exactly what regulators were trying to prevent, just in a different channel. ![](/blog-images/forex-sebi-tweet.jpg) [Tweet](https://x.com/saketh1998/status/1960555844212548014?t=UI8Rt_FhD6hQruN2KH8Pmg&s=19) ### The same story In [2023](https://economictimes.indiatimes.com/news/economy/policy/india-set-to-implement-28-gst-on-online-gaming-from-october-1/articleshow/104019503.cms), the government tried to restrict betting activity and imposed a 28% GST on the full value of the bets to discourage activity. It didn’t. What ended up happening is the govt ended up [collecting](https://economictimes.indiatimes.com/news/economy/finance/gst-on-online-gaming-resulted-in-412-more-revenue-in-six-months-netted-6909-crore-says-finance-minister-sitharaman/articleshow/113198707.cms?from=mdr) thousands of crores in taxes. Crypto was the same. Heavy taxes didn't stop anything. If anything, it seems to be picking up again after that initial dip. Now imagine what will happen with gaming and betting now that these activities are banned. And, right on cue, I just came across [this ET article](https://economictimes.indiatimes.com/tech/technology/offshore-betting-sites-cash-in-as-rmg-ban-hit-local-players-retreat/articleshow/123511791.cms) that shows offshore betting apps are trying to fill the vacuum: > The ban on online real money gaming (RMG) may have left homegrown platforms staring at the extinction of their business model but offshore betting websites are rushing in to fill the gap, said industry executives. Platforms such as Parimatch, 1XBet, RajaBets, 4RABet and Odds92 are busy pulling in the punters, boasting deposit bonuses ranging from 200% to 700% on amounts between Rs 30,000 and Rs 1 lakh, along with add-ons such as 500 free spins, ET has discovered. That means for a deposit of Rs 100, a user could get credit ranging from Rs 200 to Rs 700, going by the claims. ### **A small irony** What's funny in all of this is that the government has unwittingly and unknowingly enabled this speculative mania. I'd argue that without initiatives like Aadhaar, DigiLocker, and UPI, these gaming and betting apps would've been far less popular. UPI was meant to make payments accessible, and it also made it possible to bet ₹10-20. The same lending innovations that made borrowing instant also made it easier for people to bet with borrowed money. Without that infrastructure, small bets and leveraged speculation would've been way less viable. Indians wouldn't be spending Rs 10,000 crores a month on gaming and betting without all of these innovations. Don't get me wrong, I'm not saying we shouldn't have created UPI. The social welfare from instant payments far outweighs the harms by an order of magnitude. What I'm saying is that the entire saga around trying to regulate speculation and gambling proves that regulating these activities is way more complex, and knee-jerk reactions rarely work. > The law bans users from playing any kind of game for money, whether a game of skill or luck. And that includes games such as rummy, poker, and fantasy cricket that have survived for nearly two decades. On average, Indians spend over Rs 10,000 crore a month and at least 20–25 minutes a day on these games. > > Aggregators such as Cashfree and Razorpay, in fact, built a thriving business catering to real-money gaming companies, growing not just their volume of transactions but also margins. In July, online games accounted for about 350 million UPI transactions. In 2024, people spent Rs 50,000–60,000 crore on real-money games, and that was expected to double this year, said a senior payments executive. “No other sector grows as much,” they added. — [**The Ken**](https://the-ken.com/story/cashfree-razorpay-and-peers-rs-60000-crore-problem-as-india-bans-online-gaming/?utm_source=daily_email&utm_medium=email&utm_campaign=daily_main_crossdiscovery) These numbers don’t fully capture the money that goes into shadier apps, would be my guess. So that number will probably be much higher. ### **You can't have it both ways** Looking globally makes this clearer. The US has some of the biggest, deepest financial markets in the world. It's also a gambling paradise. For the most part, you can't have one without the other. How do I put this nicely? The degen gamblers are liquidity providers, and they provide a valuable social utility by losing money :p Their self-sacrifice deserves our respect. Ok, I’m kidding. It’s definitely possible to dampen speculation, and it’s possible to make degenerate gambling unviable and uneconomical, but that requires careful regulatory design, implementation, monitoring, and broad-based coordination. Isolated regulations and measures will always backfire. What do I mean by that? 1. In Australia, online casino-style games are illegal, and since 2019, the Australian regulator [has blocked](https://igamingbusiness.com/legal-compliance/acma-illegal-gambling-crackdown-casino-belle-blocked/?utm_source=chatgpt.com) 1,296 sites and forced ~220 services to exit, yet mirrors and rebrands keep popping up. [Influencers](https://www.theguardian.com/australia-news/2025/jun/30/australian-influencers-warned-after-several-accounts-inadvertently-promote-offshore-bookmakers-ntwnfb?utm_source=chatgpt.com) are even openly promoting them. 2. China made [gambling illegal](https://www.csis.org/blogs/new-perspectives-asia/cutting-losses-southeast-asias-crackdown-online-gambling?utm_source=chatgpt.com) on the mainland, but this has led to a spectacular explosion of offshore gambling operations across the Philippines, [Cambodia](https://interactive.aljazeera.com/aje/2019/cambodia-casino-gamble/index.html?utm_source=chatgpt.com), Laos, Myanmar, and other Asian countries catering to the Chinese. To make things worse, these operations are deeply involved in transnational crime, scam operations, and human trafficking. 3. Norway operates a state-run gambling monopoly, and only two state-owned entities can offer gambling products. Despite this, anywhere between [20-30%](https://igamingbusiness.com/gaming/gaming-regulation/norsk-tipping-turnover-up-as-foreign-market-shrinks-reports-norway-regulator/?utm_source=chatgpt.com) of the activity happens on unlicensed platforms. 4. The Netherlands has a comprehensive licensing and regulatory framework for gambling and [claims that](https://igamingbusiness.com/finance/ksa-netherlands-channelisation/?utm_source=chatgpt.com) up to 95% of all gambling happens on licensed platforms, but there are question marks over this. So, the ideal amount of speculative and gambling activity in a society is non-zero. When it comes to my industry, the financial markets, it is a truism that you can't just have the _good_ financial activity while stopping _all_ the excess. If everybody becomes a long-term investor, how will markets function? ### The costs of gambling I don't need to cite research to show that allowing all speculative and gambling activities without any constraints and guardrails is a bad idea. I'm sure people with libertarian persuasions would like that, but as someone who bought a subscription to Jacobin recently, I'm not in that camp. At an individual level, excessive gambling can lead to anxiety, depression, loss of productivity, debt burdens, and, in the extreme, suicide. At a familial level, gambling leads to loss of trust, domestic conflict, broken families, and lifelong scars on kids. At a societal level, communities can experience higher degrees of homelessness, stress on social services, lost productivity, fraud, theft, and additional burdens on legal and law enforcement systems. All this can ultimately manifest in widening inequality. I don't envy the regulators. To my mind, there seems to be an irreconcilable tension between letting markets flourish and controlling speculation. I wouldn't hesitate to say that the goals are fundamentally incompatible. Of course, this raises questions about the objective function of both regulations and markets, but that's a debate that goes to the heart of capitalism, and as tempted as I am to settle that once and for all, I'll resist the urge. ### “What are you saying, bro?” you ask. It’s important to look at this entire saga from different frames. One of the most important frames is that of incentives. What’s the reason the government is banning these gaming and betting apps? After all, it’s foregoing a decent chunk of GST revenue. [Vivek Kaul had a nice take](https://www.newslaundry.com/2025/08/27/the-rs-444-question-why-india-banned-online-money-games) in a recent article: > The media is full of news reports about individuals who played these games, lost large sums of money, fell into debt, and in some cases, took their own lives. These are the identified lives. > > In this scenario, people are talking about the negative impact of these games. It’s an everyday conversation happening all around. So, the government needs to be _seen_ to be doing something about the issue, the identified lives, that is. If I were the government, I'd probably do the same, but there are downsides. I'm reminded of the famous story of [Hercules' Labors](https://en.wikipedia.org/wiki/Labours_of_Hercules). As penance for killing his family in a fit of madness, the great Greek hero Hercules had to complete 12 tasks. One of the tasks was to kill the Lernaean Hydra, a multi-headed serpent that lived in a swamp. The issue was that the hydra had regenerative abilities, and one of its heads was immortal. For every head that was cut off, two would sprout, and this proved a challenge for Hercules. Initially, Hercules tried using his famous brute strength to kill the monster but was predictably unsuccessful. Luckily, his nephew Iolaus had accompanied him, and together, they came up with a new plan. As soon as Hercules cut off a head, Iolaus would use a burning torch to cauterize the stump of the neck, preventing a new head from growing back. As for the immortal head, Hercules cut it off and buried it under a massive boulder, trapping it forever. This is a perfect metaphor to think about bans on gambling and speculative activities. Trying to ban them is akin to killing an immortal multi-headed hydra—cut off one head and two new gambling apps will sprout. I did a cursory literature review in preparing to write this post. The bottom line is that banning gambling and speculative activities can reduce the visible activity, but a significant chunk of it always migrates elsewhere. Until regulatory actions are paired with and coordinated across ISP/DNS blocks, payment-rail controls, app-store restrictions, advertising restrictions, and cross-border policing, demand often leaks offshore or underground and, in many cases, into criminal ecosystems. This probably explains why many European countries try to _channel_ activities onto regulated platforms while trying to promote harm reduction rather than prohibition alone. Is this the right way? That leads to the other critical aspect in such regulatory interventions. ### **We need to study what we do** It's easy to pass regulations but tough to know if they are successful. Until governments and regulators study their interventions, or unless there's a research ecosystem that studies them, everything is useless. Unless the first- and second-order effects of policies are studied, what's the difference between a smart policymaker and some drunk person who happens to be in charge? Many regulatory interventions that try to curb speculative activities show activity dropping in one area, but they never track where that [activity goes](https://pmc.ncbi.nlm.nih.gov/articles/PMC8278013/). Without actually studying what works, we'll keep coming up with dumb solutions for complex problems. A lot of times, it feels like regulators cut off their nose to spite their face. That's just counterproductive. ### **Finding the impossible balance** Now, based on everything I've said so far, you might think that I'm advocating for letting gambling run wild. No. Like I said earlier, crazy speculative activity comes with huge social costs. It ruins people's lives, destroys families, creates debt problems, and can even threaten financial stability. 2008 showed us what that looks like when institutions do it, and ultimately, what are institutions if not a collection of individuals? But I'm also not saying give up on regulation because it's hard. I'm saying that because speculation is like water flowing downhill, we need to think really carefully about how to channel it. Some gambling in any society is probably inevitable. The trick is creating smart guardrails that make the worst excesses uneconomical while recognizing that speculation is like a virus that constantly mutates. This makes regulatory coordination across all nodes in the ecosystem imperative. Without proper frameworks and the ability to actually enforce rules, any attempt to stop gambling will probably just lead to weak results and unintended consequences. Implementation is always easy; measurement and enforcement aren't. Unless these capabilities are built, we'll be replaying this drama at regular intervals. In watching the Indian stock market transform, I've realized that innovation always comes before regulation. Where people want to speculate, someone will always provide a way—regulated or not. The question isn't whether to allow speculation, but how to channel it smartly while understanding that, like water, it's going to flow downhill no matter what we do. Complete prohibition is impossible because you can't regulate human nature. Understanding this painfully obvious truth is the first step to making policies that actually work, instead of half-baked measures. > “There are no solutions. There are only trade-offs.” ― Thomas Sowell Featured image: [The Dice Players" by Georges de La Tour](https://en.wikipedia.org/wiki/Georges_de_La_Tour)

Your next good read

Wed, 27 Aug 2025 00:00:00 GMT

I built [Paper Trails](https://papertrails.rabbitholes.garden/digests/) to aggregate RSS feeds from some of the blogs and newsletters I enjoy reading. It’s become a wonderful place for me to find new rabbit holes 🐰 🕳️ and you may too. Check it out and let me know if you have any suggestions. I add a possibly dumb yet genius new feature called “[Random Digest](https://papertrails.rabbitholes.garden/digests/).” Twice a week, the site automatically pulls 10 links randomly from different categories and creates a digest in case you want to randomly read something. What do you think?

A world without news

Sun, 24 Mar 2024 00:00:00 GMT

For some reason, I’ve long been fascinated by news publishing. At one point in my life, I wanted to be a journalist. Thank God I didn’t become one. As romantic as poverty feels, I’m not a huge fan of being poor. Despite dodging that bullet, I was still enamored by the industry—I quite can’t put my finger on it as to why. Though I didn’t end up working for a news publisher, I’ve followed the industry for well over a decade like a dedicated stalker. I’ve mourned dying publishers, cheered new startups, felt guilty about using hacks to dodge paywalls of sites whose subscriptions I couldn’t afford, and then donated some money to them to assuage my guilt. There was a brief moment when I stopped following the industry, about 4-5 years ago, but I couldn’t ignore it for long. Late last year, I even wrote a long post about why news publishers around the world were in such deep trouble. I published the post right around the time when the new media darlings, BuzzFeed and Vice, were knocking on heaven's door. I've been ruminating more and more about the industry ever since because the constant drumbeat of negative news keeps getting louder. From the time I published the long ass post, shit's been getting more real. [The Messenger][1], a news site started by veteran media executives, raised $50 million and shut down in January 2024 after burning it all in 8 months. In the same month, Condé Nast laid off key staffers at the legendary music publication [Pitchfork][2] and folded it into *GQ*. The *Los Angeles Times, Wall Street Journal, Time, Sports Illustrated,* *Business Insider,* and other publications laid off hundreds of employees. In India, Times Internet laid off several hundred employees. In 2023, there were over [3,000][3] layoffs in the US. 2024 seems to be on track to break that record. *The New Yorker* and several other [media observers][4] called the latest bout of media troubles an "[extinction-level event][5]." In 2024, people talk about news publishers with the enthusiasm and cheerfulness of funeral announcements. After following this bloodbath over the last 6 months, I couldn't help but wonder: are we closer than ever to a world without news? It’s very easy to say yes given all the pessimism, but I don’t think this is a question with a yes or no answer. In developed markets like the US, UK, Canada, and Australia, the news publishing industry resembles a wasteland. Local news has been decimated, and these outlets are being strip-mined for pennies by private equity and hedge funds. National news coverage is limited to a few sick but surviving publishers. While it’s tempting to talk about India in the same breath as the US—something I’ve been guilty of—it’s not all that bad…yet. India is an outlier where newspaper circulation _seems_ to be holding steady. It’s hard to draw definite conclusions because the circulation data [sucks][6]! The available data shows that the print industry is growing at a slower rate compared to the overall media and entertainment industry, but growing nonetheless.![](/blog-images/Indian-print-industry-revneues-and-circulation-1.webp) ![](/blog-images/Indian-print-industry-revneues-and-circulation-2.webp) For comparison, here’s what the US newspaper industry [looks like][7]. I’m contrasting India and the US because the US news industry is in terminal decline, and the same trends could play out in India as well.![](/blog-images/US-print-circulation-and-revenues.webp) But a closer look at the numbers shows that there’s trouble around the corner. According to ICRA, print as a percentage of the media and entertainment industry has fallen from 23% in 2016 to 12% in 2022. Digital media has been the biggest beneficiary of this shift away from print. Having read the history of US newspapers, Indian newspapers look like they are in the same position as US newspapers were before the internet. US newspaper circulation and revenues rose for a few years after the advent of the internet and then nosedived. The story may not play out exactly as it did in the US because India is not a homogeneous market like the West. In fact, India is many small countries in one. The dynamics between English newspapers and regional newspapers are also different. The circulation of regional papers seems to be holding on far better than that of English papers. But the net effect on print will be the same as consumers move from print to digital. Coming back to my question, are we closer than ever to a world without news? At a local level in the US, the answer is [yes][8], but at a national level, readers are still well served. In India, things aren’t as bad as the US, but you can see the signs of trouble. But as a thought experiment, let's assume there was no print or digital news. What would such a world look like? #### Tin-pot republic Democracy would choke and gag in the darkness as it’s slowly BDSM’d to death. We’d watch this spectacle on shorts and reels with catchy Bollywood background music. Nobody would agree on anything, and we'd all have our own special versions of the truth. Our world would look something like a version of the movie *[Idiocracy][9]*—the greatest movie ever made. It's a parody set in the year 2505. Joe Bauers, played by Luke Wilson, signs up for a secret army experiment that goes wrong. He wakes up 500 years in the future in a world that has become spectacularly dumb. The president of the United States is a wrestler and a porn star. The economy has cratered, and cities have become dust bowls with mountains of garbage everywhere. People live on junk food and entertain themselves by watching shows with titles like “Ow! My Balls!” The US is also facing a famine because they water the crops with an energy drink called “Brawndo.” People have become so dumb that all it takes to become the smartest person in the world is to identify basic shapes and answer questions like 2+5. A world without news would look similar. It has become fashionable to say that the news is useless. There’s some truth to it. Not everything that news organizations publish is useful. In fact, most of it isn’t. But on their best day, news is the disinfectant of a democracy, just like a good financial press is for the markets. I still believe in this romantic notion. Of course, it goes without saying that news publishers aren’t always good at their jobs. Half the reason people don’t trust the news is because of self-inflicted wounds. #### **Massaged news** Indian media is more concentrated than it ever was. Many of the major outlets are now owned by billionaires. Mukesh Ambani owns [Network18][10], which owns properties like CNBC, CNN-News18, Moneycontrol, and Firstpost. Gautam Adani now owns NDTV, Quint, and IANS. This isn't just an Indian phenomenon. Jeff Bezos owns *The Washington Post*, Laurene Powell Jobs owns *The Atlantic*, Marc Benioff owns *Time*, and there are plenty of other examples. As much as we romanticize the idea of a benevolent billionaire, rich people owning media is not [without issues][11]. Anyone who thinks otherwise is deluded. Media companies have to dance to the tunes of their masters—that's the price of not going out of business. As tragic as it sounds, I’d rather have a news outlet owned by a billionaire than a bankrupt one. That’s how bad the news business is. But in a world without newspapers, billionaires wouldn't have to worry about being seen. The news companies they own would become their PR arms and happily churn out their propaganda and nonsense on an industrial scale. News companies would exist only to make their masters richer and powerful. #### Loudmouths Singam Abswala would be the most famous news anchor in the country, with the most watched news show streamed live on YouTube. Lies would be the truth, and parody would be reality. In fact, we’d no longer have lies, just alternative facts. Ricky Gervais saw the future. A world without news is not good. How do you save news? The business model of news that worked for the last 200 years is incompatible with the digital age. Today, over 70% of the cost of a newspaper is printing and selling the paper. As print declines, these fixed costs become a noose. This is why print is no longer viable in developed countries, and it will eventually become unsustainable in India as well. Before the internet, American newspapers also enjoyed the privileged position of being the gatekeepers between readers and advertisers. Advertisers subsidized the news as long as newspapers were the only way to reach consumers. The internet flipped this model. Consumers and advertisers had more choices than ever and newspapers lost their gatekeeping privileges. Advertisers abandoned print for digital advertising because advertising platforms like Google, Facebook, and Amazon offer far superior targeting capabilities than a dumb print ad. A similar but nascent shift is underway in India. Print advertising is still big but won't be forever. As print advertising fell, US newspapers couldn't replace the lost dollars with digital revenues. Digital advertising revenues were a drop in the bucket. There was a saying that newspapers were trading “print dollars for digital cents.” This seems to be the case so far in India as well. Digital advertising dollars will always be a fraction of print advertising. The number of Indians who pay for digital news subscriptions is peanuts. I could be wrong, but people think of a newspaper subscription as a separate item in their budgets. But people think about a digital news subscription in the same vein as Netflix and Spotify. They choose one over the other. The post-COVID recovery in print was much slower for English papers than for regional languages in India. That’s a sign that something is changing. It could be that English news readers in India are choosing digital instead of print. It could also be that people have stopped their news subscriptions for Netflix due to inflation. This has been the case in [developed countries][12]. So, what works? As an amateur observer of the news industry, here are my thoughts: #### **Advertising** It's impossible for newspapers to offer the same advertising propositions as Google and Facebook—publishers don't have the tech chops. So it’s guaranteed that print advertising will continue to fall. But it's not impossible to pivot. Publishers like [The Independent][13] have shown that you can kill your printing operation and still thrive.__ #### **End of mass delusion** The era of chasing scale, aggregating attention, and then selling it to advertisers is over. It worked for a brief moment in time because of the generosity of social media platforms, but all that’s over. Social platforms are now deliberately [throttling][14] external links. They don’t want people to leave their websites and apps. All the publishers that relied on social traffic are dead. #### **Subscriptions** That Indians don’t pay for stuff has become accepted wisdom but I disagree a little. They pay if they see value. There are several independent subscription based publishers like The Ken, Newslaundry, The News Minute, and The Morning Context that seem to be doing okay. Other publishers like The Wire, The Print, Scroll, and Reporters Collective rely on donations, and they seem to be surviving. All traditional publishers offer digital subscriptions, but this subscription base is still small. This is partly because most of them have shitty offerings. I consume finance news the most, and the quality of what traditional publishers like Mint and ET produce is horrendous. Even in general news, you can see the deterioration in quality. Having said that, we’re still a low-income country, and the pool of paying users is small. This will grow if our economy does well. #### **Small is beautiful** Money from subscriptions will never offset print revenues. This is why I think that the era of mass publishing is over. Most of the large traditional publishers will either shrivel or die, and we’ll be left with a few large national publishers. The future of news will be small and focused. The large traditional publishers will never be able to maintain quality across all verticals. In the coming decade, my bet is that we’ll see small and focused Indian publications across niches like business, culture, women, health, climate, mental health, and tech. Building such publications will be a blood sport. The problem with applying a US lens to Indian media is that some people forget we are a poor country. Few Indians can afford the luxury of paying for news subscriptions, but the numbers will grow over time. Small publications will never rake in a boatload of cash, but the journos will be able to feed themselves. Media companies will do well to learn from individual creators. Channels like Think School, Dhruv Rathee, etc. Thy make more money from YouTube and sponsorships than most small news publishers. A lot of traditional journalists look down on creators. Of course, some deserve to be looked down on because they are idiots. But there are some savvy creators like [Mike Solana][15] who are building their own small media empires. The typical uppity attitude of media companies and journalists is a liability, and it will be their undoing. #### **Billionaires** Billionaires are starting to regret their media purchases. *The Washington Post* lost $[100 million][16] last year and is at a crossroads. Marc Benioff, who owns *Time* magazine, laid off [30 people][17]. *The Los Angeles Times*, owned by billionaire Patrick Soon-Shiong, laid off [115 people][18]. There's no shortage of cautionary tales of billionaires trying to *save* media, but they believe this time is always different. My bet is that the rich people will cut their losses sooner or later, and these storied publishers will be back to square one. Media rarely has happy endings. It's either less horrible or more horrible. #### **Independents and collectives** A few years ago, traditional news publications in the US had a mild case of *Substack panic*. For a minute, it seemed that all [star reporters][19] would leave to start their own paid newsletters. There were some success stories, like [Casey Newton][20] and [Matt Yglesias][21], but the trend seems to have died down. Reporters leaving to go solo isn't a thing in India, barring a few like Ravish Kumar and Barkha Dutt. I wouldn't be surprised if this trend picks up in India over the next five years. Collectives are a new model that I’m excited about. Sick and tired of precarious employment situations, journalists are banding together to form [collectives or cooperatives][22]. The writers own the collective and operate it like a media company. This ensures that the incentives are aligned in the right way. Several collectives, like Defector, Hell Gate, and Flaming Hydra, have popped up on the scene. I don’t think there are many journalist collectives in India apart from [Khabar Lahariya][23]. #### Age of the individuals An extension of this trend of collectives is that we may be entering a golden age of individuals. There’s truth to the annoying quip that “people trust people.” For over 200 years, publishers hired a bunch of writers, put them in a room, and published a news bundle. This model no longer works. One of the most exciting trends in media has been the rise of individual experts, creators, curators, influencers, or whatever you wanna call them. You see this most prominently on Substack. There are brilliant individual newsletters on everything from technology, philosophy, history, and construction to physics. Before the Internet, a few of these people had blogs, but they were largely invisible. But thanks to platforms like Substack, WordPress, Twitter, LinkedIn, and YouTube, individuals are publishing far more insightful things than journalists. The next big media company will be an individual newsletter, blog, podcast, and YouTube channel. News publishers will need a new playbook for this era because these individuals won’t work in the stifling environment of a newsroom. Opinion pages are a halfway solution because they no longer signal the same credibility that they used to. #### **Die tomorrow** When you're drowning, you’ll clutch at anything, including straws. One such straw for news publishers was forcing tech companies like Google and Facebook to pay for news. [Australia][24], Europe, and [Canada][25] passed bills that forced tech companies to pay publishers for allowing news on their platforms. After some protest, both Google and Facebook started paying publishers in Australia. But last month, Facebook [announced][26] that it would stop paying. Facebook also blocked the sharing of news links in response to a similar bill in Canada. Google, however, struck a deal to pay Canadian publishers. Forcing these companies to pay for the right to send traffic to news publishers was always a stupid idea. The regulations are based on the flawed notion that internet companies destroyed news, [but that’s a lie][27]. News publishers are also cutting deals with AI companies to allow them to use news content to train models. OpenAI is reportedly offering between $1 million and $5 million a year to license news articles from publishers. Axel Springer, which owns Business Insider and Politico, and Associated Press are major publishers that have [cut deals][28]. The sad reality is that none of these things can fix the fundamental flaws at the heart of news publishing. #### **Public funding** The day isn’t far off when governments may be forced to fund public-service media. The BBC is the gold standard for such a model but there are other [examples][29] in Europe and [Canada][30]. This is a [fringe idea][31] in the US because of the general wariness of big government, but it's an idea that I am sympathetic to. Government involvement in media comes with its own issues, but it's better than having no media at all. At some point, people have to realize that free markets aren’t the answer to everything. #### **Throw the kitchen sink** In a 2009 essay, media guru Clay Shirky has a [memorable line][32]: > The answer is: **Nothing will work, but everything might**. Now is the time for experiments, lots and lots of experiments, each of which will seem as minor at launch as craigslist did, as Wikipedia did, as octavo volumes did. It's very hard, if not impossible for the media company of the future to survive and thrive on just one revenue line. Successful media companies such as *The New York Times* (NYT), *The Economist*, *Financial Times* (FT), and Condé Nast have their diversified revenue sources to thank for their survival. In the case of NYT, it's subscriptions and print, but the company has built a [phenomenal bundle][33] that includes news, games, audio, commerce, and cooking. *The Economist* generates revenues from subscriptions, courses, and research services. The FT generates [revenues][34] from subscriptions, consulting, events, and recently launched a venture investing arm. Building diversified revenue streams is an existential imperative for media companies. [Condé Nast][35] generates over 40% of its revenues from subscriptions and commerce. I think it’s possible to generate revenue streams by solving the problems of audiences. #### **Innovation** I hate using this word, but bear with me. Quality in media is table stakes; it’s the least that publishers have to ensure to be even considered by readers. But it isn’t enough to ensure survival. Traditional media companies still operate like factories. They *manufacture* information and *dump* it on a website, expecting people to discover and pay for it without any consideration for what the readers want. I was listening to Anant Goenka, the Executive Director of *The Indian Express* Group, on [a podcast,][36] and he said something that was stunning to me: > **Ananth Goenka:** I think one of the big wins, and it's tough to kind of say, but since it's a long conversation, we can get deep into things. I remember I had a session with my chief editor, my father, my CEO, and a bunch of us, kind of just four or five of us, sat down. **I was just kind of saying that somewhere, the consumer, the reader, is not central to our decision making as a content producer.** Somewhere, I mean, the user wants to talk about climate change, artificial intelligence, mental health, gender issues, and the taboos with being sexually experimental. That's kind of where the English-speaking, urban, Express profile reader is. > > However, we're kind of, in a sense, still trying to make them read about our politics, which is great and a super thing, but we're also trying to make them read about over-investing resources and covering, you know, that bus accident in a random rural part of India. These are all important to uncover, but somewhere we're not addressing these needs, and some people are kind of missing this, missing them. > > Even if we do address their needs and even if we do get the content that we want to get them, we're not quite able to consistently engage with that user base enough for them to recognize that, hey, in this crowded market of one lakh registered newspapers and 500 news channels, there is one Indian Express which is consistently giving me high-quality, credible news and information on climate change. That hasn't yet happened. > > The reason it hasn't happened is because we're not really thinking about the consumer. The fact that media executives have to say this out loud is tragic. The old-school model of manufacturing content to maximize advertising inventory is over. It won’t work, partly because few media companies have invested in building first-party data and good ad products. Most of them rely on programmatic advertising, which generates peanuts. At a national and international level, US media consumers are still overserved. The brutal competition has forced publishers to innovate a little in terms of coverage, formats, and voice, but that’s yet to happen in India. When it comes to serving the affluent urban Indians that can pay, Indian media companies have done a piss poor job. Can you think of a decent daily newsletter, a podcast, or a video series that you look forward to from an Indian publisher? I can’t. With very few exceptions, they all suck. Daily newsletters and podcasts are habit-building products. If they are good, users look forward to them. This is why *[The Daily][37]* by *The New York Times* and *[The Intelligence][38]* by *The Economist* have been so successful. Both publishers also have an amazing bouquet of newsletters. *The Economist* also launched an app-based digital edition at a [cheaper price][39] to attract younger audiences. Even the *[Financial Times][40]* launched a similar app aimed at social followers who hadn't yet subscribed to anything. The Vox is another success story. They moved fast to build a brilliant [stable of podcasts][41]. It’s a tragedy that Indian media companies have ignored white spaces that require minimal investment, like newsletters, podcasts, and curated products aimed at younger audiences. #### **Curators** In a 2007 blog post, the famous media guru Jeff Jarvis wrote, “Cover what you do best. Link to the rest.” 17 years later, I think this is brilliant advice. Every media company tries to rehash the same news story in 100 different ways, and that’s a waste of resources. They do it because of SEO imperatives, but AI might make SEO less relevant. Publishers have a golden opportunity to specialize in a few areas and then become aggregators for the rest. The problem is that this is an unnatural way of thinking, but publishers have always been aggregators. Opinion pages are an example of it. I think there's a brilliant opportunity for a new media company that is both a creator and a curator. The new CEO of *The Washington Post* [said as much recently][42]: > **So you're looking to go to make the Post's footprint bigger, not to drill into smaller Washington lanes?** > > One of the many things we're blessed with is that we're probably one of the few mastheads in America that can help other news organizations and can think about aggregation. The fundamental challenge for the news industry is how, how do you deliver ever more specific verticals — people really, really want to know about the widget industry, but there's only 1000 of them. How do I charge them enough? This is the fundamental challenge we're facing and no one's cracked it yet. We can play at an aggregation level. #### Artificial intelligence My default frame of thinking about artificial intelligence is that it’s going to disrupt a lot of things, especially the media. In fact, it’s safe to assume that the information economy will never be the same. While fewer people visit the homepages of news publishers, a sizable audience still does. Imagine having an app where you can ask anything you want. Would you still visit websites, scroll, search, and discover information? Large language models (LLMs) like ChatGPT and Claude are doing just that. With LLMs, everybody on the planet has access to the collective knowledge of humanity at their fingertips. All they have to do is type into a chat box. The way we search for information will never be the same. I’ve been using ChatGPT, Perplexity, and Claude, and my Googling has reduced quite a bit. Then there’s Google’s own Search Generative Experience (SGE). Whenever you Google something, you’ll see a box with AI-powered summaries. Now that social referral traffic has all but [vanished][43], Google is once again the dominant source of referral traffic. If Google starts showing AI summaries instead of just links, publishers will be affected.![](/blog-images/Google-SGE.webp) The bigger question is: what will happen to media brands if people start getting their news and information from a chat box? AI enables everyone to build their own curated and personalized news streams. Perplexity’s AI-powered [daily podcast ][44]is a sign of things to come. #### Trust Trust is the currency of the news business. People will always bitch and moan about “mainstream media” and “Lutyens Media,” but when push comes to shove, they’ll always come running to the same sites. You saw this during COVID-19. Legacy news sites experienced massive traffic bumps because people preferred journalists over that the guy who used to tweet that donkey urine and pouring citrus juice in one's ass cured COVID. It’s going to get harder for news publishers to build trust because of coordinated attempts by the left and the right to discredit news. But if publishers don’t cower, readers will take notice. Some readers might be idiots, but not all are. They deserve far more credit than they get. Trust is going to become even more important as the tsunami of AI-generated crap gets bigger. It’s still early days, and Google is already [swamped ][45]with AI-generated bullshit, and it’ll only get worse. In such an environment, publishers have a golden opportunity to stand out as trusted voices. --- **What do you think?** [1]: https://www.semafor.com/article/01/30/2024/news-startup-the-messenger-decision [2]: https://www.semafor.com/article/02/04/2024/inside-conde-nasts-breakup-with-pitchfork [3]: https://www.fastcompany.com/91035879/news-media-layoffs-2024-list-growing-worst-year-financial-crisis [4]: https://www.therebooting.com/reality-checks/ [5]: https://www.newyorker.com/news/the-weekend-essay/is-the-media-prepared-for-an-extinction-level-event [6]: https://www.exchange4media.com/media-print-news/abc-audit-newspaper-circulation-numbers-for-jan-june-22-show-20-30-drop-122693.html [7]: https://www.pewresearch.org/journalism/fact-sheet/newspapers/ [8]: https://www.brookings.edu/articles/reclaiming-local-news-in-the-age-of-the-internet-the-techtank-podcast/ [9]: https://www.imdb.com/title/tt0387808/ [10]: https://www.nw18.com/portfolio-main [11]: https://niemanreports.org/articles/india-ndtv-modi/ [12]: https://reutersinstitute.politics.ox.ac.uk/paying-news-price-conscious-consumers-look-value-amid-cost-living-crisis [13]: https://pressgazette.co.uk/news-leaders/christian-broughton-the-independent-video/ [14]: https://www.theverge.com/2023/9/15/23875251/x-twitter-links-throttling-facebook-instagram-threads [15]: https://youtu.be/LL_hhQhtJKo?si=_ZiGc_8o5ls4ysAx [16]: https://www.washingtonpost.com/style/media/2023/10/11/washington-post-buyouts-metro-cuts/ [17]: https://edition.cnn.com/2024/01/23/business/time-magazine-lays-off-15-of-unionized-editorial-staff-becoming-latest-news-outlet-to-slash-workforce/index.html [18]: https://edition.cnn.com/2024/01/23/media/los-angeles-times-layoffs/index.html [19]: https://www.npr.org/2020/12/02/941020719/tired-of-the-social-media-rat-race-journalists-move-to-writing-substack-newslett [20]: https://www.platformer.news/ [21]: https://www.slowboring.com/ [22]: https://www.theguardian.com/media/2024/mar/02/journalism-us-media-industry-layoffs-co-ops [23]: https://en.wikipedia.org/wiki/Khabar_Lahariya [24]: https://www.nortonrosefulbright.com/en-in/knowledge/publications/a34c8ca1/australias-news-media-bargaining-code-what-happens-next [25]: https://theconversation.com/canadas-online-news-act-may-let-meta-and-google-decide-the-winners-and-losers-in-the-media-industry-208088 [26]: https://www.reuters.com/technology/meta-says-will-no-longer-pay-traditional-news-content-australia-france-germany-2024-03-01/ [27]: https://bhuvan.substack.com/p/broken-news [28]: https://www.theverge.com/2024/1/4/24025409/openai-training-data-lowball-nyt-ai-copyright [29]: https://www.niemanlab.org/2022/01/do-countries-with-better-funded-public-media-also-have-healthier-democracies-of-course-they-do/ [30]: https://www.cbc.ca/news/politics/local-journalism-initiative-funding-1.7131672 [31]: https://jacobin.com/2024/02/us-media-journalism-layoffs-policy [32]: https://www.edge.org/conversation/clay_shirky-newspapers-and-thinking-the-unthinkable [33]: https://pressgazette.co.uk/paywalls/new-york-times-bundle-revenue-growth-strategy/ [34]: https://www.niemanlab.org/2024/03/dont-expect-help-from-the-disruptors-the-fts-chief-executive-on-ai-loyalist-readers-and-its-u-s-expansion/ [35]: https://www.axios.com/2024/03/07/exclusive-conde-nast-ceo-says-business-missed-revenue-goal-in-2023 [36]: https://youtu.be/Saet3HPH2a4?si=cQujI7VNAeoKtZyB [37]: https://www.nytimes.com/column/the-daily [38]: https://www.economist.com/audio/podcasts/the-intelligence [39]: https://pressgazette.co.uk/publishers/the-economist-is-attracting-younger-readers-with-cut-price-espresso-digital-edition/ [40]: https://pressgazette.co.uk/news/financial-times-launches-99p-app-ft-edit-to-show-off-a-little-bit-more-to-non-core-audiences/ [41]: https://podcasts.voxmedia.com/ [42]: https://www.semafor.com/article/01/26/2024/semafor-interview-with-washington-post-ceo-will-lewis [43]: https://searchengineland.com/x-referral-traffic-drop-431154 [44]: https://www.perplexity.ai/hub/blog/perplexity-partners-with-elevenlabs-to-launch-discover-daily-podcast [45]: https://www.theverge.com/2024/3/5/24091099/google-search-high-quality-results-spam-ai-content

Broken news

Sat, 23 Sep 2023 00:00:00 GMT

“Good times become good memories, but bad times become good lessons.”

> Uncle Iroh, Avatar: The Last Airbender. What a crazy decade the 2010s were! The tide of cheap money deluded an entire generation into thinking they were geniuses. Everything worked until 2022. You could raise $130 million for a $400 juicer (Juicero), $1.75 billion for a mobile app that only has 10-minute shows (Quibi), $700 million for a cat picture website (BuzzFeed), or $360 million for a dog-walking startup (Wag). If you went to SoftBank or Tiger with an idea about an app that analyzes farts and tells what flower or vegetable they smell like, you’d be assaulted with a $100 million cheque—FSaaS: fart smelling as a service. But just like peach-scented farts don’t linger forever, the good times don't last. As interest rates around the world remain high, things are unraveling. The [good times][1] are over. They were too good to be true. Now that the tide has receded, it turns out the geniuses were swimming naked. The geniuses are now trying to convince the world that their nakedness was a deliberate fashion choice. It turns out, many of the supposedly radically innovative businesses built by galaxy-brained geniuses were just fleeting farts. They were all Zero Interest Rate Policy (ZIRP) babies. It wasn’t brains; it was a bull market. Cue [Green Day][2] – Boulevard of Broken Dreams. _I walk a lonely road, the only one that I have ever known. I don't know where it goes, but it's home to me and I walk alone._ _I walk this empty street, on the Boulevard of Broken Dreams, where the city sleeps and I'm the only one, and I walk alone._ Geniuses turned out to be frauds, and dreams turned out to be delusions. You know things are bad when VCs start uttering the term "forensic audit." After a decade of crazy partying, it's time for a detox. The latest casualties are from digital media, an industry I have passionately followed for over a decade. A few months ago, BuzzFeed shut down BuzzFeed News, and Vice Media filed for bankruptcy. If you rewind back to 2010, these digital upstarts were supposed to be the future. They were set to euthanize legacy media companies like _The New York Times_, CNN, and Disney and drag the industry into the 21st century. It all seemed so romantic. The death of the companies has inspired countless think pieces, postmortems, and obituaries—it's the "end of an era," and there's a "regime change." Such a charade isn't complete without derivative thunk pieces of the think pieces feigning surprise and shock. How could the digital saviors that were supposed to deliver the news publishing industry from certain damnation die? Vice and BuzzFeed News are just the poster children for the ills that plague digital publishers. Almost all publishers are buggered to various degrees. Why did they die? Could the death have been avoidable? Why does the media business suck? Were the deaths of these digital news media outlets a surprise? I have answers to everything! Before I answer the questions, let me give you some background. You don’t care about it, but I will just the same. #### Flashback I belong to a minority that still believes that a free and independent press is the difference between a thriving democracy and a banana republic. _“Four hostile newspapers are more to be feared than a thousand bayonets.” ― Napoleon Bonaparte_ I know that's a quaint notion at a time when the term "mainstream media" has become a pejorative. At its best, good journalism holds the powerful accountable. It gives us all a voice. It lifts the veil of our ignorance and makes us less stupid. The key terms here are "at its best" and "good journalism." By no stretch of the imagination is our media always at its best. But when it is, we are all better off. My dad read newspapers every day and I picked up the same habit. As far as I can remember, I’ve always read random things. My dad’s family didn’t appreciate the value of education. I still remember him telling me stories about how some asshole family members of his made it impossible for him to pursue his studies. Given his experiences, he made it a priority to get me and my brother to read and interact with others as much as possible. Tagging along with him on his Bajaj Chetak and Kawasaki Bajaj KB 100 to the local tea shop to meet his friends was a regular ritual. No matter what changed as I grew up, the one thing that remained a constant was we always had newspapers. Whenever we changed houses, my dad would hunt down a newspaper agent like Liam Neeson In _Taken_ and restart the newspaper subscription. Reading a newspaper became a daily habit from an early age. I understood very little but read them nonetheless. With time, I understood the value of newspapers. This is how weird I was. When _DNA_ launched in Bangalore, they had salespeople selling subscriptions. I still remember tagging along with the sales guys and helping them sell subscriptions in my neighborhood. Over time, I started writing as well, but I was shit at it, really shit. I can’t recall why, but I also wanted to be a journalist at one point. Thank God I didn’t become one. If I had, I would be sharing a luxurious single-bedroom condominium made of zinc-aluminum sheets with migrant construction workers from Bihar on a construction site at Whitefield. I have no idea why, but I started following the news publishing industry around 2013–14. It was the early days of social media in India, and people were poking (not that poking) each other on Facebook. Blogging was still cool, saying the term "RSS feed" out loud didn't evoke geriatric sympathies, publishers like BuzzFeed and its clones like ScoopWhoop were starting to take off, and the internet hadn’t yet become the public toilet it is today. Torrents were a thing, with boner pill ads popping from the bottom right corner. Ok, I’m done reminiscing. This Kannada serial-style flashback was to say that I’ve been following digital news publishing for a long time. I had stopped following the industry around 2019. The death of BuzzFeed, Vice, and the massive layoffs elsewhere rekindled my interest in the industry. For the past couple of months, I’ve been reading, watching, and listening to anything I could find about the industry. So I figured I might as well write about it. Why? Because I’m on the interweb and I have a blog. So clearly, I’m an expert on all things under the sun, and I must subject the world to my expertise. Them’s the rules. I start the post with a quick history of American and European media. This isn’t a detailed history but just the key events in the evolution of news and newspapers to give you a 90,000-foot view. Since the American media market is the largest in the world, with the richest consumers and a news publishing industry that’s in terminal decline, I trace the growth and decline of the American news publishing industry. I tell the story through the eyes of people in the industry, observers, scholars, and my own observations. In a sense, this is as much a curation of thoughts, views, and experiences of people in media as it’s my own opinion. **Jump around** - A broad history of news and newspapers - History of American newspapers - Did the internet kill newspapers? - Unbundling of the newspaper - Newspapers in the internet era - Do people care about the news? - News publishers and the dot-com bubble - News in the era of social media - Dancing to Facebook's tunes - Pivot to video - The end of good times for digital publishers - The original sin - Where are we now? - Extortion rackets - Welcome back to reality - Is it all doom and gloom? - Peeping into the future - Why write this post?

#### Once upon a time… {#once-upon-a-time.wp-block-heading}

Those who cannot remember the past are condemned to repeat it. —George Santayana

It’s always easy to say something was obvious in hindsight, and it almost never is, with the exception of the news publishing industry.

I've got news for Mr. Santayana: we're doomed to repeat the past no matter what. That's what it is to be alive. ― Kurt Vonnegut

The troubles facing digital media outlets aren’t new. The news business has always sucked, and the script is the same as traditional newspapers—hubris, myopia, and a lack of basic economic sense. Why and how did we end up in a place where we talk about news publishers as if they’re terminal patients? You have to look to the past for answers. As Mark Twain famously [never said][3]:

> History doesn’t repeat itself, but it often rhymes.

I’m not an archaeologist in the formal sense of the word—I don’t have any education or expertise. But when you think about it, archaeology is just digging up dirt, finding weird rocks, and making up stories about them because finding 800-year-old people is hard. So, anybody who has ever dug up dirt is an archaeologist. I was a notorious dirt digger when I was young. Furthermore, I am amazing at Googling, aka digital dirt. So, I’m an archaeologist and, by extension, a historian. Before the written word, news was transmitted through the spoken word. [Messengers][4] and [town criers][5] were the earliest newspapers but human. Government bulletins were the precursors to modern newspapers and can be traced back thousands of years. But if you believe in made-up things like history and evidence, one of the first newspapers can be traced back to Rome between 59 BC and [130 BC][6]. Thanks to Julius Caesar, the Roman Empire had daily gazettes called _[Acta Diurna][7],_ or daily events. These [bulletins][8] contained news about births, deaths, gladiatorial fights, astrology, court trials, etc. There was a separate bulletin called Acta _[Senatus][9]_ to report on the developments of the Roman Senate. In a way, this was the very first Twitter feed. The Han dynasty _may_ have had _Dibao_, or palace reports, as early as [206 BC][10]. Around 713–734 AD, in the Kaiyuan [era][11], the Chinese had something called _[Kai Yuan Za Bao,][12]_ or Bulletin of the Court_._ These bulletins were handwritten on silk and contained domestic and political news for government officials. The modern, regularly published newspapers as we know them were not possible until the invention of the movable-type printing press by [Johannes Gutenberg][13] around 1440. Although Gutenberg gets all the credit, printing presses existed long before him. The Chinese and [Japanese][14] had [woodblock printing][15] as far back as the [7th][16] and 8th centuries, and the [Koreans][17] had it in the 10th and 11th centuries. The Chinese had the [movable-type printing press][18] around 1040 AD, and the Koreans had it by 1230. They never caught on in China because, unlike English, the Chinese language has thousands of characters, and having a printing block for every character was [impractical][16]. While it’s easy to write about the history of news in a neat sequential order, the evolution of news was anything but. It's messy, chaotic, and unpredictable. To give an example, soon after the invention of the Gutenberg press, one of the earliest things to have been published was [erotica][19]:

> Among the early books printed on a Gutenberg press was a 16th-century collection of sex positions based on the sonnets of the man considered the first pornographer, Aretino—a book banned by the pope.

Soon, the printing press started spreading around Europe. In 1470, a poem describing the conquest of Negroponte by the Ottomans was [published in Milan][20]. Around the 1500s, Italy had handwritten and [printed][21] newsletters called _[avvissi][22]._ The _avvissi_ were circulated both in public and private. They aggregated diplomatic, military, political, and religious news from various sources. By the 1570s, they were [widely read][23] by the city elite in Rome and Venice. The Medici dynasty invested considerable resources in setting up an information-gathering network [throughout Europe][24] to collect intelligence. Cosimo I de’ Medici created a postal network when he ascended the throne to send and receive _avvisi_. Between the 1500s and 1660s, the Fugger family, one of the richest in Europe, established a vast network of correspondents to collect news in the form of handwritten newsletters. These newsletters contained political, military, religious, and criminal news. Apart from having a near monopoly in copper, the Fuggers were one of the largest lenders and were bankers to merchants, princes, popes, kings, and emperors. There’s [speculation][25] that they set up a news correspondent network to decide their lending rates. There’s debate over whether these were private newsletters or if they were circulated publicly, but it looks like they might [have been public][26]. In a way, the Fugger news network preceded finance news as we know it.

Fuggers are the richest family you have never heard of, with a reported net worth of over $400 billion.

There’s debate over what’s considered the first newspaper, but _Relation aller Fürnemmen und gedenckwürdigen Historien_ (Account of All Distinguished and Commemorable News), published in Strasbourg by [Johann Carolus][27] may have been the [first European newspaper][28]. Some consider this a “[newsbook][29]” and not a newspaper. The Courante uyt Italien, Duytslandt, &c._,_ was the [first broadsheet Dutch newspaper][30] and was published in Amsterdam in 1618.![](/blog-images/courante-uyt-italien.webp) The [Star Chamber Decree of 1586,][31] under the reign of Elizabeth I, imposed restrictions on the publication of news in England. Early news publications in England were called _corantos,_ and were printed in Amsterdam. The first coranto printed in England may have been _The New Tydings Out of Italie Are Not yet Come_ in 1620 by Thomas Archer. This news sheet described the Thirty Years War. _Publick Occurrences Both Forreign and Domestick_, published in 1690 by Benjamin Harris was the first colonial newspaper in America. The paper was immediately [shut down][32] by the governor of Massachusetts, and Harris was jailed. _The Boston News-Letter and The Boston Gazette_ launched 14 and 15 years later, respectively, and these papers [avoided politics][33]. In 1721, James Franklin, the elder brother of Benjamin Franklin, started _The New England Courant_ in Boston without a license. The paper opposed the British from the start, and this landed James in jail multiple times. After a couple of years, the British colonial authorities prohibited him from publishing, and he handed over the publishing of the paper to Ben Franklin to get around the restriction. _The New England Courant_ set the template for a free and independent press. The colonial era newspapers were small operations with six to twelve people. Most towns had one printing operation run by a master printer who owned the printing press. Setting up a printing press was a costly affair. Despite the printing press being a simple wooden contraption, it had some iron parts, like the screw, but America didn't have the manufacturing capabilities. The screw and the type had to be imported from England. The type was more expensive than the screw. The master printer did everything from the manual work of setting type to editing and financing the operation. These roles would separate as newspapers evolved. The master printer would typically be assisted by his wife and would employ other journeymen, apprentices, and sometimes slaves. Since most towns couldn't support multiple print operations, journeymen and apprentices moved to different places to set up shops, forming networks of printers who would collect, curate, and distribute news. These networks also developed and spread through [marriages][34]. Colonial-era printers made most of their money from job printing or on-demand printing, like printing pamphlets, broadsides, etc. In fact, pre-revolution printing operations weren’t profitable and barely made enough to put food on the table. Printers published almanacs, speeches, and other political material to diversify away from only relying on newspapers. Benjamin Franklin was a true pioneer of the newspaper business and was the most successful printer, thanks to his keen business sense. Here’s Joseph Adelman, the author of _[Revolutionary Networks,][35]_ [describing][36] the savviness of Ben Franklin:

> If you want type of any decent quality it really has to come from England that had to be imported so it's an expense on its own and then it has to be imported which adds an expense. And so many printers when they're first starting out will start out with a hand-me-down for lack of a better word set of type from a master or from someone in town who just died and they're having an estate sale to get rid of that printers belongings. So you'll buy to the cheap secondhand type that means that people are often seeking partnerships when they're trying to start an office that could be with a former master.

> That's actually something Benjamin Franklin excels at, that's part of what makes him such a success is he takes his own printing office and turns it into a training ground to send out printers to various other places. He retires himself from the printing trade in 1748 but well into the 1760s and even after the Revolution he's got printing partnerships not only in Philadelphia where he had been but in New York in New Haven Connecticut in Maryland in Charleston South Carolina in a couple of different places in the Caribbean where he's populating his former apprentices getting them out of Philadelphia so they can't compete with him and then setting up partnerships where he pays to get them set up because he has that financial capability and then takes a share of the profits.

> Benjamin Franklin was an avid ad-pitchman, using his sharp wit to craft ads for his customers. (One general was trying to convince citizens to donate horse carts to him; a Franklin-penned ad helped the general acquire over 200.) “He was the original ‘Mad Men,’” says Julie Hedgepeth Williams, a journalism professor at Samford University.

Clive Thompson/Smithsonian Magazine Newspapers weren’t meant for the masses but rather for a small elite. Newspapers were supported by ads because most people didn’t pay for their subscriptions. 30–50% of the paper was dedicated to advertisements. Unpaid dues were such a problem that newspapers would print the names of people who hadn’t paid, [begging][37] them to pay or threatening to cancel the subscription. The advertisements were usually for runaway slaves, adultery, government notices, etc. Here’s an [example][38]:![](/blog-images/untitled-2-650e94419f620.webp)

Newspapers were produced really for a small, relatively elite audience, people middle class and above. Each issue contained advertisements, which usually took up a third to half of the total space. These could include merchants and vendors, government notices, and notices searching for runaways (which included servants, the enslaved, horses and other animals, and the occasional wife). The rest of the paper was devoted to political and commercial news from the British empire, in particular from London, other colonies, and a small section devoted to local news. — Joseph Adelman

Papers weren’t always profitable, or even often so. Readers failed to pay subscriptions; some journals died after only a few issues. One early financial lifeline was text-based ads, which read like Craigslist for a slaveholding public: “I wish to buy a few negroes, of both sexes, and will pay fair prices in cash,” one typical ad read. Citizens purchased ads to talk, in Twitteresque fashion, to the world. In 1751, William Beasley took out a Virginia Gazette classified to complain about his cheating wife—“I am really of [the] opinion she has lost her senses”—and warn people not to consort with her. — Clive Thompson/Smithsonian Magazine

Like European history, the predecessors of newspapers as we know them today can be traced through Indian history. A fascinating example is that during the reign of [Emperor Ashoka][39], various administrative departments would send reports to the emperor and the council of ministers. Courts employed writ writers who would write edicts and proclamations issued by rulers. These would also be spread orally through official messengers. The Mughals had news writers tasked with sending reports from various regions of the empire to the headquarters. Portuguese missionaries brought the first printing press to [Goa in 1566][40]. The British East India Company [installed printing presses][41] in Bombay in 1674, Madras in 1772, and Calcutta in 1779. William Bolts attempted to start the first newspaper in Calcutta in 1776, but concerned officials ordered him to stop and leave for Europe. The _Bengal Gazette_, or "Hicky's Gazette," became the first newspaper in India. Hickey earned the wrath of the British, and he went broke eventually. After the _Bengal Gazette_, the _Indian Gazette_, the _Calcutta Gazette_, the _Bengal Journal_, and the _Oriental Magazine_ or Calcutta Amusements launched, Unlike Hickey, these papers operated under the [patronage of the British government][42]. Most papers during this period were started by disgruntled British employees. The papers weren’t influential because the [circulation][42] was limited to a few hundred copies. In 1791, the United States ratified the Bill of Rights, which included the First Amendment guaranteeing freedom of speech and press. This informed the debates about freedom of the press around the world for decades to come.

> So far, I have tried to highlight the key events in the evolution of newspapers in Europe, the United States, and India. If you’ll bear with me, I want to take a detour and continue with the development of newspapers in the United States. This is not because I secretly long for an H-1B visa but because the United States is the world’s biggest media ecosystem. The industry trends in the United States are also far more advanced than in any other country.

There's always a temptation to superimpose trends from the West on complex markets like India, but I will resist that. Having said that, looking at what's happening to American publishers is informative. Indian media and U.S. media might not be mirror images. Still, many broader challenges and trends, like the decline of print, the growth of digital, and the preference for online and social news sources among young people, [are the same][43].![](/blog-images/untitled-3-650e9442dd270.webp)

> Media observers often hold out the scenario of an ‘Americanisation’ or convergence upon a United States-like media system (Davis 2002; Hallin and Mancini 2004). Little in the evidence reviewed here suggests that this is a likely outcome of current developments. In fact, many American commercial legacy news organisations seem to be facing a more serious crisis than their counterparts elsewhere, and it is by no means certain that this is simply a precursor for things to come around the world. The United States may well be more of an exception and less of a forerunner than is sometimes assumed in discussions of international media developments.

The Changing Business of Journalism and its Implications for Democracy The American press from the late 1700s until well into the 19th century is indistinguishable from today’s press. Newspapers of that era often exchanged their papers with each other and [reprinted][45] select content from other papers with or without [attribution][46]. In a way, this was the early version of blogging. The United States declared its independence in 1775 but was still discovering its feet as a young nation. America didn't yet have today’s two-party system. George Washington was unanimously elected president for two terms. In fact, the founding fathers were all against the idea of multiple [political parties][47] and warned against partisan divisions. The American press of that era flourished not only because of the government's steadfast belief in a free press but also because of the profound and virulent differences between Alexander Hamilton and Thomas Jefferson, two of the most influential leaders. Both had irreconcilable views of what the young republic should aspire to. Abusing one another in person was ungentlemanly, so these differences played out in the press directly and through proxies. Notions of objectivity and fairness weren’t even part of the lexicon. The American press of the era was [bitterly partisan][48] and divisive. They openly identified with political parties. Newspapers and political parties were tied at the hip. Newspaper printing on its own wasn’t enough to make money. Political parties funded loyal newspapers and bailed them out when they were in trouble. Printers were rewarded with [lucrative][49] government printing contracts, jobs, and political appointments for their support. In many ways, the _party press_ of the era flourished in large part due to the bitter rivalry between Hamiltonian Federalists and the Jeffersonian Democratic-Republicans. Leaders from both parties used papers loyal to them [overtly and covertly][50] to attack each other. The government also helped fledgling newspapers by [subsidizing][51] postal charges. Newspapers sent to regular readers received a [90%][52] postal subsidy, while postage was free if the papers were sent to other editors and newspapers. This enabled the exchange system I mentioned earlier and helped spread the news across the country. This early phase of the development of America gave a preview of the treacherous complications of guaranteeing free speech. Facing the prospects of a war with France in 1798, Federalist President John Adam signed the [Alien and Sedition Acts][53] into law, making it illegal to say or print anything against the government. Newspaper editors supporting the democratic republicans opposed the bill and [willingly provoked][54] the government to get arrested so that they could draw attention to the government’s abuses. The editors channeled this attention and outrage to their benefit, and in the election of 1800, John Adams was defeated, and Thomas Jefferson was elected president. The naked partisanship wasn’t the only difference between newspapers in the 1800s and today. The early newspapers were colorful and didn’t subscribe to the notion of civility. The election of the 1800s was one of the [dirtiest][55] election campaigns in the history of the United States. The political distrust and animosity played out in the press, leading to some memorable insults. Our politics today could use a bit of the color of the 1800s.

Things got ugly fast. Jefferson's camp accused President Adams of having a "hideous hermaphroditical character, which has neither the force and firmness of a man, nor the gentleness and sensibility of a woman."

In return, Adams' men called Vice President Jefferson "a mean-spirited, low-lived fellow, the son of a half-breed Indian squaw, sired by a Virginia mulatto father."

As the slurs piled on, Adams was labeled a fool, a hypocrite, a criminal, and a tyrant, while Jefferson was branded a weakling, an atheist, a libertine, and a coward.

CNN

John Adams and his people for their part were already spreading rumors that Thomas Jefferson was sleeping with slaves in Monticello (which in fact he was). They also used one of my favorite all-time slurs in American election campaigns by simply saying, ‘Well, you can’t vote for Thomas Jefferson because he’s dead. And how can you vote for a dead man?’”

CBS While they didn’t get as much attention, magazines and periodicals were also developing, along with newspapers. Johann Rist, a German theologian and poet, is credited with publishing the first magazine _Erbauliche Monaths-Unterredungen_, or Edifying Monthly Discussions. By the 18th century, like newspapers, magazines were [growing in popularity][56]. Until the 1830s, newspapers cost about six cents, and the poor and the working class were priced out. All that changed in 1833 when Benjamin Day launched The Sun, a tabloid-style paper priced at one cent. Falling paper costs and the new steam printing press technology made it possible to produce more papers at a lower cost. The Sun was supported by advertising. Unlike the six-cent papers supported by political parties that catered to the "elite," _The Sun_ focused on general interest stories, crime, gossip, and scandals that entertained the masses. These penny papers introduced newspapers to the masses. Soon, other penny papers started with varying degrees of success.![](/blog-images/NewYorkSun1834LR.jpg) Some historians describe the penny press as a revolutionary step in the evolution of newspapers, but the reality is much more prosaic. Media scholar [John Nerone][58] argues that penny papers were a step in the natural evolution of newspapers, and there wasn't anything revolutionary about them. Since penny papers were supported by advertising, they claimed to be independent. In reality, American newspapers remained partisan well into the 19th century. The spread of fake news on the internet has become a major concern today, but it’s nothing new. Early American newspapers had a [tenuous relationship][59] with the truth. Newspaper publishers weren’t above making shit up to sell papers. One of the most famous made-up stories to have ever been published is the [six-part series][60] in The New York _Sun_ on the presence of life on the moon. The series depicted a fantasy lunar world full of forests, oceans, unicorns, bipedal beavers, and conversational man-bats. The story [spread][61] like wildfire across the United States and Europe.![](/blog-images/1008px-great-moon-hoax-day-4-650ec0d383dc7.webp) In _Pirates of the Caribbean: Dead Man's Chest,_ there’s a scene where Tom Hollander, who plays Cutler Beckett, tries to coerce William Turner to find Jack Sparrow and recover the compass from him. Beckett says:

Will Turner: Somehow I doubt Jack will consider employment the same as being free. Lord Cutler Beckett: Freedom! Jack Sparrow is a dying breed. The world is shrinking. The blank edges of the map filled in. Jack must find his place in the new world or perish.

"What hath God wrought!" That was the first telegraph message sent by [Samuel Morse][63]. With that message, the world became a [smaller place][64]. This reminds me of another scene from _Pirates of the Caribbean: At World's End_:

Barbossa: The world used to be a bigger place. Jack Sparrow : World's still the same. There's just less in it.

![](/blog-images/untitled-650e943f1535e.webp) The first transatlantic cable was laid in 1858 but failed within weeks. By [1861][66], the transcontinental telegraph line had been completed, connecting the Atlantic and Pacific coasts. In 1861, a third cable was [successfully laid][67] after another [failed attempt][68] between Ireland and Canada. With that, transatlantic communication became possible. The world was never the same again. The impact of the telegraph on newspapers was [dramatic][69]. The telegraph helped newspapers transcend physical limitations and transformed the business of news. Journalist Tom Standage called the telegraph the [Victorian internet][70] in his book of the same title. Thanks to the telegraph, newspapers no longer had to publish stale news. They could gather breaking news from across the world. Several large newspapers began publishing multiple editions in a day by updating the same paper with the latest news. Today, we lament that news has become [entertainment,][71] but this bellyaching is due to a lack of historical memory. The impulse to sensationalize news has been a constant throughout the history of news. In the [aftermath of the telegraph,][63] newspapers maintained public bulletins outside their offices that would be updated day and night with telegraphic updates. Some papers used to project cartoons between election updates, and some even hired artists to enact news events. Collecting news and using a telegraph to transmit it was costly. In 1846, five New York City newspapers agreed to share expenses to gather news, and the Associated Press (AP) was created. The AP [used everything][72] from pigeons and ponies to row boats to intercept European ships to collect international news and transmit it over the telegraph. Over its 177-year history, the AP has been a witness to the first draft of history. In 1850, Paul Julius Reuter used pigeons to deliver stock prices between Brussels and Aachen due to a gap in telegraph lines. In 1851, he moved to London and [started Reuters][73], the other famous wire service. In a short span, wire services became important suppliers of news for newspapers. A confluence of factors led to the dramatic growth of newspapers from the 1850s. As the century progressed, [railroads spread][74] across the United States. This opened up new economic opportunities, enabling [enterprising settlers][75] to tame the vast wild lands. The completion of the transatlantic cable in 1861 made long-distance communication easy. As territories spread, factories and transportation systems expanded. Another important enabler for the proliferation of newspapers was the US postal system. Postal coverage spread throughout the 1880s, and newspapers enjoyed [preferential][76] rates. During the same period, literacy rates in the United States rose as the number of schools and colleges increased. Advances in printing technology reduced the cost of printing and increased the output. Since the invention of the Gutenberg press, the printing press had remained [unchanged][77]. The wooden presses required considerable force and were prone to breaking. This changed in the 1800s. Early 1800: Charles Mahon (Earl of Stanhope) is credited with building the first [iron printing][78] press. This increased the output to 200–400 pulls per hour. 1810: Frederick Koenig and Andreas Bauer patented a steam-powered cylindrical printing press. In 1814, _The Times_ in London printed the first newspaper with this design, capable of printing 1100 sheets per hour. 1846: Richard Hoe creates the revolving press that can print up to 8,000 sheets an hour. The output improves to 20,000 sheets with further enhancements. 1863: William Bullock improves on Richard Hoe’s rotary press to create a press that can print [12,000][79] sheets on both sides. Later improvements raised this number to 30,000. 1886: Ottmar Mergenthaler invented the [Linotype][80] automatic typesetting machine that revolutionized printing. It removes the need for manual typesetting, thereby speeding up printing. Despite all these advancements, newspapers weren’t cheap. They cost 4-6 cents at a time when the average wage of a worker was one dollar. Newspapers remained an elite affair. The major obstacle stopping newspapers from reaching the masses was the cost of printing. Until the 1870s and 1980s, paper was made from [used clothes and rags][81]. As printing technologies improved, the demand for paper increased, but rags were in short supply. In the [1850s][82], many countries banned rag exports, which sent prices shooting up. But in the late 1860s, [inventors][83] figured out a way to make paper from wood pulp, and the price of paper fell. This kick-started the era of mass newspapers catering to the long-neglected working class.![](/blog-images/untitled-5-650e9443cd4fa.webp) As print technologies improved, communication technologies improved as well. "Mr. Watson – Come here – I want to see you." Those were the words on the [first telephone call][85] on March 10, 1876, between Alexander Graham Bell and his assistant Thomas Watson. Twenty years ago, America invaded Iraq [based on the lies][86] that Saddam Hussein was developing mass destruction (WMDs) and had links to al-Qaeda. All the major news outlets became cheerleaders for the Bush administration and helped sell the war to the American public. Over half a million people died, and the war cost the United States over [$3 trillion][87]. This wasn't the first time the American media was complicit in warmongering. In 1895, the Cuban War of Independence [broke out][88]. This was when the rivalry between Joseph Pulitzer's _New York World_ and William Randolph Hearst's _New York Journal_ hit a fever pitch. The press barons were battling each other for supremacy, and their papers featured lurid and sensationalist stories to increase circulation. Both saw the Cuban War as an opportunity to achieve dominance. Throughout the 1890s, both papers published exaggerated and even downright false stories. They were [agitating for war][89], pushing the United States to intervene in Cuba. The term "yellow journalism" was coined to describe the sensationalist style of news. In [1898,][90] the US invaded Cuba, defeated the Spanish, and liberated Cuba. Some historians attribute the invasion to warmongering by the press, but others argue that while the press played a role in the decision to invade by swaying sentiment, they [weren't the cause][91]. At the turn of the 19th century, the United States was entering the second industrial revolution. The economy was booming thanks to expanding transportation, expansion of cities, immigration, new communication technologies, and advancements in manufacturing technologies.![](/blog-images/untitled-6-650e9444e0659.webp) ![](/blog-images/untitled-7-650e9445b2a98.webp) A key development that unleashed the ravenous spirit of capitalism was the development of the concept of limited liability [in the mid-1800s][92]. Before this period, there was [no concept][93] of limited liability, and all shareholders were personally liable. Limited liability enabled a new breed of corporations to raise money from the public. This, along with the other factors, supercharged the transition of the United States from an agricultural to a manufacturing economy. Individual and family-owned businesses gave way to large corporate entities. As the American economy was taking off, so was mass consumerism and the demand for advertising. In 1841, Volney Palmer started a real estate agency in Philadelphia, looking to make a living. Business was dull because the city was in the throes of a depression. Palmer soon started a coal agency, an unlikely addition to the real estate business, but times were tough. In 1842, he started a [newspaper advertising business][94] after spotting an opportunity when he saw underutilized ships and canals. He entered into contracts with newspapers to sell their advertising space, becoming, in essence, a newspaper advertising agent. He drummed up business by convincing manufacturers to sell their wares in other places by taking advantage of the empty ships and canals. While there were many failed attempts, many historians recognize Volney Palmer’s operation as the [first advertising agency.][95] The number of newspapers grew exponentially from a few hundred in the 1700s to more than six thousand by the 1870s. Thanks to the growing economy. There was tremendous demand for advertising. Display advertising demand rose as railroads enabled companies to reach consumers across the United States. America imported the department store format from Europe, and retail advertising demand exploded. [Advertising as a proportion][96] of newspaper and magazine revenue rose from 44% in 1879 to 54.5% in 1909, reaching 60% by 1909.![](/blog-images/untitled-8-650e9447ccecc.webp) From the 1850s, the United experienced dramatic and volatile economic growth. The shaded areas represent recessions.![](/blog-images/untitled-9-650e944906001.webp) Technological advancements led to a shift from small businesses to large companies. The boom and bust cycles of the period led to rapid production, overcapacity, and ruinous competition. The excessive competition led to a sharp drop in prices and profitability and precipitated [consolidation][98] among large swathes of the industry. The United States saw the largest [merger wave][99] in history from 1895. About half of the manufacturing industry may have participated in the mergers.![](/blog-images/untitled-10-650e94495501c.webp) People like John D. Rockefeller, Cornelius Vanderbilt, and Andrew Carnegie emerged as the greatest tycoons America had ever seen. They used brutal tactics such as collusion, cartelization, political capture, and stock price manipulation to crush competition. They had near monopolies on oil, railroads, and steel at their peak. Major industries like coal, sugar, whiskey, tobacco, and meatpacking used trusts to integrate vertically and horizontally. These trusts had n[ear total control][100] over the industries they operated in. John D. Rockefeller’s Standard Oil was the [poster child of this era][101]. It controlled [90%][102] of American oil refineries. [Ida Tarbell][103] saw Rockefeller’s [brutal tactics][104] when he destroyed her father’s fledgling oil business at 14. Despite studying biology, she discovered her love for writing and became a journalist. Working at _McClure’s_ magazine, she started to [publish a mammoth expose][105] of Standard Oil, beginning in 1902. Over 19 parts, she laid bare the machinations of the oil refining giant and its brutal practices. Her dogged work was responsible for the eventual [breakup][106] of Standard Oil in 1911. The Standard Oil series is still considered one of the finest examples of investigative journalism. In reading the history, it wasn’t surprising to me that the role of women in newspapers was ignored. Even as America grew, attitudes about women remained rooted in the dark ages—a woman’s place was at home.![](/blog-images/untitled-11-650e944a5f134.webp) Despite the conservative views, several [trailblazing women][90] worked as investigative reporters, writing about important issues under pseudonyms:

> The young woman was one of the nation’s so-called girl stunt reporters, female newspaper writers in the 1880s and ’90s who went undercover and into danger to reveal institutional urban ills: stifling factories, child labor, unscrupulous doctors, all kinds of scams and cheats. In first-person stories that stretched over weeks, like serialized novels, the heroines offered a vision of womanhood that hadn’t appeared in newspapers before—brave and charming, fiercely independent, professional and ambitious, yet unabashedly female.

Throughout the history of the United States, you can see the tension between the state and the press. While people consider America a beacon of free speech, that wasn’t always the case. In 1917, the United States entered the world war and, within weeks, passed the Espionage Act to stifle dissent. The law was amended in 1918 with the Sedition Act and had a chilling effect on free speech. Over [2,000 people][108] were prosecuted under the law. As circulation and advertising revenues grew, so did competition. Commercial interests forced newspapers to be less partisan. Rising advertising demand and revenues forced newspapers to appeal to the masses. Newspapers couldn't afford to alienate their readers with partisan takes. From the late 1900s, the American press began its slow journey toward professionalization.

The share of political newspapers that claimed to be independent rose from 11 percent in 1870 to 62 percent in 1920.3 Another measure of bias is the use of charged language by the press. Negative words such as “slander,” “liar,” and “villainous” are used by papers to dismiss undesirable statements; words such as “honest,” “honorable,” and “irreproachable” are used to defend political heroes. Using textual analysis, we find a substantial drop in partisan and charged language across the late nineteenth and early twentieth centuries. The Rise of the Fourth Estate: How Newspapers Became Informative and Why It Mattered

The period from 1880 to 1990 was the golden age for American newspapers. Advancements in printing technologies, communications, and photography made newspapers even better, faster, and more visual. They enjoyed absolute dominance since they were the only mass medium for advertisers. Even during the Depression of the 1930s, newspaper circulation [continued][109] to rise. But the roots of their troubles today can also be traced to this period. Like the telegraph, the radio also had [many fathers][110]. In 1920, KKDA, owned by Westinghouse Electric, became the first radio station to go on air. By 1930, about 45% of Americans had a radio set, and radio advertising had crossed [$100 million][111]. Between 1927 and 1930, radio advertising rose by [seven times,][109] and not even the Great Depression could put a dent. World War II further increased the popularity of radio, as people preferred getting the news about the war from radio to newspapers.![](/blog-images/untitled-12-650e944bdc873.webp) Though absolute circulation rose, the great depression of the 1930s was a death knell for many newspapers as advertising [revenues fell][112] by 40–45%. Several newspapers shut down; others slashed costs, cut salaries, and merged. The slow decline of newspapers started around this time.

U.S. advertising expenditures as a share of National Income had declined from a peak of more than four per cent in the 1920s to 1.5 per cent in 1945, then recovered in the post WWII era to just under three per cent in 1957, still shy of the pre-Great Depression peak

Aggregate Advertising Expenditure in the U.S. Economy: What's Up? Is It Real?
Today, the plight of newspapers is so dire that governments are intervening to protect them. But people forget that they were the [barbarians of yesteryear.][113] In the early days, radio stations couldn't gather news, so they read out the stale news from newspapers. They could, however, buy timely news from newswire services like the Associated Press (AP). Newspapers felt threatened by the prospect of losing sales and advertising revenues. Since the AP was a cooperative owned by the newspapers, it was forced to stop selling news to radio broadcasters. In a failed attempt, newspapers even tried to [collude][114] to stop radio broadcasters from broadcasting news. Like the telegraph and the radio, the invention of television was the result of the efforts of many [scientists and engineers][115] in the 1800s and 1900s. There were experimental broadcasts starting in the 1920s, but the first [regular broadcast][116] began in 1939 by the National Broadcasting Company (NBC). By 1955, 60–70% of US households had a television. From $128 million in 1951, [TV advertising][117] spending hit $1 billion in 1955. Television started to take some advertising away from newspapers. It's easy to overextend this assumption of TV hurting newspapers, but one has to be careful. It's important to remember that television advertising and newspaper advertising are imperfect substitutes.

> In 1952, 6 percent of all advertising spending, or $454 million, went to television ads; by 1960, $1.6 billion, or 13 percent, did.

FCC ![](/blog-images/untitled-1-650e944039739.webp) American newspapers started feeling the heat with the rise of radio and television. Newspapers didn’t know it at the time, but their fortunes had turned. The other important trend throughout the 1900s was consolidation. The number of newspapers hit a peak in 1909 and started declining. There was a corresponding rise in the number of newspaper chains. By 1933, newspaper chains controlled 37% of all [newspaper circulation.][119] Unlike the pre-Civil War era, running a newspaper was no longer an amateur operation. Installing printing presses, purchasing real estate, and setting up distribution required massive capital investments. Cutthroat competition for readership in the 1900s further complicated things. Fixed costs continued to rise as [printing technologies][120] advanced throughout the 1990s. These upfront costs created entry barriers for new newspapers, and they enjoyed significant pricing power and obscene profit margins due to their reach. The 1950s were a tipping point for the American newspaper industry. A series of unfortunate coincidences set the stage for massive consolidation. As World War II ended, the United States lifted the wage freezes imposed in 1942. The pent-up demand led to a massive inflationary shock and sent newspaper production [costs spiraling][121]. This was a precipitating factor for consolidation.![](/blog-images/untitled-13-650e944c732be.webp) The soaring newspaper profits caught the attention of the Internal Revenue Service (IRS). The IRS changed the [appraisal methodology of newspaper companies][122] from book value to market value around this time. This change made it impossible for many independent newspaper owners and their heirs to pay the new taxes. They were forced to sell, and this [led][123] to the further consolidation of newspapers. Even as newspapers consolidated, the quality of journalism remained high. Papers continued to invest in editorial. Daniel Ellsberg, an analyst at the RAND Institute, leaked a [classified study][124] about US involvement in Vietnam to reporters at _The New York Times_ and _The Washington Post_ in 1971. The study showed that successive administrations had deceived the American public about the purpose and true cost of the war. The war was an epic disaster. This led to the Watergate scandal, which ended with the resignation of President Richard Nixon. In a high-watermark for American journalism, Arthur Sulzberger, chairman of _The New York Times_, and Katherine Graham, owner of _The Washington Post,_ bet the entire house in a remarkable display of courage and [published][125] the leaked documents. The Nixon administration tried to stop the publication, but the US Supreme Court allowed the papers to publish in a [landmark decision][126], affirming the freedom of the press. This period marked the birth of the [adversarial American press][127]. The scale of the consolidation was stunning from the 1960s. In 1920, 92% of American newspapers were independently owned, and 42% of American cities had competing newspapers. By 1986, only 30% of the newspapers were independently owned, and only 2% of the cities had a competing newspaper. By 1970, [98%][128] of US newspapers were monopolies, and the vast majority of cities had no competing papers.![](/blog-images/untitled-14-650e944d517e7.webp) Large chains like Gannett, Knight Ridder, and McClatchy gobbled up these newspapers.

> Between 1960 and 1980, 57 newspaper owners sold their properties to Gannett Co. By 1977, 170 newspaper groups owned two-thirds of the country’s 1,700 daily papers. From 1969 to 1973, 10 newspaper companies went public, including the Washington Post Co., New York Times Co., and Times Mirror Co.

The U.S. Newspaper Industry in Transition ![](/blog-images/untitled-15-650e944ef1ae5.webp)

> At the beginning of the twentieth century, eight groups controlled just 27 journals. Led by Hearst and Edward Scripps that number climbed to 63 groups owning 328 papers by 1935. In the final decade of the century, 135 chains controlled 1,228 journals.

Ambarish Chandra and Ulrich Kaiser Wall Street took note of the ludicrous profit margins and wanted a piece of the action.

Exactly how profitable are newspapers? At least as measured by operating margins, the answer is very profitable. (Operating margin is profit divided by revenue, before taxes. It is a way to define a company’s efficiency.) Using this measure, newspapers achieve profit margins about two to three times the average for U.S. manufacturing industries. (This is the category that newspapers are placed in by the Census Bureau.)

> The average operating margin for a U.S. manufacturing company in 1997 was 7.6 percent. The comparable average for publicly traded newspaper companies in 1997, according to Veronis, Suhler & Associates, Inc., was 19.5 percent. Gannett, often cited as an industry benchmark for profitability, achieved 26.6 percent in 1997. Some newspaper companies, such as The Buffalo News, owned by investor Warren Buffett, had margins that were in the 30’s. With the exception of television stations, which often enjoy operating margins of more than 45 percent, newspapers are hard to match for profitability among U.S. media investments. In the mid-1990’s, newspapers outperformed consumer magazine and book publishers, direct mail and promotional services, radio broadcasters, cable and pay-per-view networks.

Lou Ureneck, Nieman Lab The acquired papers were no longer owned by family owners with ties to their communities. They were Lego blocks in large listed corporations run by managers seeking _efficiencies_. Since they were listed on the stock exchanges, shareholders demanded continued profits. The American newspaper industry took a sharp left turn. Profits took center stage, and the quality of news became a distant priority. This quote by an analyst at Drexel Burnham in [1986 was telling][130]:

John Reidy, who follows the newspaper industry for the securities firm Drexel Burnham Lambert Inc., said, "Properties in the right market are very attractive businesses on a long-term basis. . . . There is an increasing recognition that there is no electronic replacement for newspapers, and many see the attraction of doing business as the only newspaper in town."

The US Congress [passed][131] the Newspaper Preservation Act in 1970 to ensure the survival of newspapers. The law provided exemptions to antitrust laws by allowing newspapers to merge their production and commercial capabilities as long as they maintained separate editorial operations. The intuition was that this would maintain a plurality of voices and stop the inexorable rise of one-paper towns. The law essentially allowed papers to collude and fix prices with a legal sanction. It wasn’t [enough][132].

> The Act grants participants in JOAs immunity from general antitrust laws and permits them to engage in such otherwise illicit practices as price-fixing, profit-pooling, and market allocation.

Joint Operating Agreements In the Newspaper Industry

> It’s an article of faith among some publishers and media observers that the internet is responsible for the newspaper industry's woes.

That’s a bald-faced lie. As I mentioned earlier, the newspaper industry's troubles predate the internet. Discussions about the problems of newspapers are accompanied by charts like this. You’ll hear people say everything was hunky-dory until the 2000s, and then the internet came and destroyed the poor newspapers. But headline numbers obscure a lot of the underlying trends. The popular canards are, well, stupid.![](/blog-images/untitled-16-650e944e5b9f6.webp) Tech observer and venture capitalist Benedict Evans had done [yeoman's work][134] going back in time to collect numbers of American newspapers. Here’s the real story: newspaper circulation peaked in 1984 at 63.3 million copies and has been falling ever since. But the real story is that newspaper circulation per capita peaked around 1945. In other words, a smaller percentage of the population bought newspapers, even as the population grew.![](/blog-images/untitled-17-650e944f65d51.webp)

> On one hand, the dominance of newspapers has been diminishing for a long time. From 1940 to 2010, the number of daily newspaper subscriptions in America rose by 2 million—but the number of households increased by 83 million. Here is another way of looking at it: about as many Americans subscribe to newspapers today as did in the early 1940s, even though the number of households is more than three times larger.

The Federal Communications Commission (FCC) Here’s a chart of advertising revenues, newsprint consumption, employees, total circulation, and per capita circulation indexed to 1950.![](/blog-images/untitled-18-650e944fcd7da.webp) US advertising spending by medium: Newspapers had been losing advertising share for a long time, even before the internet.![](/blog-images/untitled-19-650e94509c3a6.webp) As circulation flatlined, newspapers had to choose between lower profits and sacrificing quality. By the 1970s, the choice was made—[newspapers sacrificed quality for profits][135]. First, the newspapers cut editorial budgets, circulation, and production costs and fired reporters. Then, they cut the volume of news and increased the number of advertisements and advertising prices to maintain those ridiculous profit margins and please shareholders.

> It no longer is a business, as publishers once joked, in which even the brain dead could make money.

Lou Ureneck ![](/blog-images/untitled-20-650e94511a1c1.webp)

As competition disappeared, surviving newspapers raised ad rates. Between 1965 and 1975, ad rates rose 67 percent (remaining below the inflation rate); but between 1975 and 1990, as more newspapers became monopolies, rates skyrocketed 253 percent (compared with 141 percent for general consumer prices). — FCC Newspapers raised their ad rates three times as fast as inflation from the early 1970s to the late 1980s, the newspaper analyst John Morton told Barron’s in 1990.

Ryan Chittum—CJR ![](/blog-images/untitled-21-650e94519bc11.webp) Then came the internet!![](/blog-images/untitled-22-650e94529a88d.webp) Even with the competition from radio and television, newspapers were still the only choice for targeted local advertising and classifieds. Despite declining circulation, newspapers commanded immense pricing power and continued to increase advertising rates from the 1970s to the 1990s. In this period, the large chains and conglomerates had a single-minded focus on maximizing margins and revenues. This made newspapers brittle, and when the internet arrived, they were like a tin can caught in a hurricane. Even with the competition from radio and television, newspapers were still the only choice for targeted local advertising and classifieds. Despite declining circulation, newspapers commanded immense pricing power and continued increasing advertising rates from the 1970s to the 1990s. In this period, the large chains and conglomerates had a single-minded focus on maximizing margins and revenues. Newspapers had become brittle, and when the internet arrived, they were like a tin can caught in a hurricane.

As Kathryn Weymouth, the last Graham family publisher of the Washington Post, remarked when she passed the baton to Bezos: “If journalism is the mission, given the pressures to cut costs and make profits, maybe [a publicly traded company] is not the best place for the Post.”

Rodney Benson and Victor Pickard/The Conversation ### Unbundling {#unbundling.wp-block-heading} Newspapers enjoyed a privileged position as gatekeepers between readers and advertisers before the Internet. A newspaper was a bundle of news, sports, entertainment, weather, and games. You had to buy the entire paper regardless of your interests, and everybody got what they wanted. This is crucial to understanding how newspapers lost the plot. On the one hand, they aggregated advertisers; on the other, they aggregated readers' attention.![](/blog-images/untitled-23-650e9452b5e3b.webp)

So a key starting point for understanding the problem, which I think actually is a core part of the problem, is that the problem has been misunderstood, is that newspaper, the newspaper crisis, at least in places like the US and Australia, results from them no longer being as effective as a tool for attracting attention. And that really gets to the core, that the core business of newspapers was not to actually inform or provide news, but it was to attract attention for advertisers.

Amanda Lotz, media scholar and Professor at the Queensland University of Technology Newspapers were always in the business of advertising. Advertisers weren't subsidizing quality journalism; they were buying the attention the newspapers aggregated. Before the internet, newspapers were the best medium to reach consumers, and that was all that mattered to advertisers. For a long time, the interests of the newspapers and the advertisers were aligned, and everybody was happy. Then came the internet. It unbundled the newspaper and destroyed this arrangement. Advertisers didn't have to rely on newspapers to reach audiences because the newspaper was a dumb bundle. Advertisers could only target consumers based on the geographies that newspapers operated in. But internet companies like Google offered a far superior advertising proposition. Advertisers could slice and dice audiences and micro-target consumers. The readers no longer had to buy the entire newspaper bundle; they could read whatever they wanted online. The internet stripped the news bundle to its atomic unit—the news story. Readers no longer had to rely on publishers like _The New York Times_ and Gannett to assemble a news bundle. In a sense, everybody on the internet could be their own publisher. They could build their own bundle of what they wanted to read, watch, and listen to. They could read about politics in _The New York Times_, sports on ESPN, and entertainment on _Variety_. This was a boon for readers, not so much for newspapers.

> Publishers also typically engage in horizontal integration, bundling hard news with horoscopes, gossip, recipes, sports. Simple inertia meant anyone who had tuned into a broadcast or picked up a publication for one particular story would keep watching or reading whatever else was in the bundle. Though this was often called loyalty, in most cases it was just laziness—the path of least resistance meant that reading another good-enough story in the local paper was easier than seeking out an excellent story in a separate publication.

> The web wrecks horizontal integration. Prior to the web, having a dozen goodbut-not-great stories in one bundle used to be enough to keep someone from hunting for the dozen best stories in a dozen different publications. In a world of links and feeds, however, it is often easier to find the next thing you read, watch or listen to from your friends than it is to stick with any given publication. Laziness now favors unbundling; for many general interest news sites, the most common category of reader is one who views a single article in a month.

Post Industrial Journalism: Adapting to the Present Classified advertisements, such as hiring ads, real estate listings, and automobile sale advertisements, were the biggest casualties of the internet. Newspapers charged [exorbitant prices][129] for a few lines of text, and these ads accounted for 40–50% of newspaper advertising revenue. Classified advertising revenues peaked in 2000 at $19.6 billion as sites like Craigslist, Monster, Zillow, eBay, and Cars.com became popular. By 2010, classifieds revenues had dropped by 70% to $5.6 billion. Any industry that saw 40–50% of its revenues vanish should have died, but the newspaper industry continued to hobble along. It shows the extraordinary position newspapers were in. As classified revenues started dropping, so did other print advertising. For a long time, brands advertised in newspapers because they had no choice. They had no clue if people who bought newspapers cared about the ads. Since newspapers were local monopolies, businesses had no choice but to advertise. But, on the internet, advertisers paid only for the ads consumers saw. This was a revolutionary shift, and there was a sharp decline in print advertising. As Professor Amanda Lotz put it, the internet stripped away the profitable parts of the newspaper bundle and left the publishers with the most expensive part—the news.

> Internet communication technologies have unbundled the newspaper the internet has improved replaced or at least affected just about every part of the bundle and done so in different ways. The key here, where i'm kind of going with this argument is that it used to be that an accumulation of things added value to a newspaper and bit by bit the internet has stripped many of them away and what is left is largely the most expensive part and what is missing are all the different ways that used to pay for it.

Amanda Lotz Newspaper readership was declining long before the internet, as radio, television, and other mediums started competing for attention.![](/blog-images/untitled-24-650e9453afd7d.webp) By the turn of the century, Americans had more media competing for their attention than at any point in history. Sure, news mattered, but videos and movies mattered more.![](/blog-images/untitled-25-650e94555ce01.webp)

> Within the span of a single human generation, people's access to information has shifted from relative scarcity to surplus.

Vin Crosbie The newspaper industry's inflation-adjusted revenues peaked at $89 billion in 2000 and plummeted 80% to $18 billion in 2020. Newspaper subscription revenues also took a large hit, dropping by over 50% from $15.8 billion in 2000 to $7.8 billion. Online advertising revenues reached $3.3 billion in 2020, but they were a drop in the bucket compared to the losses in subscription and print advertising. Newspapers were trading "print dollars for digital pennies.”![](/blog-images/untitled-26-650e945551853.webp) The internet caused a dramatic shift away from traditional advertising channels. Print and radio were the biggest losers.![](/blog-images/untitled-27-650e945657085.webp) ![](/blog-images/untitled-28-650e94571dff2.webp) The internet didn’t kill newspapers. Newspapers were stabbed by radio, television, and other [economic shifts][135]. As they lay bleeding on the ground in a dimly lit parking lot, the internet walked in and tripped over something in the dark. The internet looked down, picked up the object it had tripped over, and held it up in the light—it was the bloody knife that had been used to stab newspapers. As the shocked internet stared at the knife, the cops rushed to the crime scene, and the internet was accused of the stabbing. What killed the newspapers wasn’t the internet, but a change in how people consumed information coupled with a generational shift in attitudes. Each successive generation has adopted a new medium to get its news: it started with radio, television, cable television, followed by the internet, social media, and so on. As I write this post, version one of social media is dying; what comes next is anyone’s guess.![](/blog-images/untitled-29-650e945757fd2.webp) Newspapers ain’t hip enough.![](/blog-images/untitled-30-650e945844113.webp) ### News deserts The internet affected [local newspapers the most,][143] leading to the closure of over 2,000 newspapers. At one point, newspapers were shutting down at a rate of [two per week][144]. The number of reporters per 100,000 people dropped by [62%][145], and the ratio of reporters per $100 million spent by state and local governments declined by [67%][145]. The total revenue lost by newspapers amounted to over $40 billion.![](/blog-images/untitled-31-650e94598dac6.webp) As newspapers closed, small towns and counties transformed into [news deserts][147]. Thousands of local communities don’t have any [news coverage][148] today. Without vigilant reporters, local governments, notorious for corruption, have been left unsupervised.![](/blog-images/untitled-32-650e945a7d037.webp) The death of local newspapers is not good for democracy. [Numerous studies][150] have shown that the loss of local news leads to increased municipal borrowing costs, reduced civic engagement, lower voter turnout, and a lack of political accountability. Newspapers are like sunlight—they are the best disinfectant, especially at the local level. ### How did the newspapers respond to the internet? {#survive.wp-block-heading} There are two broad narratives about how newspapers responded to the arrival of the internet: 1. They were sitting ducks that didn’t innovate. They were extracting rent even as the internet ravaged their business. 2. The newspaper companies were anything but lame ducks, and they were far more innovative than people gave them credit for. In their fear of getting disrupted, they went overboard on adopting digital and sacrificed print. ##### Narrative 1 The newspapers were dinosaurs clutching their printing presses with a death grip while staring at the internet like a hound foaming at the mouth with its fangs out, ready to shred it into keema. The narrative that newspaper companies were useless and incapable of innovation has become a truism. The story is that they were a classic example of disruptive innovation. The cool kids kneecapped the arthritic incumbents with a cricket bat. But the reality is that the story of newspapers getting disrupted is a little more complex. History shows the newspapers were anything but dinosaurs waiting to be hit by an asteroid. They were more innovative than they get credit for. Before the internet hit the mainstream, there was existential paranoia about being disrupted among the major papers. In the early 1990s, Roger Fiddler [conceptualized][151] a tablet for reading news at the newspaper giant Knight Ridder. The same Knight Ridder spent $50 million to develop a video-text service called [Viewtron][152] in the 1980s. It was a [dedicated terminal][153] on which you could read news, check airline schedules and bank balances, and order a meal. During the same period, most major newspapers offered [audio-text services][154]. Subscribers called a phone line to get news, horoscopes, race listings, and sports scores, among other things. They also offered news over fax and were early adopters of private internet networks like [AOL][155] and [Compuserve,][156] but the internet was too small at that point. This excerpt from a [phenomenal study][157] by Iris Chyi, a media scholar, further illustrates how nimble newspapers were:

> Contrary to general impressions, most U.S. newspapers were not slow in adopting Internet technologies for news delivery. The Web did not become publicly accessible until 1991. Soon after Mosaic (one of the earliest Web browsers) was released in 1993, the Palo Alto Weekly went online in January 1994 as the first Web-based newspaper. By May 1995, as many as 150 U.S. dailies offered online services—when less than 1% of the U.S. population had Web access (Carlson, 2003). The New York Times went online in January 1996, and numerous newspapers followed suit. By 1999, more than 2,600 U.S. newspapers were providing online services (Editor & Publisher Interactive, 1999). However, by 2003, the industry consensus was that no business model had been found (Carlson, 2003).

Iris Chyi > Meanwhile, Rusbridger was thinking about the Guardian’s digital future. In 1994, a year before he became editor, he visited Silicon Valley. “I came back and wrote a memo to Peter saying the Internet was the future,” Rusbridger recalls. “I told Peter this would change everything and we had to explore it.” Emily Bell, the Observer’s business editor at the time, remembers having dinner with Rusbridger and others during the Edinburgh TV festival in August, 1999, and telling him that changes he’d made to the paper’s Web site were inadequate. She prodded him to move more aggressively into the online world, with more breaking news and analysis; in 2001, he placed her in charge of turning the Web site into a vibrant online paper. Ken Auletta | The New Yorker The question then is, How dedicated were the newspapers toward going digital? Even a cursory reading of history shows that most newspapers knew what was coming. They were experimenting with digital technologies on the eve of the internet. Were the experiments half-hearted attempts with the shiny objects of that era or attempts to appease people agitating for change? Whatever the case, you can't fault the newspapers for being complacent. ### Narrative 2 The newspaper publishers, driven by lust, fell for the siren song of the internet. They ignored their faithful print editions and cheated on the print editions. Online editions earned pennies compared to print dollars. Newspapers ended up in limbo where print was fast dying, and digital was disappointing. The newspaper industry made a mistake by going all in on digital. Despite the sharp declines, print was still generating all the revenues. This is the provocative view of some media studies scholars like Iris Chyi and industry observers.

> As newspaper firms were amazed by (and obsessed with) each and every digital technology, the recession hit and put many companies in serious financial difficulty. Driven primarily by fear and uncertainties at this stage, newspaper firms acted upon the unchecked assumption about the all-digital future and responded to their financial woes by slashing resources for their print product to continue their incomplete transition online. But the truth is, most newspapers are stuck between an unsuccessful experiment (for their digital product) and a shrinking market (for their print product). Even more embarrassing is the fact that the (supposedly dying) print edition still outperforms the (supposedly hopeful) digital product by almost every standard, be it readership, engagement, advertising revenue, or paying intent.

It might seem like betting on digital was a mistake if you look at the online subscriber numbers of major news publishers.![](/blog-images/untitled-33-650e945a9cc4a.webp) But continuing to invest in print when the bottom of the print advertising market fell off wouldn't have helped. Even god couldn't have made print advertisements competitive compared to digital ads.![](/blog-images/untitled-34-650e945b7d262.webp) This view led to a fascinating [back and forth][159] between Iris and Joshua Benton, founder of the Nieman Journalism Lab. Josh believes newspapers [couldn't have done][160] much, and the more I look at the numbers, the more I agree with him. I don't think newspapers could've done anything that would've allowed them to transition to the digital age unscathed. The internet changed how people consumed information, and disruption was inevitable. As Alan Mutter, a veteran media executive, [wrote][161] in response to Iris Chyi's the paper: > It’s hard to imagine how newspaper companies can survive over the long term if they put their primary focus on print. Which narrative is right? The one that makes the most sense to you. ### Did the newspapers do everything they could to prepare for the internet? No. In 2019, historian Jill Lepore wrote a phenomenal article titled "[Does Journalism Have a Future][162]?" In the post, she recounts two incidents involving _The Washington Post_ and _The New York Times_ that now, in hindsight, seem insane. The Washington Post let go of an opportunity to invest in Facebook. It also refused to back the founders of Politico, one of the greatest online publishing success stories. _The New York Times,_ on the other hand, refused to invest in Google. It's easy to extrapolate from these anecdotes and paint the newspapers as dinosaurs, but that's not the point. At the very least, they knew about internet upstarts threatening their existence. If nothing, this shows their myopia. They could've tried harder to adapt to the new era. I'm conscious that it's easy to exaggerate these things in hindsight. Why didn't the newspapers ever put up a decent fight against search giants like AOL, Yahoo, and Google? This question has bothered me for a long time. Newspapers had some idea of the threat that internet companies posed. Yet, the industry let the internet upstarts punch them in the face and walk away. Some newspapers did try. In 2011, the Tribune, Gannett, Hearst, and _The New York Times_ tried to pool their advertising inventory to compete against Google. The partnership shut down two years later. _The Guardian_, CNN, Reuters, T_he Economist_, _Financial Times_, and others formed a similar advertising alliance that ended in [2021.][163] In [2016][164], _USA Today, The Houston Chronicle, The Miami Herald, and The Los Angeles Times_ formed a similar partnership. There were several other [advertising partnerships][165] between competing publishers with varying degrees of success, but they were late by a decade. By the time of the first advertising partnership between news publishers in 2011, Google had generated $38 billion in revenue. As the internet arrived, newspapers were flush with cash. They had a chance to build advertising offerings that could've, at the very least, been distant alternatives to Google and Yahoo.

> The disastrous error that newspapers made early in our digital lives was treating online advertising as a throw-in or upsell for their print advertisers. Helping businesses connect with customers was always our business. We were facing new technology and new opportunities and we did next to nothing to explore how we might use this new technology to help businesses connect with customers.

Steve Burttry, director of Student Media at the Manship School of Mass Communication at Louisiana State University. Not all experiments were in earnest. In response to the internet, newspapers just started to upload articles online in a haphazard way. They were too scared that digital would cannibalize print. In 2017, Melissa Bell, the co-founder of Vox Media, gave the [Reuters Memorial Lecture][166] on how we broke news and how to fix it. During the discussion, the legendary Marty Baron, the former editor of _The Washington Post_ and _The Boston Globe_, made some interesting comments:

> I'm not sure that if we had done any one thing, things would have turned out all that differently, to be honest with you. There were a lot of efforts to deal with the internet.

> So there were a lot of efforts, I mean not all that we should do, certainly with regard to classified advertising, people were aware of what Craig Newmark was doing. There were a lot of people saying, why aren't we doing this? And obviously in classic fashion, the industry was worried about doing that, going full bore because they were worried about undermining their pre-existing business model, which is the classic story of disruption, right? So, so, I think it's, we made a lot of mistakes.

> I think I always say that what we're talking about here is a new medium. It's not the same medium, all right? So we had print, then we had radio. It's different. The way you communicate on radio is different from the way you communicate in print. Then we had television. The way you communicate on television is different from the way that you communicate on radio and the way you communicate in print. And along came the web, and what did we do? We just put up print stories. And then that didn't work. And then we said, well, okay, let's put them up faster. And we put them up faster and that didn't really work. And what we're talking about now is just a different way of communicating.

Marty Baron There was a certain collective delusion about the effectiveness of a newspaper bundle before the internet. Newspapers almost made it seem like readers looked at all advertisements in a paper. Advertisers had to go along with the crazy notion because they had very few local advertising alternatives. This enabled local papers to become monopolies. > Print publishers used to tout the “pass-along audience”—people who didn’t buy a magazine or newspaper but picked it up in, say, a dentist’s office, and could therefore be counted as readers. Advertisers were often skeptical of the numbers, which depended on surveys of readers trying to remember if they read a publication they didn’t pay for. CJR Newspapers enjoyed tremendous pricing power throughout the 20th century. Owning a printing press was a license to print money. The period from the 1950s was the golden age for newspapers, as they took in boatloads of cash. Newspapers thought this would go on forever and forgot the fact that this golden era was an aberration.![](/blog-images/untitled-35-650e945c459bd.webp) Speaking in a panel titled “[Will there be journalists in 2030?][167]” at the International Journalism Festival in 2017, here’s what George Brock, a former journalist and professor of journalism, said:

> In the late twentieth century, we had a period in journalism in which income from print and terrestrial television was very solid and relatively assured. It convinced an entire generation of journalists, my generation, roughly speaking, that all this would continue roll forward on wheels indefinitely. That is historically complete nonsense. Every other area of journalism has been improvisational, volatile, risky and littered with the wrecks of projects that don't work. So we have to be weird to get used to threats coming at us might be artificial intelligence. It might be virtual reality. It might be ad blockers. It might be anything. They will come at us in a regular stream. Get over it.

### Do people care about the news? {#care.wp-block-heading} The internet exposed the inconvenient truth that most people don't [care enough about news][168] to pay for it. There isn't a lot of good data on news consumption habits, but the available data gives you a directional idea. The Reuters Institute published a study tracking [online news consumption][169] during the 2019 UK General Election. They found that the average user read 16 minutes of news in a week, which made up only 3% of the total internet time, even during the election.![](/blog-images/untitled-36-650e945c45d26.webp) Rasmus Kleis Nielsen, the director of the Reuters Institute for the Study of Journalism, published another [estimate][170]. The time spent on online news ranges from 6 to 23 minutes a day.![](/blog-images/untitled-37-650e945d51815.webp) Another report from Rasmus Nielsen and Meera Selva found similar numbers. Only 17% of users access news more than five times a day. 48% read news once a day.![](/blog-images/untitled-38-650e945d97f77.webp) The fact that most people don't care about news was an open secret. In the early 2000s, even as newspapers were touting page views that numbered in the millions, they were making peanut from them. Notice I use “peanut” and not “peanuts.”

> For a long time, longer than anyone in the newspaper business has been alive in fact, print journalism has been intertwined with these economics. The expense of printing created an environment where Wal- Mart was willing to subsidize the Baghdad bureau. This wasn’t because of any deep link between advertising and reporting, nor was it about any real desire on the part of Wal-Mart to have their marketing budget go to international correspondents. It was just an accident.

> Advertisers had little choice other than to have their money used that way, since they didn’t really have any other vehicle for display ads. The competition-deflecting effects of printing cost got destroyed by the internet, where everyone pays for the infrastructure, and then everyone gets to use it. And when Wal-Mart, and the local Maytag dealer, and the law firm hiring a secretary, and that kid down the block selling his bike, were all able to use that infrastructure to get out of their old relationship with the publisher, they did. They’d never really signed up to fund the Baghdad bureau anyway.

Clay Shirky ![](/blog-images/untitled-39-650e945e5db47.webp) Readers were flirters, not lovers 💔![](/blog-images/untitled-40-650e945ee4476.webp) News was always a tough business, and the advertising bonanza in the second half of the twentieth century blinded newspapers to this fact. The present-day sorrows of news publishers are no different from those of other historical periods. ### A false dawn {#dot-com.wp-block-heading} News publishers entered the 21st century with shrinking print advertising revenues, declining circulation, negligible online advertising revenues, massive debt burdens, and no salvation in sight. There was cautious optimism that newspapers could crack digital. A new breed of online publications like Slate, Salon, Wired, _Fast Company_, and Inside started with a promise to pillage readers and put traditional newspapers out to pasture. Salon Media was a poster child of this new breed of publishers, and it raised $25 million at a valuation of $107 million through an [IPO][172].![](/blog-images/untitled-41-650e945f78b9b.webp) The economic logic of digital-first publishers was simple. Over 50% of the cost of publishing a newspaper was printing and distribution, and by being online first, they could cut this [cost][174].![](/blog-images/untitled-42-650e945f797a3.webp) The first era of digital publishing was accompanied by all the buzzwords of innovation, disruption, and wishful projections of millions of readers and billions in digital revenues. Then the dot-com bubble shattered the delusional, and reality punched these new-age publishers in the face. Several online publications shut down, and Slate even launched a print publication to [survive][175]. Print publishers had the last wheezing laugh. ### A new dawn part 2 Matt Drudge started the Drudge Report in 1994 as a conservative news aggregation site. The site became popular during the Clinton-Lewinsky scandal as it broke stories before news outlets. By 2010–11, the site was driving [more traffic][176] to major news websites than Facebook and Google. The site foreshadowed the power of aggregators long before Google, Yahoo, and Facebook. In 2005, Arianna Huffington, Ken Lerer, and Jonah Peretti launched the Huffington Post as a liberal counterweight to the Drudge Report. The site started aggregating news and publishing views from an army of unpaid writers like the Drudge Report. By 2010, its [traffic][177] was higher than that of _The LA Times, The Wall Street Journal,_ and _The Washington Post_.![](/blog-images/untitled-43-650e94604681e.webp) Blogs had become [popular][178] by 2005, but mainstream media publications and traditional journalists [looked down on them][179] as amateur rabble-rousers. Joshua Benton of the Nieman Journalism Lab summed up attitudes about blogging in an [amazing 2010 talk][180]:

> They don't know what they're talking about, these bloggers. They are a bunch of idiots. As if many of the people who were writing blogs were not the same people that reporters would call to get expert testimony on a given question in many cases. “They're they're not burning up the shoe leather”, “they're not going to the scene”, “there they don't have smoke in their hair after a fire” as if of course all newspaper stories were Watergate and as if many were not or maybe even most we're not based on press releases and press conferences any number of arrangements that are handed to journalists in which they perform a bit of journalistic magic on, but for the most part is hardly the stuff that Pulitzer Prizes are given for.

> I found these attitudes, I mean some of these attitudes have weakened, but they've certainly not gone away. I find them strange because I saw bloggers and news reporters as kindred spirits as people who had similar a similar set of instincts about wanting to find out information and share it with others and be heard. I also found it interesting because aggregation and reuse are utterly intertwined into the DNA of modern American journalism, aggregation is at the very center of what every journalist does. Even the ones who shiver in disdain at the mention of The Huffington Post.

Journalists had forgotten that American journalism was deeply partisan until the early 20th century. To put it another way, it was all opinion-based. But publishers and journalists sneered at the mere mention of blogs. They ignored the fact that opinion columns had been a [major part][181] of their own publications for over half a century. They could’ve built new sections and hired good bloggers like Huffpost did, but they were too snobby and uppity for their own good and lost the plot. The opinion columns of newspapers were Substack before Substack. Newspapers continued their half-baked and uncertain digital transitions throughout the 2000s. On the one hand, they were unable to let go of the addiction to high margins and bountiful profits of the late 20th century. On the other hand, no matter what they tried, print advertising revenues continued to fall off a cliff and were replaced by the peanuts from digital ads. Facebook launched the [News Feed][182] in 2006. Publishers didn’t know it yet, but this consequential feature would upend their world. The 2008 financial crisis hit newspapers like a category-five hurricane. Newspaper advertising fell by [30%][183] between 2007 and 2009. Publishers cut over [21,000][184] jobs. Eight major newspaper chains filed for bankruptcy between 2008 and 2010 and re-emerged from the reorganization process.![](/blog-images/untitled-44-650e9460a4445.webp) This is how profitable newspapers were despite the grim times:

> Despite the tough economic times, the average profit level of U.S. daily newspapers in 2008 and 2009 was still almost 16 percent, according to industry data. That was more than three times the historical average 4.7 percent profitability of a Fortune 500 company.25 It was modest, however, compared to newspaper profit margins in previous years, which had exceeded 20 percent on average every year from 1993 until 2007, peaking at more than 28 percent in 1999 and 2000. Even in the depths of a recession in 2002, U.S. newspaper profits averaged 27.7 percent.

Marc Edge, a Canadian journalist, academic, and media observer. Newspapers were in far worse shape than ever by 2012–2013. As they recovered from the 2008 crisis, they once again found themselves in a world they didn’t recognize or understand.![](/blog-images/untitled-45-650e946132e2b.webp) ### Snorting social {#social-era.wp-block-heading} As newspapers struggled during the 2008 crisis, another profound shift was underway—the social era was starting. Facebook, YouTube, and Twitter started seeing dramatic growth starting around 2009. ![](/blog-images/untitled-46-650e94620c989.webp) Social media became the dominant news source in a short time. Younger users [preferred][185] social media for news compared to older users, who preferred print and television.![](/blog-images/untitled-47-650e94625c790.webp) Newspapers jumped on the social media bandwagon with trepidation, even as the same platforms sucked away advertising dollars.![](/blog-images/untitled-48-650e94633cd82.webp) The news publishing scene in the early 2010s.

> At places where editors and publishers gather, the mood these days is funereal. Editors ask one another, "How are you?" in that sober tone one employs with friends who have just emerged from rehab or a messy divorce.

Bill Keller, executive editor, New York Times _The New York Times_ was representative of the challenges faced by all “legacy” news publishers. As it prepared to enter the social era, _The Times_ was having an existential crisis and was in the midst of profound soul-searching.![](/blog-images/untitled-49-650e9464bc02e.webp) It entered the 2010s with falling print advertising revenues, declining circulation, mounting losses, and a massive debt load. The situation was so bad that _The_ _Times_ had to [borrow $250 million][187] from Mexican billionaire Carlos Slim at an interest rate of 14%. _The Washington Post_ was in a similar boat and was [bleeding money][188].

Neither company could stop the bleeding. The Times lost $543 million in 2006, $58 million in 2008, and $40 million in 2011. The Post lost $165 million in 2009. Petrified of falling into corporate hands, the two instituted multiple rounds of layoffs to stay solvent. Fears of bankruptcy loomed. — Jill Abramson, The Los Angeles Times

![](/blog-images/untitled-50-650e946574031.webp) In 2013, the media world was shocked to learn that Jeff Bezos, the founder of Amazon, had [acquired][189] the venerable _Washington Post_ for $250 million. It probably wasn’t the end that Katherine Graham, who oversaw the paper through the Watergate scandal, would’ve liked. The acquisition came days after another billionaire, John Henry, the owner of the Red Sox and Liverpool FC, [acquired][190] the storied _Boston Globe_ for $70 million. For a long time, media observers argued that giving away news for free online was the “[original sin][191]” of news publishers. It wasn’t. Many papers tried to charge online, and all the experiments failed miserably. In 2011, _The New York Times_ decided to [erect a][192] paywall, a move that was met with skepticism. In the ensuing years, a team of 8 led by Arthur Sulzberger (The Sulzbergers owned _The Times_) prepared a 96-page internal report that laid bare the dramatic challenges _The Times_ was facing in adapting to the digital age. The report name-checked all the leading digital publishers like BuzzFeed, Huffington Post, and Vox. BuzzFeed, in particular, was mentioned 23 times, and in a profound twist of irony, BuzzFeed News [leaked][193] the report. Things couldn't have gotten any worse for the embattled Times.

Arthur Greg Sulzberger had just written “The Innovation Report,” and my sense was that it dripped with a fair amount of envy for both BuzzFeed and Vice, especially because of ... They were ahead of the Times in an area called audience development. — Jill Abramson, former managig editor of The New York Times.

In stark contrast to the _Times_, BuzzFeed was the hottest media company of the era. Jonah Peretti started it as a side project in 2006 when he was at the Huffington Post. AOL [acquired][194] HuffPost for $315 million in 2001, and Jonah Peretti decided to focus on BuzzFeed full-time. BuzzFeed was the poster child of this era. It built a massive brand by figuring out the secret to harnessing social traffic. People scoffed at BuzzFeed, saying that it was a site for cat pictures and listicles, but it was generating billions of views and impressions. Rather than post links or worry about the homepage, BuzzFeed tailor-made content for each social platform, and it was working. Jonah Peretti was also a sharp operator who understood the media better than most seasoned players. Early on, he saw the writing on the wall that he had to build credibility for BuzzFeed. Borrowing a page from the well-worn playbook, Jonah Peretti hired Ben Smith from Politico to start BuzzFeed News in 2012. On the one side, BuzzFeed was posting silly pictures and goofy memes, and on the other, BuzzFeed News was breaking serious news stories. People dismissed BuzzFeed as a gimmick and a relic of the social era, but they understood the power of social media and were the masters of virality. Their success inspired [copycats][195] across the globe, from India to Nigeria. In the US, a new generation of online publishers like Upworthy, Business Insider, Vox, NowThis News, Ozy, Mic, and Recode popped up on the scene. Other publishers like Vice Media, Engadget, and Refinery29 had their origins before the social era and were part of the scene as well. The success of BuzzFeed caught the attention of venture capitalists (VCs). Why? This slide comparing the time spent on a medium vs. the advertising dollars from “Queen of the Internet.” Mary Meeker, a former VC at Kleiner Perkins, got VCs horny for media more than anything else. As journalist and author Alex Madrigal [put it][196], “this is the chart that launched a thousand digital-media PowerPoints.” The message of the slide was simple: time spent on a form of media and the advertising dollar more or less converge over time.![](/blog-images/untitled-51-650e946709070.webp) ![](/blog-images/untitled-52-650e94681bcfa.webp) The popularity of the internet, social media, increasing smartphone penetration, and the assumption that new-age digital publishing startups could break the advertising dominance of Google and Facebook attracted a lot of VC money into digital media.![](/blog-images/untitled-53-650e946964b93.webp) The newer, digital-first publishers raised stupid amounts of money. Threatened by the upstarts, legacy media companies from the Times, Fox, and Disney to NBC invested hundreds of millions in these startups. Legacy media companies invested more money than traditional venture capitalists (VCs).![](/blog-images/untitled-54-650e946a1d72e.webp) [Axios][198] Notable deals.![](/blog-images/untitled-55-650e946a4c113.webp) By 2010, social traffic referral traffic to digital publishers from Facebook was already in the single digits. In [2013][199], Facebook had Twitter envy and tweaked its algorithm, and social traffic to publishers shot up like a rocket. By 2015, Facebook had overtaken Google as the biggest source of referral traffic. Social traffic didn’t replace search but rather [expanded][200] the traffic pie. For the first time in a long time, the media seemed a little less funereal.![](/blog-images/untitled-56-650e946b09922.webp) I didn't know who coined the term “BuzzFeed Envy," but it best captured the vibe of the era. Every publisher was envious of BuzzFeed because everything was working for them. Even storied legacy publishers like _The New York Times_ and _The Washington Post_ started aping BuzzFeed. It wouldn't be a stretch to say BuzzFeed remade the digital publishing industry in [its image][202] for a while. In 2015, an anonymous person in the media [wrote a letter][203] to the advice column at The Awl saying, “I hate myself because I can’t work for BuzzFeed.”

BuzzFeed is the most successful media company of our time. BuzzFeed is the future of the media business. BuzzFeed is the most widely recognized media brand among young people and will inevitably eclipse the major media organizations and one day become a super-hegemonic media power the likes of which we’ve never seen. They’re past being just a website/media organization. They’re a cultural institution. BuzzFeed is so powerful they can make the president use a selfie stick

In 2015, Ben Thompson, founder of Stratechery, called [BuzzFeed][204] “the most important news organization in the world.”

> In short, by not making money from display ads, and by extension deprioritizing page views, BuzzFeed incentivizes its writers to fully embrace Internet assumptions, and just as importantly disincentivizes pure sensationalism. There is no self-editing or consideration of whether or not a particular post will make money, or if it will play well on the home page, or dishonestly writing a headline just to drive clicks. The only goal is to create – or find – something that resonates.

The world was BuzzFeed’s oyster. In contrast to BuzzFeed, there was Gawker—a loud and boisterous publication with a take-no-prisoners approach that took pride in defiling journalistic traditions. Gawker had a vehement disdain for those in power and prided itself on dragging them through the gutter. It wasn’t just a lurid gossip site; it had built a successful network of sites covering sports, technology, women, gaming, and productivity.

In the twenty-first century, the laws of traffic make demands, and we just follow. — Nathan Heller, The New Yorker.

Everybody was worshiping at the altar of traffic. In 2012, A. J. Daulerio, the editor-in-chief of Gawker, [announced a new experiment][205]. Each day of the week, a Gawker writer would be on “traffic-whoring duty”—the goal was to publish things that would get the most eyeballs: > This week, the writers of this site have all agreed to participate in an obnoxious, but worthwhile exercise. Each day, a different staff writer will be forced to break their usual routine and offer up posts they feel would garner the most traffic. While that writer struggles to find dancing cat videos and Burger King bathroom fights or any other post they feel will add those precious, precious new eyeballs, the rest of the staff will spend time on more substantive stories they may have neglected due to the rigors of scouring the internet each day to hit some imaginary quota. The writers not relegated to traffic-whoring duty will still post, just less frequently than many of them are probably used to. The stunt might have been a [parody][206] of what other publishers were doing at the time, but it captured the motif of the era—moar views. Post views were all that mattered. View count was a better indicator of quality than the opinion of a cantankerous curmudgeon sitting in the corner office yelling at the clouds. Future media historians will remember 2015 because that was the year _The New York Times_ invited Jonah Peretti for advice:

Jonah Peretti, the BuzzFeed CEO, was asked to address the New York Times board and give them advice. And then Cliff Levy, who's one of the senior editors, interviewed him and asked him, "If we hired you tomorrow to be CEO of The New York Times, what would you do?" And Jonah says to them, with a straight face, "Well first I would ask you for a raise. And then I would go into my office, lock my door, and cry." Just to give you a sense of sort of the arrogance and sense that we had the wind at our back and these guys were screwed. — Ben Smith speaking to Nick Gillespie, editor at large at Reason

The times were good for digital publishers. The massive traffic from Facebook and other social media platforms gave publishers a false sense of comfort. Publishers believed that the good times would last forever. They didn’t. ##### **Facebook Giveth, Facebook Taketh Away** {#facebook-dance.wp-block-heading} In 2015, Facebook [announced][207] that it would prioritize posts from friends, and posts from publishers and brands would rank lower. The honeymoon for publishers was over. There was a [sharp decline][208] in referral traffic to publishers. The story of [Upworthy][209] is illustrative of the power that Facebook wielded. In 2012, Upworthy had about 3 million unique users, and by 2013, it had over 70 million uniques. By the end of 2014, the number had crashed to 20 million. The fate of other viral outlets like 9Gag, Viral Nova, Little Things, Distractify, etc., was similar. The algorithm change caught publishers off guard, but it wasn’t a surprise if publishers had paid attention to the history of Facebook. There were signs as far back as [2013][210]. Facebook had [always][211] tweaked its algorithm at regular intervals, and chaos ensued. Publishers were ignorant because they were hooked on Facebook traffic, and it wasn’t easy to wean themselves off. They had hitched themselves to Facebook, and there was no easy way off.![](/blog-images/untitled-57-650e946bd413f.webp) ### Trump saves journalism Ok, no, I’m kidding. That was a BuzzFeed-style headline. Depending on who you ask, 2015 was one of the best years in the history of the United States of America. It was the year Donald Trump, aka Mango Mussolini, announced that he was running for president. Trump’s unexpected victory, the incredible polarization, and the unprecedented [attacks][213] on the press were bad for democracy but good for publishers. Starting in 2015, several publishers like _The New York Times_, _The Washington Post_, Slate, and ProPublica saw a decent [bump][214] in subscriptions and traffic. While it was a small bonus for the bigger publishers, it didn’t help the smaller publishers much. As Trump was making America great again, things were taking a turn for the worse for the digital media outlets. Facebook was throttling the traffic, and the good times of bountiful social traffic were over. ### Pivot {#pivot-to-video.wp-block-heading} Video had become big, and YouTube, Instagram, and Snapchat were ascendant by 2015. The advertising dollars were also moving to video, and Facebook wanted a piece of the action. Months after deprioritizing news articles in the feed, Facebook announced the launch of Facebook Live. In 2016, Mark Zuckerberg made an announcement that would change the fortunes of digital publishers forever. In an interview with [BuzzFeed,][215] he said:

> We’re entering this new golden age of video. I wouldn’t be surprised if you fast-forward five years and most of the content that people see on Facebook and are sharing on a day-to-day basis is video.

By 2016, the dreams of a digital publishing revolution had collided head-first with reality. The new generation of startups realized during the 2000 dot-com bubble that making money from news was hard. The new crop of publishers were learning the same lessons in 2016. These companies had taken sizable investments from VCs and were under pressure to generate revenues. Major publishers like BuzzFeed, Mashable, and Vice went all in on video in a desperate bid to eke out some ad dollars. Many publishers even [fired][216] editorial staff to pivot to video. The shift to video was based on the same [vague assumptions][217] as the VC investments in digital media based on the Mary Meeker slide: that a lot of people watching TV will shift to online video. The pivot to video was a disaster. With months of Zuckerberg and other top Facebook executives touting the glorious future of video, _The Wall Street Journal_ published a damning article that Facebook had overstated video metrics by 60–80%. It was sued by a group of advertisers in 2017 and settled the suit in 2019. Facebook [changed the algorithm][218] again in 2018. It prioritized content from friends and family and deprioritized video and brand content. It was déjà vu for publishers all over again. Referral traffic from Facebook to publishers [dropped once again][219].![](/blog-images/untitled-58-650e946c4d145.webp) This wasn’t the only time Facebook screwed over publishers. By 2015, mobile traffic was set to overtake desktop traffic. At the same time, more Americans were consuming news on [mobile.][220]![](/blog-images/untitled-59-650e946ce6e86.webp) Facebook saw the writing on the wall that it had to capitalize on mobile to continue growing advertising revenues. In 2015, it launched a new publishing format called Instant Articles. It was a mobile content format in which Facebook would host the articles in partnership with publishers. The pitch was simple: mobile websites sucked, and Facebook would take care of the experience. It could load articles faster, retain readers better, and increase ad revenues for publishers. It didn’t. By 2017, major publishers had stopped publishing on the platform after making peanut in ad revenues from instant articles. Note again that I used “peanut” and not “peanuts.” In an effort to compete with Facebook, Google introduced Google Accelerated Mobile Pages (Google AMP). Much like Instant Articles, AMP rendered mobile sites faster by stripping them to the bare essentials and hosting them on Google’s servers. But as David Pierce, Editor-at-Large at The Verge, [wrote in a brilliant piece][222], Google AMP was driven more by desperation to not lose out on mobile advertising than “an altruistic move.”

“If Google said, ‘you must have your homepage colored bright pink on Tuesdays to be the result in Google,’ everybody would do it, because that’s what they need to do to survive,” says Terence Eden, a web standards expert and a former member of the Google AMP Advisory Committee. One media executive who worked on AMP projects but who, like other sources in this story, requested anonymity to speak about Google, framed the tradeoff even more simply: “you want access to this audience, you need to play by these rules.” — The Verge

Google also made it impossible for publishers not to use AMP because it said that AMP news stories would rank higher in its news carousel. Much like how Facebook made publishers dance to its tunes, [so did Google][222]. Many publishers saw a traffic bump because of AMP, but there was disillusionment by 2017. While traffic rose, publishers made far less money from AMP pages than on their mobile websites. The AMP technology was too restrictive. Publishers soon ditched AMP, just like Instant Articles. These were the two big examples of the power platforms wielded over news publishers, but there were countless others. My favorite example of how platforms can destroy livelihoods is the [endless pivots][223] of Medium, started by Evan Williams of Blogger and Twitter fame. It began as a cool blogging platform with a clean, no-nonsense design. - Early on, it commissioned freelancers but ditched them in a year. - It then launched advertising and attracted a bunch of publications to move to Medium’s CMS. It again ditched ads and fired a third of the staff, leaving the publishers depending on the ad money in the lurch. These small publications with limited resources were forced to move elsewhere. - In 2018, it executed a perfect rug pull by canceling its membership program for publishers that had moved to the platform without notice. - In 2019, it again got into editorials and launched a series of publications with fantastic talent. True to its nature, it executed another rug pull like a blue-chip shitcoin by firing 75 editorial people. Fool me once; shame on you. Fool me 37 times, shame on, well, weather! It’s the weather! Journalists and writers became the [precariat][224].

> The precariat, a mass class defined by unstable labor arrangements, lack of identity, and erosion of rights, is emerging as today’s “dangerous class.” As its demands cannot be met within the current system, the precariat carries transformative potential. To realize that potential, however, the precariat must awaken to its status as a class and fight for a radically changed income distribution that reclaims the commons and guarantees a livable income for all. Without transformative action, a dark political era looms.

### Beginning of the end… {#turning-point.wp-block-heading} 2017 was a turning point for the digital darlings. Most of them were still in the midst of the great pivot to video, but [the cracks][225] were starting to show. - The year started with Medium laying off 50 employees and pivoting away from advertising. - Then Oath, the abominable offspring of Yahoo and AOL, laid off 500 people. - Traffic to Mic was down 70% as it continued its pivot to video. - BuzzFeed, which wanted to IPO more than Hillary Clinton wanted to be president, missed its revenue targets and laid off 100 people. - Mashable had raised ~$60 million and was once valued at $250 million. Ziff Davis acquired it for $50 million. - Univision was looking to sell a stake in Gawker (Fusion Media) after a year of acquiring it. This was just 2017. 2018 wasn’t any better for digital media outlets as the drumbeat of bad news got louder. - In 2018, Vice missed its revenue target. - Disney, which had invested $400 million in Vice, wrote down its stake by $157 million. - Mic was the supposed go-to news destination (not) that had raised almost $60 million. Bustle Digital acquired it for $5 million after letting the majority of the staff go. - Atlantic Media sold Quartz to Uzabase for $86 million. The [story of Quartz][226] is also instructive of the social era of publishing. Atlantic Media launched Quartz in 2012 as a publication aimed at the “global business elite,” with former _WSJ_ editor Kevin Delaney at the helm. It was targeting a niche dominated by the _Financial Times_, _The Wall Street Journal,_ _The Economist,_ Reuters, and Bloomberg. Quartz was free and relied on bespoke native advertising and beautiful banner ads. Within a year, its traffic had overtaken _The_ _Economist._ Quartz had a culture of innovation and experimentation. Its advertising was top-notch, and so was its storytelling, which melded facts with beautiful visuals. It created amazing newsletters long before others jumped on the bandwagon. In 2016, it launched its widely praised news app that looked like a [messaging app][227] instead of an old, boring collection of headlines. It was even profitable for a brief moment. But like the other publications of the era, Quartz became a casualty of Facebook’s fickleness. It then pivoted to quantity, video, then subscriptions, and was sold in 2018 only to be acquired back by co-founder Zack Seward in a weird deal. After failing to raise money, it was [sold][228] to G/O Media in 2022. As an outside observer, there were two moments in 2018 that signaled the end of the scale and the social era. The first was when Disney [wrote off][229] its entire $400 million investment in Vice Media. The second moment was when Jonah Peretti [pitched consolidation][230] with other digital media publishers as a way to wring some dollars from Google and Facebook:

The better solution, he said, would require a much more audacious effort: a series of mergers with five or six top internet publishers. “You have Vice and Vox Media and Group Nine and Refinery,” Mr. Peretti said. “There’s tons of them that are doing interesting work.”

> Mr. Peretti extolled the logic of combining forces: A larger entity could lobby for better business terms from Facebook and Google, and in turn supply them with videos and articles safe for users and friendlier for advertisers.

Vice was the other darling of the social era like BuzzFeed. In contrast to BuzzFeed’s fun and quirky image, Vice had built an edgy brand with its irreverent and gonzo approach to covering news and culture. It started in 1994 as a counterculture magazine and survived the dot-com crash but had built a following among young millennials. It parlayed its claim to millennial attention to raise $1.6 billion. It was evident that there was a gaping chasm between the numbers Vice [claimed][231] and the actual numbers early on. The dodgy tactics they used to goose their numbers were an [open secret][232]. But legacy media publishers were so threatened by digital upstarts that James Murdoch, Rupert Murdoch, and Disney threw millions at it. The ambitions of Vice were never compatible with reality. But that doesn’t mean they were all fluff and had no substance. With BuzzFeed, they did more to break the old-school sclerotic notions about how “news” should be reported. Like BuzzFeed, they appealed to underserved millennials who had different tastes and sensibilities. But the fact remains that they were in a low-margin media business, and the VC-imposed expectations were incompatible with reality.

I want us to be the next MTV, ESPN and CNN rolled into one. — Shane Smith

Its bet to redefine television was a [disaster,][233] and the company was preoccupied with raising the next round. Add this to the frat boy culture, and allegations of [rampant harassment][234] were a constant distraction for the company. It’s not that Vice didn’t have any substance; they had their moments. Remember the ISIS documentary? But moments are all they had. Any business that relies on going viral cannot survive for long. On its best day, it was an “interesting” publication. At no point in its existence could it justify the lofty valuations that rose from a billion to five billion. Throughout the late 2010s, things continued to get worse for publishers. They were stuck between a rock and a hard place while having to watch a truck with its brakes cut off speed towards them. Publishers bet on social was an epic failure; the pivot to video was an act of Hara-kiri; advertising revenues were a peanut; and none of the publishers had built subscription products. The only solution they could come up with was more scale. The consolidation continued, but not in the way Jonah Peretti had hoped. A final gasp for scale for a desperate IPO In 2019, Vox Media [acquired][235] _New York_ magazine. Soon, Vice Media [acquired][236] Refinery29, which catered to women, in a deal valued at over $400 million. In 2020, life came full circle when BuzzFeed [acquired][236] Huffington Post. In 2021, BuzzFeed acquired Complex for $300 million. The BuzzFeed acquisitions, in particular, were a desperate attempt to build scale for an IPO. In December 2021, the company [went public][237] through a SPAC, raising just $16 million instead of the $250 million it had hoped for. It’s been. Of the three publishers, only BuzzFeed managed an IPO. But it was a disaster. The stock is trading 95% below its IPO price.![](/blog-images/buzzfeed-share-price-650ed6d80480b.webp) The end of the beginning came in 2023. In February 2020, Vox Media raised $100 million at a 50% [discount][239] to its peak valuation of $1 billion. Vox Media was a shadow of its former self, but it was still standing, unlike the fate that would befall its two other competitors. In April 2023, BuzzFeed announced that it was [firing 150 people][240] and shutting down the award-winning BuzzFeed News. In hindsight, maybe Ben Smith (the former editor of BuzzFeed News) [quitting][241] was a sign. It was a sad end to a newsroom that punched above its weight and published some remarkable stories, including the [Pulitzer-winning][242] expose of the mass internment camps of Uighur Muslims in China.

> Additionally, I made the decision to overinvest in BuzzFeed News because I love their work and mission so much. This made me slow to accept that the big platforms wouldn't provide the distribution or financial support required to support premium, free journalism purpose-built for social media.

Jonah Peretti Nick Denton’s comment 11 years later seems prophetic:

> Ben Smith's quick-hit campaign "scoops" are about as viral as cat videos. That fits with Buzzfeed. But I suspect Smith has too much respect for journalistic accuracy to be comfortable with Jonah Peretti's stunts. Remember that Buzzfeed's founder made his name with fake news, like the Nike letter. And Peretti's craving for the quick viral fix will not be satisfied by the nourishing fare put out by prestige hires like Doree Shafrir and Matt Buchanan. Either before or after acquisition, Buzzfeed will collapse under the weight of its own contradictions.

Nick Denton, founder of Gawker Media | The Guardian Vice Media, which was valued at $5.7 billion in its last round, filed for bankruptcy in May 2023. It was bought out by a consortium for $225 million. Just to be clear, $225 million is wayyy less than even a billion, let alone $5.7. The Vice hustle of somehow always raising another round came to an end. Vice’s fate was sealed in 2017 when it raised $450 million from TPG, which would make moneylenders look like sweethearts.

> TPG’s and Sixth Street’s money came in the form of preferred stock rather than common shares. The preferred stock paid a 12 per cent dividend in the form of additional stock and junior debt rather than cash and had other rights for priority payment which contributed to a “complex and restrictive equity structure”, according to bankruptcy filings. This investment, however, did leave room for higher priority senior loans to be undertaken by Vice in future years.

Financial Times It was a depressing end for two of the biggest names in digital media. It wasn’t just BuzzFeed and Vice. In 2023, the media industry as a whole will have laid off over [1700 people][243]. Remember when everybody thought that these digital upstarts would kill legacy media publishers like _the Times_ and _the Post_? Remember that time when legacy media threw hundreds of millions into these companies to not be killed by them? Remember all the bombastic pronouncements of the digital publishing revolution? It feels like yesterday. It’s ironic that the disruptors are dead, and the legacy media publishers are alive and, in most cases, thriving. T_he New York Times_ pulled off a successful transition to online subscriptions. Legacy publishers became BuzzFeed and Vice faster than they could become the new legacy publishers.![](/blog-images/untitled-61-650e946dcb670.webp) _The Washington Post_ is struggling but still [standing][245]. _The Atlantic,_ in which another billionaire, Laurene Powell Jobs, owns a majority stake, is also [doing well][246]. I believe The Guardian had the most stunning transition from print to digital. The Guardian has a unique structure. It’s owned by a trust whose sole duty is to ensure the independence of the publisher. The storied publisher, known for its legendary investigative exposes such as the news of the world hacking scandal, Snowden revelations, Paradise Papers, Panama Papers, and Wikileaks documents, had never made a profit since 1998. It first made a profit in 2019 after launching a membership program based on voluntary reader contributions. Today, it has over 1 million online paying users, a mix of digital subscriptions, and recurring voluntary contributions, all [without a paywall.][247] The _Financial Times_ and _The [Economist][248]_ are thriving and going from strength to strength. Legacy giants [Condé Nast][249] and [Hearst][250] were supposed to be put down with mercy but are doing better than ever. On the other end of the spectrum, as long-time media observer [Brian Morrissey][251] notes, the boring old-school publishing business did well:

> The “winners” of the last decade were not BuzzFeed, Vice, Vox et al, but more “boring” SEO businesses like Dotdash, Future, Red Ventures and Ziff Davis.

### What went wrong? {#what-happened.wp-block-heading} Writing a postmortem is easy with the enormous privilege of hindsight, but many of the sad fates of digital media publishers were predictable. It was as predictable as the outcome of what would happen if you tickled a horse’s buttocks. What was the original sin of newspapers? Not [charging][252] for news? Failing to [innovate][253]? Not building [digital businesses][254] separate from print? Or was it relying on an [advertising-funded][255] model? This is one of those “Is there a god?” questions. But here’s how I think about the question: Of course, newspapers were overly reliant on advertising, and of course, a lot of newspapers failed to innovate. That being said, could American newspapers have transitioned from print to digital without disruption? Impossible. A monopoly advertising bounty underwrote the success of newspapers in the 20th century. That bounty vanished with the internet, and so did the business model. That model was incompatible with the internet era. Change is always messy, especially when dealing with a radical paradigm shift like the internet, which has destroyed many old ways of producing and distributing news. Could the newspapers have done more to prepare for digital? Of course, yes, but that’s like telling someone they should’ve taken an umbrella after it rains. What was the original sin of digital-first publishers? The usual suspects are: - Relying too much on social media platforms for distribution - Publishing useless and undifferentiated content. - Focussing too much on hacks and optimization instead of quality. - Focussing on quantity vs. quality. - Taking venture capital money (VC) All these are true. The way I see it, digital publishers' biggest mistake was taking money from venture capital. Let me be clear. I’m saying taking money to start a business is bad. Of course not. Few can afford to start a digital media business on their own dime. But the problem was that digital media outlets took the wrong kind of money from the wrong people. This quote sums up the issues with venture money:

“Big problems have occurred when you have founders who have unwillingly or unknowingly signed on for an outcome they didn’t know they were signing on for,” said Josh Kopelman, a venture investor at First Round Capital, an early backer of Uber, Warby Parker and Ring. He said he was happy that companies were embracing alternatives to venture capital. “I sell jet fuel,” he said, “and some people don’t want to build a jet.”

The New York Times Media was never a jet fuel business. News was profitable for a brief period in the 20th century because newspapers were monopolies until the internet. That was an aberration.

As long as a newspaper was the only one in its community, its profits were certain to be extraordinary; whether it was managed well or poorly made little difference. (As one Southern publisher famously confessed, “I owe my exalted position in life to two great American institutions – nepotism and monopoly.”)

Warren Buffett ##### Original sin number one: hot money The original sin of digital media publishers was being convinced by VCs that news could be profitable. News has never been profitable. It would’ve been obvious if digital media entrepreneurs bothered to read history. News publishing has always been a blood sport, with the best days being when papers had a runway of years instead of months. Newspapers have always barely survived and died but rarely thrived. Just getting rid of the fixed costs of starting a newspaper and publishing online doesn’t change the economics of the news business. For a brief moment, VCs and publishers bought into the delusion that digital publishing was a tech business—it wasn’t. Changing the form and medium of publishing words doesn’t change the economics of the news business. It still boggles my mind that BuzzFeed and Vice could raise hundreds of millions on the fantasy that news publishing could be a tech business. The other wrinkle, as I alluded to earlier, is that few people care about news. This is why news has never been profitable on its own and has always been subsidized.

> Building a profitable serious news channel suffers from the somewhat intractable fact that serious news has never been profitable, moderator James Fallows said. Instead, it's always attached itself to a "host body," like the Travel Section of the Los Angeles Times, or the car and real estate sections of other big papers. Perhaps the problem with TV news isn't that the networks aren't giving audiences what they want. It's that TV news is giving audiences exactly what they want, and some people don't like the outcome. The most profitable networks aren't "serious," and the most "serious" networks aren't profitable.

Derek Thompson

Media is often a terrible standalone business but is good support for other businesses. The TV business is now dominated by tech companies, a trend likely to continue. That isn’t particularly new. “Media has historically been owned by non-media businesses,” Joe notes, going back to early radio and then cable systems owning TV networks. “The business of media has outsized influence but undersized monetization.” The result: “I don’t know the media business works at scale without alternative models.”

Joe Marchese Venture capital funds have a 10-year lifecycle, but it takes time to deploy capital and exit investments. Once you consider that, the average holding period of VC funds drops to about [five years][256]. Is this enough to build a profitable media business, even if you ignore the economics of digital media? Hell no. It’s not enough to build a good media business, let alone a profitable one. The result of this delusion was that news and digital publishing became a game of scale. In the 2010s, digital media outlets believed that if they could achieve scale, they could sell that to advertisers. The problem was that they never owned the attention; they were renting it from Google, Facebook, Twitter, and other platforms. They were forced to jump from one burning building to the next in the race for scale. Remember the time when the [Kindle][257] was supposed to save newspapers? That was the beginning. - The Apple iPad was going to save journalism. - Social media was going to save news and journalism. - Listicles, clickbait, and pandering to “millennial sensibilities” were going to save news and journalism. - User-generated content was going to save news and journalism. - Distributed publishing was going to save news and journalism. - Micropayments were going to save news and journalism. - Crowdsourcing was going to save news and journalism. - Slideshows and autoplay videos were going to save news and journalism. - Pivoting to video was going to save news and journalism. - Stories, reels, and shorts were going to save news and journalism. - In 2023, artificial intelligence (AI) is going to save journalism. Nope. It’s a cliché to blame the woes of digital publishers on all these things, but that’s not what I mean. Experimenting is not a bad thing. I understand that it’s easy to write such things with the privilege of never having been a journalist or run a news business. If I were a publisher, I would’ve done the same. Two quotes come to mind. The first by [Clay Shirky][258]:

> People committed to saving newspapers demanding to know "If the old model is broken, what will work in its place?" To which the answer is: Nothing. Nothing will work. There is no general model for newspapers to replace the one the internet just broke.

And this from [Troy Young][259], the former president of Hearst Magazines:

> Publishing, sadly, is bit of a perpetual hackathon. You are always looking for the next vein in this pockmark drug addict arm to find like a new source of revenue.

The issue was that trying new things often became an all-or-nothing bet for publishers. Then there’s the case of digital publishers hitching their wagons to social media platforms. The fact that you shouldn’t rely on one thing should have been common sense, but it wasn’t. The 2010s were an example of why knowing history is important. I started following digital media around 2013. Algorithmic changes by Facebook would always lead to a lot of hue and cry about how the “evil platforms” are “killing news.” If these publishers knew even a little about internet history, then they would’ve realized this was always the case. [Google][260] and [Facebook][261] have changed their algorithms at regular intervals. Whenever these two companies changed something, businesses and websites always suffered. Before Facebook, there was Google, which updated its algorithm at regular intervals. There was a term called “[Google dance][262]” to describe the changes in page ranks after an update. Every Google search algorithm update would kill hacky models that relied on gaming the algorithm. You have to hand it to the original bloggers; [they knew][263] this from the start of the social era:

> I guess my point is, if you’re one of these people considering giving up on blogging in exchange for paying more attention to Facebook, Twitter, YouTube and MySpace, or whatever they throw at us mere mortals, bear in mind you are giving up on something rather unique and wonderful.

Hugh McLeod Publishers had to be on social media platforms, but they often became their major source of traffic. Times were good, and publishers went for the ride and didn’t bother diversifying their reader base. News has always been a [small part][264] of the content shared on Facebook but has generated a disproportionate amount of noise. As the Trump era dawned, Facebook realized that the bad PR it was getting over how news showed in its feeds wasn’t worth the grief and de-emphasized it. All the flimsy media business models based on suckling on the social teat evaporated overnight. Josh Marshall, the founder of Talking Points Memo, a publication that has survived and thrived since the dot-com bubble, [summed it up best][265]:

> All of this is to say that news publishing is a tough business. It requires finding an unserved niche, providing some unique service, and building a durable relationship with a specific customer base. But that’s really no different from most forms of commerce: doable, but hard; potentially profitable, but usually not wildly so. In digital publishing, scale was the god that failed. And thousands of journalists went along for the roller-coaster ride, without anyone warning them how it was bound to end.

If VC money is bad, then what alternatives do media companies have? This is where my argument that VC money in media is a bad idea starts to look shaky. The short investment cycle of venture capital is incompatible with the media business, where it takes decades to build trust. It’s easy to say _VC money in media_ is a bad idea, but there aren’t a lot of alternatives for wannabe journalists and publishers. There are foundations, trusts, and billionaires, but they are a drop in the bucket. Media requires long-term patient capital. Is raising money a sin? Not everybody can fund a business themselves when other VCs and startups drive salaries up. Journalists also have wives and kids, and this is what makes the media business so hard. Unless a media startup can deliver quality and have a unique voice and perspective that’s worth paying for, raising outside money is a mistake. Quality alone doesn’t guarantee success, but it does reduce the odds of failure. Like with other startups, even media needs a whole ecosystem of patient funders that aren’t in it for pump and dumps and quick exits. It needs funders who are patient and also understand the value of good journalism. You need funders with a social motive rather than a profit motive. This ain’t gonna happen in my lifetime. ##### Original sin number two: divorce from readers It’s unintuitive, but news is also a relationship business. If I like a publication, I will support it for a long time. The internet destroyed old news business models, and survival became a priority for publishers. They stopped caring about readers. The language publishers used to describe readers was telling. Readers became “views,” “clicks,” “eyeballs,” and “impressions.” The moment this dehumanizing and abstract language became the norm, publishers reached a point of no return. How many of the publishers had a brand that would be missed? Did BuzzFeed and Vice have the same strong brand as _The New York Times_ and _The Washington Post_? Nope. Sure, they had some affinity with millennials, but not one worth paying for. The digital native publishers of the 2010s had their moments but never had a large, loyal audience. They lived and died based on social traffic. People who consume news on social media are different from those who search for or visit a homepage. Social media audiences are like mercenaries and aren’t loyal to anything. I love publishers like _The Guardian_, _The New York Times_, _The Washington Post, The Atlantic_, Newslaundry, Scroll, _The Indian Express_, Aeon, The Ken, _The Economist,_ _Financial Times,_ and individual writers on Substack. I subscribe to some of them and pay even though I don’t read them all because they make the world a better place. Can the same be said for the majority of these digital-first publishers? No. The moment they chose to debase themselves by focusing on quantity over quality, their eventual demise was assured. The debasement was a result of the burden of expectations imposed on them by the VC overlords. Take the example of _The Guardian_. I love its mission, and I root for its success. Most digital publishers never bothered to build a relationship with their readers and treat them with respect. Instead, it became a transactional relationship, where they saw readers as bundles of attention to be aggregated and sold. > It turns out that success in the age of disruptive digital media may actually be a pretty traditional thing: It’s about getting hitched. No one, of course, has the secret to successful lasting relationships. But we’ll be working on it. Renée Kaplan, the head of audience engagement at the Financial Times A relationship doesn’t mean long, intimate calls with journalists. It means knowing your audience and writing things that inform them and add value to their lives. It means building a publication that readers consider essential to their lives and root for to succeed. It means publishing inclusive things that give voice to the marginalized and the afflicted. It also means not being afraid to publish things readers disagree with, afraid they will cancel subscriptions. In short, it is the opposite of a _wham, bam, thank you, ma'am_ model of publishing. Did these publishers offer something worth paying for? Few did. BuzzFeed News was worth paying for, and so were _some_ of the things Vice published, but they had flawed business models. BuzzFeed subsidized BuzzFeed News when it didn't have a sustainable model to start with. Add this to the VC expectation—they were buggered very early on. The return expectations of VCs and the return potential of news were never compatible. This [excerpt][266] from a postmortem of BuzzFeed News captures the sad reality of the news business well:

“There was always the sword of Damocles hanging over BuzzFeed News,” says a newsroom employee, one of about 60 who will be affected (120 jobs across other divisions are also being cut). “Everyone in news knew it wasn’t profitable, the board hates it, Jonah kind of keeps it around ’cause he likes it, and eventually the day would come where it’s a terrible line item in red. And, you know, I guess the day came.”

A [telling excerpt][267] from _Traffic,_ by Ben Smith, the former editor-in-chief of BuzzFeed News:

“I’ve come to regret encouraging Jonah to see our news division as a worthy enterprise that shouldn’t solely be evaluated as a business” Mr. Smith writes. “Jonah resented what seemed like ingratitude from people whose work he so valued that he was approaching $100 million in losses.”

The fundamental flaw among all these publishers was their ridiculous expectations. They all started with good intentions, but when the reality of the news business didn't meet their expectations, they sacrificed quality for quantity. They became content factories, republishing the same thing I could find on a hundred other websites. They started cramming their web pages with all the ads and autoplay videos they could.![](/blog-images/untitled-79-650e9479a0e1a.webp) ![](/blog-images/untitled-63-650e946ee4f3d.webp)

Publications in general cultivate a kind of intimacy. Readers identify with them, see their perspectives reflected in them. That’s why there’s a sense of grief when they disappear. I’ve been thinking about the loyalty we have to one particular publication or another. Social media made us disloyal consumers since we read whatever floated up in our feeds. The general-interest media companies that survived, though, had a lot of built-up loyalty, in both brand and editorial perspective: NYT, New York Magazine, The New Yorker, The Atlantic. They translated that loyalty into paywalls and digital subscriptions. Readers paid because they couldn’t not read the publications. Turns out that’s a good business model. Kyle Chayka, writer and author

Kyle Chayka, writer and author
Building a good news business is like trying to ride a horse blindfolded at midnight while drunk and naked. It’s hard. Publishers are [competing][269] against everything from Netflix to Kim Kardashian. It takes something special to even have a chance of survival, let alone success.

> Media continues to compete with every single app on your phone. 2021 will require you to go deeper in building a direct relationship — with not just your users or audiences, but with your true believers. Unless you’re able to capture attention and build a relationship, you can’t monetize, and therefore, you don’t have a business.

We really mean believer, because these people are often buying into a mission they believe in, not just a subscription to a media product.

Rishad Patel, co-founder of Splice Media

“There was this era at the beginning when it was considered smart and prescient to be mobile-first. Then there was the Facebook era where we and a whole lot of other digital publishers were able to really dramatically expand our audience and introduce our brands to the world on the backs of this distribution of social media. That era is clearly over. The way I would describe the new era we’ve entered is one where publishers are going to live or die based on their relationship with readers.”

Zach Seward, co-founder of Quartz | Nieman Lab ### Where are we? {#where-are-we.wp-block-heading} ##### Twilight of social media 1.0? The phrase “end of an era” is overused, but the current moment does feel like the end of something. Social networks were fun when they started, but now they suck. Facebook had a messy divorce with news, and after the stupid detour into the metaverse, it’s figuring out what its purpose is, like someone having a midlife crisis. Elon Musk asked himself, _What’s the best way to blow $44 billion?_ His answer was to buy Twitter and destroy it in public, like an untalented performance artist. LinkedIn is probably the last weird but sane…ish platform. Instagram and TikTok continue to grow in dominance and are the go-to social platforms for young people. Social traffic continues to decline, and Google is now once again the [largest source][270] of referral traffic to publishers.![](/blog-images/untitled-64-650e946ff38ec.webp) The Reuters Institute for the Study of Journalism publishes an [annual study][271] that gives a bird's-eye view of news consumption around the world. Here are some interesting charts: The evil social media platforms might be destroying democracy, but more people get their news on social media than anywhere else. "Anywhere else” includes [aggregators][270] like Google News, which are becoming a dominant source of traffic.![](/blog-images/untitled-65-650e9470a8a6a.webp) Younger people prefer Instagram and TikTok over Facebook. More people are getting news on YouTube, WhatsApp, TikTok, and Instagram than on other social platforms. The growth of TikTok is stunning, and it’s no wonder publishers are making a beeline to produce short videos. Monetization on TikTok is still limited. I hope publishers have learned from the infamous _pivot to video_ and don't go overboard. If not, TikTok will giveth until it taketh. Publishers will learn the same old lessons about not relying on other platforms.![](/blog-images/untitled-66-650e94719a88a.webp) An interesting trend is that people no longer share news on open social platforms. I’d wager that this trend will continue to grow. Social media platforms have become performative hellscapes filled with bots, grifters, and people shilling useless things. Being on social media is no longer fun, and people will continue to move away from open social platforms to private spaces.

> Online participation has shifted to some extent into closed networks such as WhatsApp, Signal, Telegram, and Discord, where people can have private or semi-private conversations with trusted friends in a less toxic atmosphere.

![](/blog-images/untitled-67-650e9472d286d.webp) Only 17% of users paid for news in 2022, the same as in 2022 across 20 rich countries. The cost of living crisis and the lack of perceived value seem to be the major reasons. I don't know if it's too soon to conclude that we've hit peak subscriptions, but subscription fatigue is real. People have limited budgets, and there are only so many things worth paying for. There's also the fact that many people don't care about the news. Where does that leave us? The reality is that there's a hard ceiling on the number of people who can pay. As everything becomes a subscription, people will have to choose between important things. There aren't enough people who care enough about news to pay. There's also a [power law distribution][272] at play with news subscriptions. Most publications won't make enough to have a pizza once a week. We're seeing this with the creator economy. So, things will only continue to get worse for publishers and creators.![](/blog-images/untitled-68-650e9473ce41d.webp)

With household budgets under pressure and a significant part of the public satisfied with the news they can access for free, there are signs that the growth in online news payment may be levelling off. Across a basket of 20 richer countries, 17% paid for any online news – the same figure as last year. Norway (39%) has the highest proportion of those paying, with Japan (9%) and the United Kingdom (9%) amongst the lowest. Amongst those cancelling their subscription in the last year, the cost of living or the high price was cited most often as a reason. In the United States, Germany, and the United Kingdom, about half of non-subscribers say that nothing could persuade them to pay for online news, with lack of interest or perceived value remaining fundamental obstacles.

What will get people to pay for news? Cheaper and more flexible pricing and valuable content. Most news publishers ignore younger users because they tend not to have a lot of money, but this is a missed opportunity. Publishers should remember that building a brand takes time. Creating affordable products for younger users can prime them to pay more as they grow older. Even large legacy publishers like _The New York Times_ have [realized this][273].![](/blog-images/untitled-69-650e9473ed7a2.webp) Younger people seem to trust individuals more than brands. The rise of individual creators and influencers has been a megatrend over the last five years. This has massive implications for legacy publishers if they ever hope to capture the attention of youngsters. Today, the vast majority of the audience of legacy publications is much older. Few users are paying for individuals yet, but 8% is nothing to scoff at. I’d bet that this number will continue growing at a steady clip. The [media bundle of the future][274] will be people assembling individual voices and publications on platforms like Substack, podcasts, YouTube, etc. > In the United States 8% of subscribers pay for a newsletter written by an individual journalist or influencer and 5% pay for a podcaster or YouTuber. This trend is still largely confined to the US. ![](/blog-images/untitled-70-650e947502b87.webp) The proportion of people who are not interested in news or are actively avoiding news is increasing, which is cause for concern.![](/blog-images/untitled-71-650e94755dd50.webp) There’s a secular decline in trust in news. Trust is a subjective measure, and factors like the political climate, geopolitical events, and people’s sense of their financial well-being have an impact. I think news organizations will never be able to please everyone. Objectivity feels like a quaint notion to me and leads to bothsidesism. Humans report news, and it's colored by their views and lived experiences. Unless someone manages to write about something in the most anodyne way, I don’t understand what objectivity is. Publications should aim to be fair, honest, and transparent rather than objective.![](/blog-images/untitled-72-650e9475e7dbe.webp) Trust in news is important, but I also think that news organizations shouldn’t concern themselves too much with the issue. If they go down the rabbit hole of trying to please everyone, they will be influenced by the whims and fancies of readers. While respecting the reader is important, it’s also important to understand that they’re not always right. Readers are easily aroused by the passions of the moment are often idiots—me included. The topic of trust and objectivity reminds me of this interaction between Alan Rusbridger, the former editor-in-chief of _The Guardian,_ and Marty Baron, the former editor of _The Washington Post_:

Alan Rusbrider: Do you think the Washington Post should be objective?

Marty Baron: I think we should be, I don't like, that's not the word that I would use. What word do you use? We should be independent, we should be fair, we should be honest, we should be honorable, and then we should do our work, do our research, and whatever we find, if we've done it all properly we should tell people what we've found, in a straightforward, direct, unvarnished, unflinching manner, and that that's what we ought to do. And whatever the facts tell us, the story is, I mean, the obligation is for us to do the work properly and thoroughly, and then to tell people what we found and not hesitate to do that.

What Mr. Baron says is what news organizations should aspire to be. ### State of local news Print newspapers are still stuck in an uncertain transition from print to digital, even after two decades of the internet. Except for the large publications like _NYT_ and _WaPo_, none of the regional and local papers have been able to convince readers to pay. It’s a case of death by a thousand cuts. Private equity, hedge funds, and other investment vehicles [own over 50%][275] of all local and regional newspapers.![](/blog-images/untitled-73-650e947662af1.webp) These financial groups buy newspapers, cut staff to the bone, and try to wring out as much cash as possible. The death of local newspapers had a [devastating impact][150] on the civic life of American towns and cities.

What threatens local newspapers now is not just digital disruption or abstract market forces. They’re being targeted by investors who have figured out how to get rich by strip-mining local-news outfits. The model is simple: Gut the staff, sell the real estate, jack up subscription prices, and wring as much cash as possible out of the enterprise until eventually enough readers cancel their subscriptions that the paper folds, or is reduced to a desiccated husk of its former self. — McKay Coppins/The Atlantic

### Extortion rackets {#extortion-rackets.wp-block-heading} The greatest trick the newspaper industry pulled was to convince the world that Google, Facebook, and the internet caused their demise. As I showed above, they didn't, but facts are inconvenient opinions. But as newspapers began their terminal decline after the internet, they managed to seed the idea that the internet and tech companies were the cause of their woes—it wasn’t their corporatized shortsightedness, rent-seeking, or inability to innovate. It’s one of the greatest PR moves in history.

The illusory truth effect is the tendency to believe false information to be true after repeated exposure. The Big Lie works through indoctrination. If a lie is repeated enough, people believe it. The repetition becomes the support for the lie. — Wikipedia

By sheer repetition, it has become a truism that Google, Facebook, and other internet companies killed newspapers. They evoke sympathy like an injured puppy, while big tech companies like Google and Facebook are treated as vultures. It’s a remarkable example of revisionist history. They have managed to obscure their historical [anticompetitive behavior][90] since 1920. According to the newspapers, the solution is that Google and Facebook must pay them. Why? Because Google shows links to news websites with a text preview and sends them tons of traffic. Facebook allows the sharing of news links by **willing** people exercising their own **agency** and sending them traffic, so it should pay. Huh? There’s a long history of this link tax. - In 2014, Spain implemented a “link tax,” and Google News shut down, causing a drop in traffic to Spanish news websites. - Germany implemented a similar law, and Google responded by removing snippets requiring publishers to opt in by waiving payments. Traffic to German publishers fell, forcing them to backtrack. - In 2019, France passed a similar regulation forcing Google to pay for news snippets in search results. Google refused to pay and removed the snippets, just showing links instead. After back and forth, Google agreed to pay 121 French publishers $76 million but was instead hit with a $500 million fine by the French competition commission. The most successful implementation of a link tax was in Australia. The fortunes of the [Australian news industry][277] have been a mirror image of their American counterparts.![](/blog-images/untitled-74-650e9476c555d.webp) In 2021, Australia passed the [News Media Bargaining Code,][278] forcing Google and Facebook to negotiate with Australian publishers. Google threatened to pull out, and Facebook (Meta) banned the sharing of Australian news articles for a brief moment, but both tech giants cut secret deals with publishers with revenues of more than $150,0000. This bill is estimated to have generated [A$200 million][279] a year for news organizations. The results seem mixed, with most of the money going to large newspapers owned by the likes of [Rupert Murdoch,][280] with many smaller publishers cut out of the bargaining process. This year, Canada passed a similar bill modeled on the Australian law. Facebook [blocked][281] the sharing of Canadian news links in response, while Google has threatened to do the same. Last year, a bipartisan group of legislators in the United States introduced a [similar bill,][282] but it’s yet to pass. Countries around the world have either passed or are considering similar legislation. These regulations boggle my mind. Here’s the reality: news has very little value for Facebook. In fact, considering the amount of grief that news causes Facebook, it’s better off without it on the platform, and the [data bears this out][283]. Facebook's usage has remained unaffected despite the news being blocked. You could argue that Google needs news to show better results, but that still doesn’t change the fact that publishers get far more value from Google’s traffic than Google gets from news content. I hate to say the platforms are [in the right,][90] but it's a fact.

There is no evidence that shows news outlets are worse off because of Google, Facebook and other aggregators. If anything, evidence (and lots of it) shows that, overall, news outlets would be in worse shape without these digital platforms. That’s what I found in a study I undertook with economist Joan Calzada of the “link tax” imposed by Spain (before the EU-wide directive was instituted in 2019).

Ricard Gil/The Conversation These are [terrible laws][284]. Why should only Google and Facebook pay? Why not TikTok, where most young users get their news? Why not email, Apple News, Telegram, Reddit, Discord, Flipboard, Twitter, and other platforms that are sizable sources of referral traffic? Hell, why not anybody on the internet? A functioning democracy needs a strong press. Given the dire straits of newspapers, I believe in any and every solution, even the most extreme. Despite that, I can’t bring myself to agree with these extortion rackets.

> Commercial news organisations no longer offer value to advertisers. Instead of searching for ways to make an obsolete business solvent, efforts should focus on alternative ways to fund public-interest journalism.

Amanda Lotz Google and Facebook won’t save journalism. It’s not like Google and Facebook’s [continued success][285] is guaranteed. Remember Yahoo, Myspace, Orkut, and countless other search and social platforms? In a world where Google and Facebook are no longer dominant—it’s not an outlandish notion in the age of AI—who will newspapers extort? The bigger question is: for how long will these companies continue paying? The skeptic in me says not for long.![](/blog-images/untitled-75-650e9477480c3.webp) ### Snap back to reality {#welcome-to-reality.wp-block-heading} The era of social 1.0 is over. The era of scale delusion is over. There’s no more cheap money mad enough to chase digital media. Publishers addicted to the high of social traffic are past the acceptance stage and are showing withdrawal symptoms. They’ll kick the addiction. Welcome to the age of shrunken ambitions. This might sound insensitive, but here’s how I think about digital media in 2023. All the cuts and layoffs have shrunk digital media to its equilibrium—a barbell with few large publishers and lots of niche publishers. The end of the 2010s has shown what publishers should have realized at the beginning of the decade—the future of news is small. Having said that, just because these publishers have shrunk doesn’t mean they are in a good spot. Most of them have cut some of their best and brightest reporters and are a shadow of their former selves. Without good writers and reporters, I don’t know how they’ll be able to build a sustainable business. The digital media company of the future will be small, focused, and audience-first. Publishers have learned the hard way that building companies that rely only on advertising is impossible. Small doesn’t mean [smaller ambitions][286]—not all media brands want to remain small. There’s a sensible middle ground between chasing scale and thoughtful expansion into other niches. The way the likes of The Information, Skift, _The New York Times,_ and The Ken have grown are good examples. A [series of niches][287] add up to a decent-sized business. [This is poetry][288] by Rafat Ali, founder of Skift:

> It should be harder than just coming up with some bullshit idea to start a millennial media outlet, whatever that means. It shouldn’t be easy to get two full floors in World Trade Center building as your office, when you’re running on borrowed money and time. It should be hard to call yourself the Condé Nast of the next generation, harder to even build one. It should be harder than starting with clickbait and then pivoting to quality, and then raise up hands when that is hard to do. It should be hard to replicate your success in one vertical to others.

##### Let a thousand niches bloom. The media company of the future will have diversified revenue streams such as subscriptions, ads, events, and commerce. The 2010s also showed that building scale-oriented general interest publications is a fool's errand. It’s not easy to compete against the likes of _The New York Times, The Guardian_, BBC, _Nikkei_, _Australian, Le Monde_, etc. [The Reuters Digital News Report][271] found that people across most countries pay for one national publication:

> As in previous years, we find that a large proportion of digital subscriptions go to just a few upmarket national brands – reinforcing the winner takes most dynamics that are often associated with digital media. But in a number of countries, including the United States, we are now seeing the majority of those paying taking out more than one subscription. This reflects the increased supply of discounted offers as well as the introduction of all-access bundles in some markets.

It’s a little ironic that people in media—a terradome—of all places need a reminder that building a good media business is hard. The era of free money is over, and zombie businesses that relied on raising the next round will wither and die—Vice Media is a harbinger of death. Publishers like Vox that are hobbling will continue to face challenges, but none that are insurmountable. Some publishers will overcorrect. They will make [false choices][289] between subscriptions, advertising, niches, and scale. The brands that survive this winter will be in a better place heading into this new era of publishing. Then there’s the question of artificial intelligence (AI)—the 8,000-pound gorilla in the room. I’m not prone to florid ejaculations about futuristic nonsense. I don’t know how, when, or if AI will reshape and upend the world as we know it. But operating under the default assumption that AI will cause chaos is wise. For example, Google expanded the availability of [Search Generative Experience (SGE)][290]. Unlike the traditional search results with links, you will see summaries of the search results and more prompts to explore. SGE is still in beta, and if it becomes the default search experience, links will become far less important than they were. What does that mean for media brands if people adopt AI chat interfaces where they ask questions instead of browsing search results? How will [generative audio][291] and video shape digital publishing? Predictions are a fool's errand, but it’s safe to say that an age of disruption is upon us. Having said that, there’s also a risk of overcorrecting in response to AI. Richard Tofel, the former president of ProPublica, captured the [tradeoffs succinctly][292]:

Having said that a revolution is soon upon us, that doesn’t mean that everything is changing everywhere all at once. One of the things I most noticed in looking back at the Nineties was that the technologists, and especially those with the arrogance to label themselves “futurists,” were often directionally right about change, but frequently far off in predicting its pace. Indeed, as I wrote,

it was often so long before they were right that they proved poor guides to people in business who needed to make decisions today… [T]o know where your industry is going is never enough in business. You also need to know when it is going to get there.

This dynamic may also apply in our own moment. In the last revolution, Xerox PARC, the early Apple (up through Newton), Knight Ridder’s Viewtron and Boulder Design Lab, Prodigy and AltaVista—brilliant innovators all– proved to be ahead of their time. That may yet repeat itself with AI. The imperative, again, is therefore to become familiar with new tools, to bolster capabilities and to imagine a different future, rather than to bet the farm on someone’s particular speculative prediction.

I also think that AI is a golden opportunity for news publishers to build trust. It’s safe to assume that AI will make the problem of [misinformation][293] and [disinformation][294] worse. People instinctively turn to trusted sources of information when in doubt. It’s the same reason why legacy publishers are the preferred subscription for national and international news despite the mistrust in the news. The age of AI is an opportunity for news publishers to earn the trust of readers. ### Where’s the silver lining? {#silver-lining.wp-block-heading} In 2023, the legacy news media companies must accept that the “[golden age][295]” of news is over. No matter how many goats they sacrifice to the heathen gods, the monopolies and the grotesque margins of the old are not coming back. Digital publishers must accept that bundling eyeballs while relying on the charity of platforms and aggregators is a recipe for disaster.

> In the newspaper industry and television industry 20 years ago success was a a return of 20 or 30% today success might be a return of 8 or 10 percent which is still better than most businesses but for those people that are used to very successful media businesses is not quite the same so what they're having to do today is work harder get money from more places than they did before and this is uncomfortable for many people in media particularly in the news parts of medium.

Robert Picard Legacy and digital publishers today face the same brutal realities that newspapers have always faced throughout history. The silver lining is that news publishers, despite their troubles, aren’t extinct. More publishers—new and old—are [experimenting and innovating][296] with new forms, formats, and revenue models. There’s a massive gap in funding due to the loss of advertising. Philanthropies, foundations, and billionaires have [stepped into the breach][297] and pledged hundreds of millions to support local news organizations, but it’s still a drop in the bucket. It’s also true that readers have never had access to so much [quality news][296] and journalism for free at any point in history. That applies to national and international news, but the internet hasn’t provided an alternative to local news. The struggles of local outlets are a common theme across the developed world. Large communities, minorities, the marginalized, and the afflicted have no voice, and that’s a serious issue. Rising media concentration in both developed and developing countries is another serious concern. This has serious implications for media plurality. Given the woes of news publishers, media scholars like Victor Pickard have been arguing that news is a “[public good,][298]” like schools and roads. Victor Pickard, in particular, has been arguing that, left to its whims, a free market system can never provide the news required for a well-functioning democracy. He calls it a “[market failure][299]”:

But this coming year, as advertising-dependent journalism continues its slow death, as vulture capitalists continue to pick over the bones, as news rooms continue to hollow-out, we will come to see systemic market failure for what it is. We will acknowledge that no entrepreneurial solution lies just around the bend. We will give up the ghost of discovering a magical technological fix or a market panacea. Instead, we will begin to look more aggressively for non-market-based alternatives.

Any mention of state funding immediately leads to red visions of communism and state-controlled media, especially in a country like America, which celebrates the virtues of free markets and is allergic to big government.

> Another favorite argument Pickard takes on suggests that the problem would be solved if only newsrooms had adapted faster or were more open to innovations that would monetize their content. This idea, Pickard contends, misses the fact that the crisis is systemic: a new business model isn’t out there waiting to be discovered, because it’s all of capitalism that’s the problem. Those who take this technocratic line—as if all news organizations need is a visit from McKinsey consultants—see journalism as just another product and portray its collapse as beyond our control. The effect is to ignore the market fundamentalism that caused the problem in the first place. Pickard contends instead that the problem with the business model for news in this country is that we haven’t fully embraced the fact that news is a public good, and thus, like other public goods—schools, for instance—cannot be adequately provided by the market.

Magda Konieczna Yet, from its earliest days, the American government has played a major role in the development of the press. It has had [postal subsidies][300] since 1792, support for [public broadcasts and radio][301], [free licenses, and tax breaks][302]. Many [European countries][303] have long had public broadcasters, yet they have thriving democracies and press. In fact, European countries have the highest support for public media on a per capita basis in the world.![](/blog-images/untitled-76-650e9477c83c9.webp) ![](/blog-images/untitled-77-650e947829946.webp) Even emerging [economies][305] like India and Brazil have public broadcasters with varying degrees of success. But that doesn't mean public funding of news is without its challenges, chief among them being how to distribute money. This is one reason why governments around the world have resorted to a link tax on big tech companies. Taxing tech companies is easier and helps politicians avoid distributional issues and recriminations. While authoritarian assault on institutions is always a worry, public funding is also a design problem. As long as public broadcasters, publishers, and funding organizations do a good job of cultivating trust and demonstrating their value in people’s lives, they have good odds of surviving the wrath of those in power. There are many success stories in Europe, with [the BBC][306] being the most popular. Advocates of public funding have proposed [various mechanisms,][307] such as: 1. Tax credits for news subscriptions 2. State or locally-funded news vouchers that can be exchanged for news subscriptions 3. Community-owned and operated news cooperative 4. Direct funding of public news But there’s little to no appetite for this in America and other emerging markets. That leaves smaller for-profit and nonprofit news organizations with limited options. **Philanthropic funding** While more wealthy individuals, foundations, and nonprofits are [funding][308] journalism than ever, it’s still not enough. There are also issues of editorial independence with such funding mechanisms, as was the case with the ad-funded model. **Billions** More billionaires like Jeff Bezos (_The Washington Post_)_,_ Marc Benioff _(Time),_ Laurene Powell Jobs _(The Atlantic),_ John Henry _(The Boston Globe), a_nd Chatchaval Jiaravanon _(Fortune)_ own news outlets than ever. The issue is the interest of billionaires in media is cyclical. They think they can use the business acumen from other industries to save media companies but get punched in the face by the brutal economics of the media business. History is [littered with examples][309] of quick flings and messy breakups of media companies by billionaires, from _The New Republic_ to the Gothamist. We may soon have to add names to that list, given that _The Washington Post_ is set to lose about [$100 million][245] in 2023. Is there a limit to Jeff Bezos’s patience? The same is the case with _[The Los Angeles Times,][310]_ owned by billionaire Patrick Soon-Shiong. **Handouts from big tech** While publishers rail against Facebook and Google, the irony is that they are among the largest funders of news. [Google][311] and [Facebook][312] have [committed][313] well over a billion dollars to support news organizations across the world. In the absence of support from the government, they’ve become key supporters of news organizations. You and I can argue their intent: whether they are doing this from the goodness of their hearts, if it’s PR, lobbying, or moves to head of government interventions.

> Google and Facebook have been very effective in achieving two goals in the United States. One of these goals is that they have been the most generous and consistent funders of local newsrooms over the past five years.

Should we leave it to the platforms, etc.? I have always been an advocate of formalizing these arrangements under legislation, but I also recognize that I am talking about America here, and that there are other parts of the world where, without the support of non-governmental actors, journalism would be in a much more dire position. So, I guess what I would wish from the platforms is better regulation in countries where the regulation will actually help independent press. In countries where it won't help independent press, if the platforms are really earnest in their endeavors, they now need to align their practices on the ground. — Emily Bell

What percentage of the committed amount is spent is unknown. Funding arrangements between Google, Facebook, and news organizations are shrouded in [secrecy][312]. The effectiveness of these grants is also up for debate, and the [available evidence][314] shows that the results are mixed at best. But the problem with relying on handouts from big tech companies is that they are capricious. This year, Facebook ended [news payments][315] in several European countries. There’s no perfect business model; there are less terrible and more horrible models. A big challenge for publishers is that most people don’t care about news. This graphic is from the Reuters [2021 Digital News Report][316]. When asked how concerned people are with the financial state of news organizations, most people were either oblivious, ill-informed, or didn’t seem to care.![](/blog-images/untitled-78-650e94792d85d.webp) If the apathy toward news wasn’t scary enough, more people are avoiding news than ever. Political polarization seems to be the culprit, but I suspect the issue is more complex. Regardless of the reason, this isn't good for publishers. This is also a self-inflicted wound. The moment [news became entertainment][317], trust in news became collateral damage. So where does that leave us? A lot of imperfect solutions are much better than an ideal solution that will never be a reality. People like me crying over the sordid state of news publishers must make peace with this fact and try to fix one small thing at a time. History has never been kind to revolutionaries. If there’s a revolution that changes attitudes toward news among policymakers and consumers, that’s a bonus, but this scenario is a pipe dream at best. ### Peeping into the future {#future.wp-block-heading} Let me be clear: I have no idea what the future holds, but you can make reasonable guesses. **The end of mass delusion** For a brief moment in the 2010s, there was the belief that if you built enough scale, you could aggregate that attention and sell it to advertisers. This idea underpinned BuzzFeed, Vice, and pretty much all the digital native upstarts. That’s over. The problem was that these digital publishers never owned the audience but were rather renting them. They were at the mercy of the platforms and had to dance like monkeys to their tunes.

“Every publisher with that model is facing a potential problem, especially if their journalistic focus is too random that they can’t secure direct advertising deals. It’s not that advertising is failing as such. It’s the model of what we call ‘low-intent micro-moment’ traffic from social platforms monetised by random ads,” says Baekdal, who defines low-intent moments as when readers consume ‘snackable’ or entertainment content they’re unlikely to pay for. — Thomas Baekdal, media analyst.

Building an advertising-funded, scale-oriented publishing operation without social traffic is almost impossible.

Actually, I think you do see certain general journalism outlets being more sustainable now through reader revenues, and I think that that’s definitely a model for some of them. We don’t know much about payment mechanisms yet, how they will develop, and what people will pay for. So I don’t think that there is a viable advertising-supported model for free journalism — there just isn’t. It’s not going to happen. — Emily Bell

The news publisher of the future will be small and focused. Here are a few examples: 1. James Harding, a former editor of The Times, founded the UK-based slow news startup Tortoise. Instead of breaking news, Tortoise focuses on slow and deep reporting on important issues. It started with long-form articles and then pivoted to audio. The audio operation is profitable but the overall business is yet to break even. 2. Puck is a subscription-based newsletter that covers media, Hollywood, and Silicon Valley. Unlike regular business models, it puts the writers at the center, like Substack, but with the institutional resources of a legacy media company like the NYT. Puck writers aren’t just salaried; they earn incentives based on subscribers and also get equity in the company. 3. Zetland is another slow-news startup based in Denmark. As it was running out of money, it appealed to its readers to become members and is now profitable. 4. Rafat Ali founded the travel-focused publication Skift. It tried to raise VC money but was unable to match their voracious appetite for scale. It decided to stay small, focus, and expand by going deep instead of wide. It’s profitable and doing well today. 5. Mediapart is a French subscription-oriented publication that only does deep investigations. It has been profitable since 2011, with over 200,000 paying subscribers.

“Unless you’re the New York Times, you are not going to succeed if you don’t have a clearly defined understanding of who your audience is. Niche media is picking a lane and knowing exactly who is the consumer of that content.”

Jacob Donnelly, publisher of Morning Brew **Direct relationships** The story of the 2010s is all about the whirlwind romance and messy breakup between news publishers and social media platforms. Since the birth of the internet, there have been countless examples of the perils of relying on gatekeepers. If publishers knew history and had some common sense, they would have realized that relying on other platforms for all their traffic is a bad idea. But they didn’t. From 2010 to 2016, they were high on social traffic—it was one helluva drug. Once social media platforms became raging dumpster fires after Trump, and they changed their minds about the value of news on their platforms, publishers were caught off guard. The visitors from social referrals were just that—visitors. They visited and then left. None of the digital-first publishers bothered to build direct relationships with their visitors. By the time they realized that, like Quartz, it was already too late, The digital media company of the future can only survive if it can convince readers that it matters. Publishers can only survive if they become part of readers' daily routines. Building businesses with high dependence on external referral traffic sources is a recipe for disaster. As if the example of the last decade weren’t enough, Twitter (X) seems to be throttling traffic to [outbound links][318]. This is after it stopped Substack from embedding tweets and showing Substack links in Twitter search results. LinkedIn is following a similar strategy of [reducing engagement][319] for posts with links. TikTok seems to be the darling of the moment among publishers, but it's bound to disappoint—they always will. Building businesses around distributed models is like jumping from one burning building to another; you’ll be burned at some point. Referral traffic matters, but the priority has to be to own the distribution through newsletters, communities, chat apps, applications, events, etc.

What is clear, though, is that the only way to build a thriving business in a space dominated by an Aggregator is to go around them, not to work with them. In the case of publishers, that means subscriptions, or finding ways to monetize, like the Ringer, beyond text. For web properties it means building destination sites that are not completely reliant on Google. For manufacturers it means building relationships with retailers other than Amazon and building brands that compel customers to go elsewhere. And for digital content providers…well, this is why I view Apple’s policies as the most egregious of all.

Ben Thompson/Stratechery

> I’ve lived through Yahoo going away; I’ve lived through Facebook going away; I’ve lived through a very strange moment of Snapchat going away. I feel like we would be making a mistake if we didn’t envision what it would look like if Google went away. I don’t think it’s going away tomorrow, but I do worry that every media executive that I’ve ever spoken to is deeply aware of how much Google drives the top of the funnel, how much the entire architecture of the internet is organized around Google’s wants and needs, and how little self-awareness there is about this being critical dependency instead of a benign relationship.

Nilay Patel, editor-in-chief of the Verge

> In hindsight, the twenty-tens saw the emergence, growth, dominance, and incipient decay of the largest social networks. All of us users have had the opportunity to learn the same lessons that Peretti did: we can’t rely on large digital platforms that are motivated by profit above all, and there is no guarantee they will protect or support us or work to deliver the best experiences possible. Instead, they will continue to encourage us to churn out content for free; they will work ruthlessly to capture our attention and then commodify it through every possible avenue. Those huge, public networks are growing riskier, messier, and less enticing by the day; the rocket that drove their explosive growth is faltering.

Kyle Chayka/The New Yorker **All** **advertising isn’t the same, and not all of it is bad** A big problem in publishing is that people often talk as if there’s one type of media company or funding model—there are no absolutes. A big mistake publishers made in response to the arrival of the internet was that they relied on the same print frame of thinking. The assumption was that advertisers would pay the same dollar for a web banner as they did for a print ad; that was a fatal miscalculation. In response, they stuffed webpages with low-quality ads, popups, banners, autoplay videos, and other garbage, destroying their brands and alienating readers in the process.![](/blog-images/untitled-79-650e9479a0e1a.webp) When this didn’t work, there was a shift to programmatic advertising, but it was rife with fraud. Everybody went along as if everything was okay, and publishers lost out once again.

They’ll say 50 percent of our marketing isn’t working anyway, therefore we’re used to that and still get good performance. If it works and looks like it’s performing everyone pats themselves on the back. The funniest conversation I’ve ever had with an agency was when I told them a campaign they had run was 90 percent fraudulent, and their reply was: ‘Oh, I know, but it really performed well. The click-through rates were phenomenal.’ I re-emphasized that those click-throughs were fraudulent; the ads weren’t seen by humans, and their response was ‘The client is happy. We’re renewing the contract.’

Confessions of an ad tech veteran on fraud But there’s still a place for advertising done well. For all the talk about the _NYT's_ shift from print to digital, it still generated [$73.8 million][320] in digital advertising revenues in Q2 2023. This was [possible in part][321] due to its focus on creating first-party data and direct advertising sales. The same is the case with Puck, the new upstart newsletter-focused publication. Despite having subscriptions from day one, advertising makes up a sizable chunk of [Puck’s][322] revenues. Even [The Rebooting][323], a Substack newsletter by longtime media observer Brian Morrissey, is ad-supported because of its focused, high-intent, and niche audience. Packy McCormick’s popular [Not Boring][324] follows the same approach. It works because such blogs and newsletters have a high-intent audience, which is valuable for advertisers. If done well, advertising can still be a meaningful part of a larger business model. **Age of individuals?** One of the defining trends of the last five years has been the rise of the individual. The popularity of Substack and the boom and bust of the so-called "creator economy" were signs. With Substack, you saw several talented writers and journalists like Casey Newton, Matt Yglesias, Matt Taibbi, and Andrew Sullivan leave large publishers to strike out on their own, and they are doing well. Of course, it’s easy to start from scratch when you have built a brand elsewhere. While it’s still an 80/20 or 90/10 distribution, other talented writers like Packy McCormick, Byrne Hobart, Simon Owens, and Mark Rubenstein, among others, have built decent subscription bases. Jarrod Dicker, a media executive at The Chernin Group, put it best when he compared a media business to a record label—it’s all about the talent baby:

> Media companies have always been talent companies but their business models don’t necessarily reflect that. That’s because while talent was a driving force behind their business, the financial focus was tied closer to content ownership and distribution; two things media companies once had complete control over.

The future media business will be inclusive of its foundation of advertising, subscriptions, events & brand reputation but will extend to newfound territory that fortunately is right in its wheelhouse: Talent Management (Artists and Repertoire A&R). At the peak of the Substack mania around 2020–2021, there were endless think pieces about how all the [talented writers][325] would flee legacy organizations. That always sounded far-fetched to me. Being a solo creator means having to do the grunt work of everything from copyediting and accounting to filing your taxes. You also lose the institutional perks of legal support and insurance, among other benefits. It’s for some people, but not for everyone.

What Substack has done is a great example of a media business in a box. You and I are both using slightly different models than a lot of others, but I think what Substack has enabled is the ability for people to set up a media business in just 10 minutes. You can hook up a Stripe account and have a media business with all the necessary infrastructure and minimal costs. When you can lower your costs, you have a lot of upside. To some degree, it's hard because you have to do everything, and I don't think it's for everyone. Many people don't have the privilege to go off on their own and make it work, but for those who have some traction, reputation, and particularly expertise in an area, it's very attractive. —

Brian Morrissey speaking to Alex Kantrowitz of the Big Technology newsletter. Talent will continue to be unbundled from large publishers. I don’t think it’s going to be a deluge, but writers will continue to leave to start on their own. While legacy publishers hate for their brands to be outshined by large personalities, it’s inevitable at some level. Some ambitions aren’t compatible with a regular paycheck, and that’s always been the case. What’s different this time is that there’s an entire ecosystem of tools and platforms, from Substack to that WEB3 stuff (don’t roll your eyes), that enable people to go solo with ease. Publishers can either sit back and watch this happen or do something. _[The Atlantic][326]_ hired several writers in 2021 under a model that offered the best of being independent while having institutional support. Puck is the latest example of this transformative shift away from [institutions to individuals][327]. **Pivot to quality** Brian Morrissey [summed][328] up the last decade well: "They were not writing for people; they were writing for algorithms." This stupidity is over. It’s kinda shocking that people needed a decade to realize this, but publishers have learned that optimizing for the algorithms is a path to ruin. The era of _hacks_ is over. The publisher of the future will focus on quality, delivering value, and building lasting relationships. I don’t agree with the truism that _people don’t pay_ _for stuff._ People will pay if they see value, as the examples I shared above have illustrated, but the proposition has to be damn good. It will be hard, but the media has always been hard. Publishers know that social distribution matters, but they have they can't rely only on that. Social distribution is the icing on the cake, not the cake itself. It has a role to play in helping publishers reach [new audiences][329]. But it can never be the primary distribution and monetization channel. If you play in other people’s gardens, you play by their rules.

> I think digital publishing, when it first started, the main issue was the artificial constraint on the ability to publish. In many cases, you needed a printing press. Now, the internet has changed that and it has led to all kinds of new publications. Anyone can create content and there are no gatekeepers. In some ways, this happened in the early internet. However, the problem was that it was impossible to find and it was impossible to make money from. So, algorithms became necessary. The original algorithm was the search algorithm. SEO popped up as a way to solve the problem of discoverability. What happened was that everyone started writing for algorithms instead of people.

Brian Morrissey speaking to Alex Kantrowitz of the Big Technology newsletter. Other plotlines that are worth keeping an eye on: **Ey AI** Artificial intelligence will allow users to personalize the content they consume. So, [what does this mean][330] for the media brand when chat becomes the primary interface? Will AI replace journalists or augment them? AI won’t replace human journalists anytime soon, but it's already helping them be [more productive][331]. It opens up tons of possibilities to help publishers do more and tell [better stories][332]. The other AI plotline to watch is how publishers react. Some publishers, like the AP, have cut licensing deals with OpenAI, while others are preparing to [sue them][333]. **Web27** While Web3—whatever that was—is a smoldering wreck, I don’t think it’s done with media yet. Publishers will have another tryst with Web3 or crypto technologies once again. What’s different this time is the fact that crypto is [more legal][334] than it has ever been. Europe has taken the lead by [passing][335] the Markets in Crypto-Assets Regulation (MiCA), a comprehensive piece of legislation to regulate crypto. The US Securities and Exchange Commission (SEC) has taken a regulation by enforcement approach. Crypto is neither legal nor illegal in the US, but as the ambiguity persists, crypto has entered mainstream both on the retail and institutional side. The recent launch of a [stablecoin by PayPal][336] is an interesting development. During the last crypto bull run, publishers like _Time, The Economist_, AP, and CNN [dabbled with NFTs][337] and made _some_ money. They had to abandon the projects as the crypto bubble popped. Crypto is more mainstream than it has ever been. Whenever the next bull run comes, it will open up opportunities for publishers to make a buck. The [Civil Project][338] launched in 2016 that tried to fund news companies with token sales was an early sign. I don’t know how it’ll end, but it’s something to watch. **Rebundling** Publishing always swings from unbundling to rebundling. Over the last two decades, we’ve seen the unbundling of everything from content to talent, but the pendulum always swings the other way. To some extent, you can already see this with the likes of _[NYT][339]_ bundling news, games, cooking, commerce, and sports. [Every][340] that bills itself as a "writers collective" is another example of rebundling. Substack is an obvious candidate in my head. **Every company is a media company** Former A16Z partner [Benedict Evans][341] once said, "a16z is a media company that monetises through VC." The storied venture firm took that seriously and launched a publication called [Future][342] in 2021. The motivation was the increasingly _[negative and unfair][343]_ coverage that tech and Silicon Valley were getting. By the time Trump was elected, news publications had stopped writing glowing and optimistic puff pieces about tech companies and stopped treating them with kid gloves. The coverage became [critical][344]. The media had realized the power that tech companies wielded over society. Silicon Valley developed an adversarial relationship with the press in reaction to the critical coverage. Many of the _tech elites_ bypassed mainstream media publications and went direct on Twitter, YouTube, and podcasts. Marc Andreessen decided that the world needed a techno-optimist publication and launched Future, but it shut down in 2022. If you follow the media industry, the launch of Future was a big deal. It also portended an important shift: every company is now a media company. This trend has exploded in the last couple of years. You will see companies invest considerable resources to produce content and own their messaging. I am happy about this trend because we’ll see more idiotic puff pieces like the one Sequoia published on [Sam Bankman-Fried][345]. #NeverForget **Big is bad** Since the 1970s, deregulation has been the norm in much of the developed world and the US in particular. The result of this fetish for free market solutions is the [massive concentration][346] across vast swathes of developed economies. There’s a growing realization that concentration is not good, and the [sentiment][347] against "big" companies is turning. The [antitrust movement][348] that had all but died in the US is sputtering back to life. This comes at a time when governments are becoming comfortable with intervening to fix market failures. We saw this with the COVID-19 stimulus, measures to fix supply chain issues, the Inflation Reduction Act (IRA), the CHIPS and Science Act (CHIPS), and the European [antitrust][349] prosecutions. The sentiment against [bigness][350] is pronounced for tech companies. There are several [landmark antitrust cases][351] against big companies like Google, Facebook, and Amazon working their way through the courts. The outcome of these cases can have profound consequences for news publishers. ### **What's past is prologue** As American legacy media companies make their transition from print-oriented business models to digital, the media landscape resembles a wasteland. The depressing trends are the same across advanced economies like the United Kingdom, Canada, and Australia, but that’s where the resemblance ends. When I started writing this post, I assumed that news publishers were dying everywhere and that the entire world resembled a graveyard. It’s not. The [trends are different][352] in Europe, Asia, Latin America, and Africa. The Europeans have had a long tradition of generous support for public service broadcasters and news publishers. They also didn’t see the same level of corporatization as the US and Australia, so the European news publishers are in much better shape compared to the US. Asia, on the other hand, is probably ten years behind the United States. In India, for example, print isn’t declining at the same rate as in the US. It’s difficult to draw definite conclusions because the circulation data sucks.![](/blog-images/untitled-80-650e947c5e581.webp) ![](/blog-images/untitled-81-650e947e82b6c.webp) I wanted to write about the Indian news publishing industry as well, but I figured it was worth looking at the largest media market with the most advanced trends first. While it’s easy and tempting to extrapolate the US experience to the rest of the world, the story may not play out the same way. Having said that, news publishers, even in emerging markets, are facing similar challenges with the transition to digital, changing attitudes toward print, the rise of news consumption on social platforms, and the coming age of artificial intelligence. Despite the dreariness, there are signs of hope. Seasoned and young crazy people are building wonderful publications like [Gaon Connection][355], [Khabar Lahariya][356], [Newslaundry][357], the [reporters’ collective][358], [The News Minute][359], [The Ken][360], [The Morning Context][361], [The Arc][362], [The Print][363], and [The Wire][364] with a variety of models. I don’t know how many will survive, but as legacy media outlets continue to debase themselves, I'm hopeful these new publications will thrive. It’s hope that kills, but that’s life. ### Why write this post? {#why.wp-block-heading} If I can confidently say I’m a little less dumb in life, it's because I grew up with newspapers. As I grow older, I have started to appreciate the value of things a lot of people, including me, take for granted. Things like good journalism, good books, public libraries, sharing knowledge without agenda, and the value of archives, among other things. As I mentioned at the beginning of the post, I had dreams of being a journalist. A few right turns instead of left, and I can imagine an alternate reality where I would've been a journalist. One thing that worries me the most is the slow and steady degradation of our information ecosystem. Nathan Robinson, the editor-in-chief of _Current Affairs_ magazine, summed it up in his post titled "[The truth is paywalled but the lies are free][365]." Paywalls are the most obvious symptom of this degradation. The number of publications implementing paywalls is increasing across the world. If the current trends in paywalls prevail, we'll have an information apartheid. I'm not saying that news should be free, but the fact remains that most people can't afford to pay for it. There have to be free alternatives, and this is where public funding can play a role. Sharp-eyed media observers like [Simon Owens][366] argue that there are still countless sources of free and quality news.

Is it true that many of the premium publishers now feature some sort of paywall? Yes, but no matter your interest, there are a huge number of high-quality YouTube channels, podcasts, news sites, newsletters, and social media accounts dedicated to that niche. Some of the best economic analysis in the world is being disseminated on places like Substack and Twitter, and longform podcasts allow experts to go extremely deep on just about every topic. A half hour before I sat down to write this article, I watched a 20-minute video explaining how global warming has placed Greenland into the center of a geopolitical quagmire due to its proximity to melting oceans. It was free to view and just as good as any reporting you’ll find at the Washington Post.

Such arguments miss the fact that journalism is still the dominant taproot of knowledge, and it’s shriveling. Good journalism costs a lot of money, and news publishers have to recover the cost. There’s nothing wrong with that, but it’s still a problem, and the markets aren’t going to provide a solution. Then there's the question of scientific and academic research. A small number of companies control the output and have turned subscriptions into [extortion rackets][367]. The victory of book publishers over the Internet Archive's controlled digital lending was another [punch in the gut][368] for people who advocate for knowledge to be accessible. I’m not even getting into the issue of fake news and disinformation. This fraying of our information and knowledge systems has been bothering me for a long time. At the heart of all existential issues that plague humanity, from climate change to pandemics, is an information component. Good communication and information can make a difference. One of my favorite examples comes from South Africa. Faced with a dire water shortage and the prospect of taps running dry in 2018, Cape Town implemented one of the most successful behavioral change campaigns, [using good communication][369] to _nudge_ people to use less water. A small number of gatekeepers choking off access to our collective knowledge is not good for society. A couple of months ago, I published a post titled "[A life well lived][370]." One aspect of a life well lived is living with purpose. If I look back ten years later, I'd ask myself if I did something about this problem. ### Parting thoughts In the past couple of years, terms and phrases like "[splinternet][371]" and "[twilight of the open web][372]" have become popular. As I was writing this post, I couldn't help but be amazed at the amount of free and open information. The fact that I could write about the history of American media despite having never been there or worked in that industry still blows my mind. We've all become jaded because of the internet, but the open web is a treasure. I don't know if the open web as we know it will die, shrivel, or splinter, but I hope it doesn't. If it does, humanity will be worse off for it.

That Substack thingy.

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Dear influencers, please stop hurting India

Mon, 26 Jun 2023 00:00:00 GMT

If you are working in financial services, you would have heard or thought about this: "India has 140 crore people, and even if 10–20% of the population starts investing…" If you look at the data, you'll quickly realize that your assumptions are from Mars and the reality is from Venus. There are just 3.37 crore unique mutual fund investors. If you add the unique demat account holders, the number goes up to 5-6 crore. That's it. That's the total population investing in the stock market. I'm excluding the indirect participation through EPFO, of course.![](/blog-images/Unique-MF-investors-by-PAN-In-crores-1.png) Most people on the outside looking in at the Indian financial markets think that the real problem to be solved is better platforms, fancy features, and better stock or mutual fund recommendations. Sure, "AI-powered stonk tips powered by machine learning on zero trust blockchains" help, but that's not the real problem. So, what does it take to expand the markets? As that old saying goes, "It takes a village to raise a child." It takes the concerted action of financial intermediaries, regulators, the government, and individuals to expand the markets. Speaking about individuals, one interesting development in the last five or so years in the Indian markets has been the rise of financial influencers. These are individuals with large followings on platforms like YouTube, Instagram, Twitter, etc. Influencers exploded in popularity after the COVID-19 pandemic, when the stock market became a global pastime and millions of new investors entered the markets. Credit where credit is due, through their videos, reels, and paid courses, these finfluencers have attracted lakhs of new investors (I know you're thinking gamblers) into the markets. I know that's a blasphemous thing to say, and before you bite my head off, hold on! An influencer is anyone who can influence the actions of others. It goes without saying that there are good influencers and other influencers who should be given free tickets to the first Elon Musk rocket to Mars. So, what’s the issue? The success of some of these influencers has attracted hundreds and thousands of other wannabe influencers. If you throw a rock anywhere in India, you'll hit an influencer. I've followed most of these finfluencers since they were unknown. You and I can quibble about it, but in the initial days, most of them used to say generic and harmless things. Then the pandemic hit, and things went south. For every sensible influencer, there were ten new loudmouths. Times were good in the markets, given the massive influx of new users wanting to prove that they were better than that old guy, Warren Buffett. The influencers were making money hand over fist from sponsorships and courses. Then inflation rose, interest rates spiked, the stock market took a tumble, VC funding dried up, and sponsorships vanished. These influencers were still making money, but not as much as earlier. So now, stock market and personal finance courses have become the new golden geese. But courses still don't solve the problem. Since 2022, the pace of new user growth in the markets has dramatically slowed. So how do you attract new users to your course? Escalate! In the last couple of years, these fininfluencers went from saying harmless things to spreading dangerous nonsense. Look, I have no problem with people making a living, but there are some ethical and moral lines. I wrote about these influencers in July 2022, when several of them recommended crypto platforms that went bust. Since then, things have gotten worse. All it took was Nifty falling by 15% for these people to go from suggesting index funds to selling endowment policies to ~~ruining~~ teaching kids about investing. The nonsensical things these people are saying to attract new people to their courses and generate views on their videos are funny but alarming. A few gems that recently fell from the mouths of these geniuses: 1. The stock market is a Ponzi scheme, and the only way to retire successfully is to participate in the Ponzi scheme. 2. If you don't time your SIPs and keep getting in and getting out, you will lose money. 3. My personal favorite: Instead of repaying your credit card immediately, you can invest that money for 45 days, mint free money, and repay on the due date and not before. 4. Are you renting a house? If you had invested your rent money in Nifty and slept on your neighbor's balcony, assuming even a 10% rate of return for 25 years, you would've made crores. One can't help but do the same calculation with spending money on soaps, agarbattis, and undergarments. 5. Another genius calculated the ROI on the Taj Mahal and suggested that the gormint stop constructing useless buildings. 6. Another genius one-upped this by doing the same calculation for a famous statue. 7. Another genius escalated this further by calculating the ROI of the Parliament building. He's right; Parliament vs. Oyo Rooms? It's not even a competition. 8. My other favorite is probably a demonstration of the greatest increase in human IQ ever. An influencer went from making funny videos to offering divorce advice. And stupid people say you have to study law to offer legal advice. Idiots. These financial influencers have become a real nuisance. It's a wonderful model. Today, if you are a research analyst (RA) or an investment advisor (RIA), you must abide by a litany of rules before opening your mouth. Hell, RIAs have to pay to get their advertisements approved and cannot publish them before that. If you don't want to do all that, start a YouTube channel and say whatever you want. In a sign of the times, these influencers were featured on the front page of Economic Times and other regional dailies with government logos, no less. A cursory look is enough to realize that what many influencers are doing is the exact same thing as registered RAs and RIAs. In the guise of “educational videos,” “mentorships,” “and seminars,” these people are offering advice and even committing downright fraud. Again, I am not painting everyone with the same brush. Good influencers are the exception, not the rule. You can try to educate people, warn them, and put in deterrents, but greed is one helluva drug. The person saying, "Invest in mutual funds for the long term and focus on your goals," will always look like an idiot compared to a loudmouth selling a course where you can learn how to time Nifty to make double the returns with half the volatility. Despite all the information and awareness, people keep getting misled by these pied pipers and losing their hard-earned money.![](/blog-images/Pied-piper-stealing-money-from-millions-of-people-97637-1-1024x745-1.webp) I started the post by saying that the real problem to solve in the markets is not "AI-powered quantum computing stonk tips," but finding ways to expand the markets. In theory, influencers are a part of the solution, but in reality, they've become the problem. I'm shocked that they don't have the common sense to realize that they have to be responsible, considering their large following. In an ideal world, investors should learn, do their due diligence, and then invest their hard-earned money or find an advisor. But we don't live in an ideal world. When these influencers know that people are investing their hard-earned money based on whatever they say, I don't understand how they can continue to be stupid and escalate their stupidity with each passing day. Being an influencer is just like running a business. Why will anyone interact with a business if it's untrustworthy? Just like trading and investing, making money is hard. Sometimes, you might get lucky, but the odds are that you will lose it all. It's the same with being an influencer. If you continue saying ridiculous and dangerous things, in the short run, you'll get views, likes, followers, more sponsorships, and make a lot of money, but no one will trust you in the long run. Be a part of the solution; don't add to the problem. Be a part of the solution; don’t add to the problem. ####

Death to the banks; central bank accounts for all

Sat, 27 May 2023 00:00:00 GMT

Throughout the history of modern banking, two narratives have been constant: "Banks are dead" and "Why do we need banks?" The "banks are dead" narrative is a favorite of the techno-optimist and fintech crowds. Whenever there are new technologies, regulatory changes, or market disruptions, two things happen: the likes of McKinsey and Deloitte publish "the future of banking" reports, and these people share them like they are gospel. In my head, these reports sound like: "Humans have domesticated pigeons; banks are dead because we can send money for free using pigeons!" You can also hear this narrative whenever fintech bois open their mouths at some annoying fintech panel or event. They can't resist a chance to portray themselves as the cool kids that can do backflips while talking about banks as if they are the equivalent of old people with arthritis who constantly need protection from elder abuse by governments. The "why do we need banks" narrative becomes popular during banking and financial crises. If banks keep fucking up and have to be bailed out by taxpayers, why put up with the charade of private banks instead of regulating them as public utilities or cutting them to size? Neither of these two narratives has _[fully][1]_ come to pass. Despite all the threats of fintechs and financial disintermediation, banks are alive, well...ish, and bigger than ever. ![](/blog-images/NBFI-as-a-share-of-total-global-financial-assets-1.png) But. Yes, there's always a but. Banks aren't dying, but thanks to post-2008 regulations, market failures, and other structural reasons, they have retreated from many business lines. At the same time, non-bank financial intermediaries, or shadow banking entities, have grown. You can see this even in India, where NBFCs have grown in size and compete with banks for deposits and credit. For the most part, the fintech promise is a bit like Leonardo DiCaprio trying to win an Oscar. Everybody knew he was talented, yet it took 20+ years, freezing his balls off, and eating raw bison liver in _The Revenant_ to win an Oscar. Fintechs haven't murdered banks or brought about a glorious financial inclusion revolution. By and large, they've been co-opted by banks or are competing for the same set of users. Non-bank entities today perform many of the same activities as banks, but there's more to that story. There isn't a clear separation between banks and non-bank entities because banks have direct and indirect linkages to non-bank entities. Banks tend to have other non-bank business lines like asset management, broking, and market making. Jumping to the conclusion that non-banks or shadow banking entities are eating the lunch of banks is tricky. I'm not saying all fintechs are failures. Success stories like Revolut, Starling Bank, Nubank, [M-Pesa][2], Stripe, Wise, Instamojo, RocketMortage, Altruist, etc., come to mind. It may be that fintechs are expanding markets rather than stealing market share from incumbents in the developed markets, but the story seems different in emerging economies[ [1][3], [2][4], [3][5]]. So far, banks seem to have the [upper hand][2], but despite the recent bruising, new-age fintechs have proven to be a [scrappy bunch.][6] ![](/blog-images/OFIs-share-of-credit-assets-1.png) With the mini-banking crisis in the US, the "why do we need banks?" narrative is again in vogue. The question isn't without merit. These excerpts from insightful posts by [Martin Wolf][7] and [Gillian Tett][8] get to the heart of the issues with modern banking:

So how does this industry create mayhem on this scale? And why is it allowed to do so? It does so — and is allowed to do so — because, as the Bank of England has explained, banks create money, which is an essential public good, as a byproduct of their lending, which is an important economic good. We want banks to have risky assets and safe liabilities. Yet the liabilities of a highly leveraged, risk-taking institution cannot be safe and will unavoidably seem least safe during a crisis. Yet it is then that people want their money — their reserve of purchasing power in a frightening world — to be at its safest.

Worse, it is often easiest for banks to justify lending more just when they should lend less, because lending creates credit booms and asset-price bubbles, notably in property. The willingness of the public to treat bank liabilities as stores of safe purchasing power provides stable funding, until panic sets in. To reduce the likelihood of panic, governments insure bank deposits, liquidity and even solvency. That makes crises rarer, but bigger. The authorities are simultaneously supporting banks and reining in the excesses created by support. This is a system designed to fail.

Martin Wolf

> The SVB drama suggests that governments will indeed do this — if needed. But that raises two more big questions: if the only way to quell a Twitter panic is for governments to backstop depositors, does that mean banks must become utilities? And, most crucially, will governments also backstop non-banks such as money market funds if they fall prey to a Twitter run?

Gillian Tett So, if you extend this line of thought, what will banks look like if you cut them to size? In the past few years, banking and legal scholars in the US have outlined several provocative proposals to make banking accessible, especially given the inability of the US government to distribute stimulus despite 90%+ of Americans having a bank account. These proposals share broad similarities but fall on a wide spectrum of radicalness. #### The People's Ledger: How to Democratize Money and Finance the Economy Saule Omaroava, a professor of law at Cornell University, published the most far-reaching and radical proposal in a paper titled The People's Ledger: How to Democratize Money and Finance the Economy. The paper starts with an explanation of how the banking system works, which I think is informative and important to understand the scope of the proposal. We've all heard and read these dominant views of how banks work: 1. Banks intermediate the flow of funds from savers to borrowers. 2. Banks take deposits from savers and lend a portion of them to borrowers. This view of how banks work and how they create money is wrong. Professor Omarova describes banks as franchises that monetize the sovereign public’s full faith and credit.

The current U.S. financial system is in essence a public-private franchise arrangement for the distribution of a unique collective good: the monetized full faith and credit of the United States. At its core, it is a system for supplying and dispensing a uniform national currency and its credit equivalent, dollar-denominated debt. The sovereign public, acting through its central bank and fiscal authorities, is the ultimate creator, or issuer, of this critical collective good. Privately owned banks and other financial institutions, in turn, distribute sovereign credit-money throughout the economy, effectively collecting “privatized seigniorage” for their services.

Thus, contrary to the widespread misconception, banks do not simply “intermediate” between private savers and borrowers by lending to the latter what the former have previously deposited. In practice, banks create deposits when they extend loans to creditworthy customers, as simply the liability-side entry offsetting the newly created asset on the bank’s balance sheet. The real key to the spendability of these newly loaned funds as deposit-account “bank money” is, therefore, not their fictitious derivation from some privately pre-accumulated capital, but an act of the sovereign: the Fed accommodation and monetization of bank-created private liabilities.

This definition of banking comes from another paper she wrote with Robert Hockett titled Fintech Franchise and it's a must-read.

With that background, in the paper, she outlines a structure in which the Federal Reserve's balance sheet becomes the central platform for allocating money and credit. There's a degree of separation between ordinary people and the central banks, with commercial banks in the middle today. She proposes doing away with this separation by allowing people and businesses to open bank accounts with the Federal Reserve directly. This naturally leads to comparisons with central bank digital currency (CBDC), and she has an insightful perspective on the ineffectiveness of CBDCs. She contrasts the _technocratic_ CBDC design proposals aimed at minimizing disruptions to the banking system with her "explicitly political—and consciously progressive take" on CBDCs.

To date, virtually all CBDC discussions proceed on an assumption that CBDC will be issued and administered alongside the existing forms of commercial bank money. Banks are generally presumed to continue offering deposits, combined with other financial services, even when CBDC goes live.

Much of this “engineering” aims to make CBDC a less attractive alternative to private deposits, in order to avoid so-called “disintermediation” and lower the likelihood of more frequent and violent bank depositor runs—an inherently difficult balancing act. These attempts to minimize the inevitable structural disruption from introducing a universally available CBDC, in effect, significantly complicate the task of designing CBDC and slow down its implementation.

On the liability side, she proposes opening Fed accounts for all citizens and moving all bank deposits from banks to the Federal Reserve's balance sheet, rendering banks non-deposit-taking entities. Apart from "financial inclusion and democratizing access to financial services," this would disrupt the non-bank or shadow banking system, which is prone to runs and has been at the center of the 2020 COVID-induced financial shock and the 2008 crisis. As she mentions, after the 2008 crisis, whether it likes it or not, the Fed has been getting more involved in _credit allocation, _starting with its purchase of mortgage-backed securities in 2012, corporate bonds in 2020, and extending credit lines to municipalities in 2020. She proposes that the Fed should make its role in credit allocation explicit and go even deeper by restructuring the asset side of its balance sheet. If banks no longer have access to cheap deposits, they will need a cheap substitute. She proposes the creation of a new discount window (NDW) to remove the [stigma][9] associated with the existing discount window, which can be used to offer cheap loans against collateral. Explicit credit allocation would involve expanding the scope of asset purchases to cover debt issued by new investment authorities tasked with funding public infrastructure projects. To further control interest rates, the Fed could build a trading portfolio for open market operations (OMO) that mirrors that broad fixed-income market. It would replicate the portfolio every day like an index by buying and selling assets to tamp down the price and interest rate volatility. In doing so, the Fed can be far more effective and targeted in setting monetary policy than the existing system of working through banks. With interest-bearing Fed accounts for everyone, the Fed can manipulate the interest rates and the quantity of money in people's accounts through "helicopter drops" to set monetary policy. This begs the question, "What's the role of banks? As she outlines, the proposal does not change the role of banks. For banks, deposits are the cheapest and stickiest source of funding. With the migration of these deposits onto the Fed's balance sheet, banks will access cheap funding directly from the Fed through the new discount window instead of millions of depositors. This would remove the bank run problem and make the system safer. [Pushback][10] against the proposal. #### Digital Greenbacks Robert Hockett, another professor of law at Cornell University and a frequent collaborator of Saule Omarova, published a similar proposal [1, 2] to offer free basic banking to all Americans. The proposal has two versions: a wallet offered by the Treasury Department and the Federal Reserve. Professor Hockett published this proposal in the wake of the COVID-19 pandemic. Unlike the proposal by Saule Omarova, this is less radical in its original intent and seems to be motivated by the desire to ensure all citizens have access to free and fair basic banking services rather than upending the banking system, but the end result of the proposal is the same. Both proposals also share many of the same radical ideas. The US Treasury Department operates a platform called TreasuryDirect that allows US citizens to invest directly in Treasury bonds. On the platform, you can also hold cash in a zero-percent certificate of indebtedness. These are zero coupon instruments for parking cash to buy Treasury bonds later. Professor Hockett proposes turning TreasuryDirect into a wallet with peer-to-peer (P2P) payment capabilities. He also proposes conferring legal tender on zero-percent certificates of indebtedness, turning them into digital dollars, or "digital greenbacks." To address financial stability issues arising out of a deposit flight, he says that a cap on account balances could serve the purpose. In the Federal Reserve version of the proposal, he envisions the Fed offering a wallet with payment capabilities. The Fed wallet balances would become the direct liabilities of the Federal Reserve. This would also enable the Fed to implement monetary policy far more effectively by altering interest rates on balances in Fed Wallets, helicopter drops, and negative interest rates. This proposal and the one by Professor Omarova propose similar ideas to deal with the asset side issue of the Fed's balance sheet: discount window loans for banks to substitute deposit loss; expanding Fed asset purchases to infrastructure and social bonds. #### Central Banking for All Lev Menand, Morgan Ricks, and John Crawford, all law professors at Columbia Law School, Vanderbilt Law School, and UC Hastings, published a [similar proposal][11]. They propose that the Federal Reserve be authorized to open free, interest-bearing accounts (FedAccounts) for everyone, just like commercial banks are allowed to have accounts with it. As the authors envision, free Fed accounts would enhance financial inclusion since the poorest are excluded and exploited from the banking system.

Banks find it unprofitable to service low-balance accounts. Moreover, when banks do maintain such accounts, they often use questionable tactics to generate revenue, such as overdraft “protection” fees averaging thirty-five dollars per overdraft. These fees exploit behavioral biases (among other things, many people “who incur overdraft fees do not expect to overdraw their accounts”) and fall disproportionately on low-balance households. In 2013, one in ten Americans reported paying such fees. Estimates of annual overdraft fees vary, ranging from $14 billion to as much as $32 billion.

This Article does not fault for-profit institutions for pursuing profits (although abusively exploiting behavioral biases should be off limits). But this Article does question whether this resource—the mainstream, account-based money-and-payments system—should be left to “market” provisioning in the first place. Money is often described as a public good, and FedAccount would bring this conception to full realization by transforming the U.S. account-money system into public infrastructure akin to roads, sidewalks, public libraries, the judicial system, and law enforcement. These resources are usually funded in whole or in part out of general revenue.

This would also enhance financial stability by "crowding out" run-prone shadow monies and deposit substitutes, which originated in part due to deposit insurance limits. If large companies and institutions had access to non-defaultable central bank money that earns a competitive interest rate, they would have no reason to seek privately issued shadow monies like repo, money market funds, and other instruments.

Although deposit insurance basically ended runs on deposits, modern panics have involved runs on institutional deposit substitutes. The 2008 financial crisis featured a run on dollar-denominated cash equivalents such as asset-backed and financial commercial paper, repo, Eurodollars, auction-rate securities, prime brokerage free credit balances, and money market mutual fund shares. The Swedish and Japanese episodes just mentioned were similar. It is important to understand that, like deposits and redeemable bank notes, these other types of financial sector short-term debt are privately issued “money”: they satisfy money demand. Accounting standards classify them as cash equivalents, and central banks often include some of them in their broad measures of the money supply. Leading economists refer to these short-term debt instruments as “forms of money” or “private money.” A Fed governor recently acknowledged that their “private creation . . . is, at least to some degree, the creation of money.”

The authors note that the proposal would simplify banking regulations and shrink the size of the banking and financial system, which has become ["too big to supervise][12]." They also point out that the system would more than pay for itself from the seigniorage revenues from the Fed's asset portfolio. Just like the other two proposals, the authors propose that the Fed's discount window loans could replace the loss of deposit funding for banks. But unlike the other proposals, they stop short of proposing a radical overhaul of how the Fed manages its asset side to offset the expanding liabilities after the complete deposit migration from banks to the Fed's balance sheet. They propose "indefinite" discount window loans to deal with the shortage of safe treasuries and the public relations and political constraints of the Fed expanding asset purchases to corporate bonds and other instruments. Saule Omarova critiques this proposal on similar lines in her paper:

> Notably, Ricks et al. frame their proposal as a variation on the public banking idea, rather than a straightforward CBDC plan. Ultimately, however, these parallel conversations—one on CBDC and another one on FedAccounts—run into the same conceptual problem. In both cases, the crucial question is: What would, or should, happen on the asset side of the central bank balance sheet, in order to accommodate the proposed expansion of central bank liabilities?

The People's Ledger: How t s Ledger: How to Democr o Democratize Money and Finance the y and Finance the Economy — Saule T. Omarova. #### Into the future All these radical ideas evoke red visions of communism and socialism; as things stand, none are in the realm of possibility. Given that they threaten to upend the very structure of modern commercial banking, the incumbent banks will fight these proposals tooth and nail. We saw a live demonstration of this when Saule Omarova was nominated in 2021 by Joe Biden to head the Office of the Comptroller of the Currency (OCC), which regulates banks. She was labeled a communist and subjected to red-baiting. The banking lobby mounted a vicious campaign to sink her nomination. One useful heuristic to think about such radical proposals is the Overton window. Political analyst Joseph Overton created the concept to illustrate the range of possible political policy possibilities. Policymakers rarely pursue policies at the extremes or outside the window. In other words, our society is hardwired to be inert. The window shifts over time with changes in attitudes and beliefs.

> The Overton window is an approach to identifying the ideas that define the spectrum of acceptability of governmental policies. It says politicians can act only within the acceptable range. Shifting the Overton window involves proponents of policies outside the window persuading the public to expand the window. Proponents of current policies, or similar ones within the window, seek to convince people that policies outside it should be deemed unacceptable. According to Lehman, who coined the term, "The most common misconception is that lawmakers themselves are in the business of shifting the Overton window. That is absolutely false. Lawmakers are actually in the business of detecting where the window is, and then moving to be in accordance with it."According to Lehman, the concept is just a description of how ideas work, not advocacy of extreme policy proposals.

Wikipedia Central banks opening accounts for all is a fringe idea, but centrist progressives like Matt Yglesias have taken a liking to the idea. The debates and soul-searching over the need and role of banks are mostly limited to the US and, to a small extent, Europe. Contrary to popular perception, the US financial system, despite its purported sophistication, is stuck in the Stone Age. It's not only archaic but also exploitative. This excerpt from the paper by Ricks et al. (2020) is telling:

> Many Americans lack access to basic banking services. Whereas bank account penetration in other advanced economies like Canada, France, Germany, Japan, and the United Kingdom exceeds 97%, about “6.5 percent of U.S. households [are] ‘unbanked,’ meaning that no one in the household had a [bank] account.” Another 18.7% of U.S. households are “underbanked,” meaning that, despite having a bank account, they rely to some degree on expensive nonbank services—such as nonbank money orders, check cashing, and payday loans—for payments and other financial needs. Un- and underbanked individuals use a mishmash of products and services to make and receive payments. They cash checks at retail stores (such as grocery, drug, or convenience stores) and standalone check-cashing businesses. These providers typically charge 1.5% to 3.5% of face value.

The other laughable fact is that the US still doesn't have real-time payments. It's even more laughable when you consider that Japan introduced real-time payments in 1973. These debates are less relevant in India, considering that the RBI has never allowed a bank to fail. Thanks to real-time peer-to-peer payments (P2P) and Jan Dhan accounts, over 90% of Indians have access to free basic banking and payments. But the issue of [exploitative][13] hidden charges, misselling, and [rent-seeking][14] is [universal][15]. With time, banking systems grow in complexity, and so do the risks to financial stability. Instead of root-and-branch banking system reform, policymakers in advanced economies have resorted to piecemeal solutions and put band-aids on septic wounds. As we face more banking crises, which we inevitably will, the Overton window for such ideas should shift. Only time will tell if banks will be disintermediated by tech advancements (fintech) or if policymakers will take a hockey bat to the sclerotic knees of traditional banks. #### Parting thoughts Any talk of bank disintermediation is incomplete without a mention of central bank digital currencies (CBDCs). But the definition of CBD lies in the eye of the beholder. There are various proposed variants of CBDC and various definitions. As I've tried to understand what CBDCs are and why we need them, I've come out more confused than I was before. But I still think having a broad outline of what CBDCs are and what they purport to achieve is useful. These reports are good resources to start with: [Digital Dollars: Critical Design Choices and Effects of a Central Bank Digital Currency][16] [Central bank digital currencies: foundational principles and core features][17] [CBDCs: an opportunity for the monetary system][18] [Design Choices for Central Bank Digital Currency: Policy and Technical Considerations][19] I also publish these posts on that Substack thing

Read this on that Substack thing.

The title was inspired by this song I came across by accident. [1]: https://www.fsb.org/2022/12/global-monitoring-report-on-non-bank-financial-intermediation-2022/ [2]: https://blogs.lse.ac.uk/businessreview/2021/01/19/from-fintechs-to-banking-as-a-service-global-trends-banks-cannot-ignore/ [3]: https://www.fsb.org/work-of-the-fsb/financial-innovation-and-structural-change/fintech/ [4]: https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2020/06/29/The-Promise-of-Fintech-Financial-Inclusion-in-the-Post-COVID-19-Era-48623 [5]: https://www.imf.org/en/Topics/fintech [6]: https://www.linkedin.com/pulse/fintech-food-15-trillion-reasons-love-simon-taylor-/ [7]: https://www.ft.com/content/d27b000e-6810-11e8-8cf3-0c230fa67aec [8]: https://www.ft.com/content/a60e543d-c950-4ebb-8da9-d6b0b359ad7b [9]: https://bpi.com/discount-window-stigma-we-have-met-the-enemy-and-he-is-us/ [10]: https://twitter.com/1954swilliamson/status/1448654303875395600?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1448654303875395600%7Ctwgr%5E0c8d35195a7c2c2a04d2bf1d56ac26d46b01d483%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.bebhuvan.com%2Fwp-admin%2Fpost.php%3Fpost%3D791action%3Dedit [11]: https://scholarship.law.columbia.edu/faculty_scholarship/3118/ [12]: https://scholarship.law.cornell.edu/clr/vol103/iss6/8/ [13]: http://www.math.iitb.ac.in/~ashish/paper.htm [14]: https://www.theguardian.com/business/economics-blog/2013/sep/23/brain-drain-unproductive-financial-sector [15]: https://epod.cid.harvard.edu/publications/rent-seeking-and-corruption-financial-markets [16]: https://rooseveltinstitute.org/publications/central-bank-digital-currency/ [17]: https://www.bis.org/publ/othp33.htm [18]: https://www.bis.org/publ/arpdf/ar2021e3.htm [19]: https://www.nber.org/papers/w27634

It’s your grandfather’s banking crisis

Mon, 08 May 2023 00:00:00 GMT

In the previous post, I wrote about a few underappreciated aspects of banking panics in the wake of the Silicon Valley Bank collapse. Since publishing the post, the _not-so-serious_ banking crisis seems to be getting serious. First Republic Bank, which was experiencing a bank jog, found its white knight in Jamie Dimon. After frantic attempts, banking regulators were able to cajole J.P. Morgan into acquiring the almost-dead bank. By size, First Republic now has the distinct honor of being the second-largest bank failure in Amrika.![](/blog-images/Bank-failures-by-size.jpeg) Other regional banks are experiencing wild stock moves as investors figure out the next domino to fall. ![](/blog-images/koyfin_20230506_090301144-1.png) As the banking crisis metastasizes from a bruise to a pus-oozing wound, traders also seem to be struggling with banks with "Pacific" in their names. They can't seem to figure out the good Pacifcs from the bad. Since the last post, there have been several cool papers on various facets of this _not a serious banking crisis yet_. You might be wondering why this fascination with the _not a serious banking crisis _in America when I'm in India. As one random guy on the internet famously said, "It's the dollar's world, we're just living in it." If this _not a serious banking crisis yet_ becomes more serious, it won't matter if we're in India or Tanzania—we're all buggered. The other thing about this _not a serious banking crisis yet_ is that it has led to profound questions about banks, questions that are relevant in India as well. We Indians have been lucky that the Reserve Bank of India has been pretty good at handling banking issues throughout history, but that doesn't mean we won't have a serious banking crisis in the future (#AtmanirbharBharat🤞). I've read all these papers several times. Since we're living in a post-reading world of 60-second TikToks and reels and since turning 30+ page papers into 60-second financial performance art videos is a tad difficult, here are a few interesting highlights from the papers so that you don't have to do disgusting things like read them in full. ### It's not your grandfather's banking crisis. What causes a banking crisis? Well, obviously, the causes and context vary around the world. Despite the differences between banking crises, there are surprising similarities across history. Looking closely, you can identify a common set of causes and factors in almost all banking and financial crises. Carola Frydman, a research associate at Northwestern University, and Chenzi Xu, Chenzi Xu, a research fellow at Stanford University, published a wonderful paper reviewing studies published in the last 20 years about banking and financial crises from 1800 to 1980. In the literature review, they tease out the common characteristics of banking crises throughout history. The paper is also peppered with fascinating historical anecdotes that you will enjoy if you're a banking geek. The one issue, as they note, is that most studies focus on banking crises in advanced economies, given the size of the banking systems and the easy availability of data. It's sad that there aren't a lot of studies on banking crises in emerging economies, but they include the available studies. What's surprising is that a disproportionate number of studies focus on the Great Depression of the 1930s.![](/blog-images/Number-of-publications-studying-a-year-and-historical-banking-crises-patterns-1.jpeg) Stylized descriptions of past crises are helpful in understanding not just the crises but also the structure of financial systems. A case in point is the thousands of research papers and books that were published in the wake of the 2008 financial crisis. All the papers and books have done more to sensitize people about modern finance than anything else. The polarized views about the financial services industry are a sign of that. The common characteristics of banking and financial crises. ##### **Leverage** Leverage increases financial fragility. Since 1800, all banking crises have been preceded by rapid credit growth and asset price bubbles (with apologies to Eugene Fama). Financial crises are more likely when there's rapid credit growth for households and the non-financial sector. In 18 advanced economies from 1870 to 2020, there was a 36% probability of a financial crisis when leverage, as proxied by the ratio of private credit to GDP, was higher compared to a 22% probability with low leverage. In the post-war period, there's been an increased correlation between financial crises, asset price booms, and rapid credit growth. Not all leverage increases fragility. Higher leverage among households in the non-tradable sector leads to financial and banking crises than leverage in the tradable sector. What causes leverage to build up? Correlative evidence shows that prolonged periods of stability and low volatility lead to increased leverage and end with banking crises. This is the exact thing Hyman Minsky wrote about in his financial instability hypothesis: stability breeds instability. Downturns with higher leverage following financial crises are much sharper and prolonged than regular crises. In crises with low leverage, economic stagnation is shallower, and growth returns to the trend by the end of the fifth year; this isn't the case with crises caused by high leverage.![](/blog-images/The-evolution-of-real-GDP-growth-around-financial-crises-1.jpeg) The level of public debt to GDP affects the subsequent recovery through the private sector's deleveraging and the fiscal space of governments. **Additional reading:** Do higher public debt levels reduce economic growth? ##### **Depositor runs** Much like the Silicon Valley bank failure, the social networks of depositors play an important role in the diffusion of information and the spread of banking crises. The popular notion that uninformed depositors are more likely to run doesn't seem to hold. Banking panics in the UK in 1854 and 1857 show that both informed and uninformed depositors are likely to run. ##### Bank fragility On average, banks with higher deposit outflows and maturity mismatches pre-crisis are more likely to get into trouble. While banking crises get all the attention, shadow banks have been at the heart of several historical crises, but these entities are understudied. **Additional reading:** It's relevant to note that, contrary to popular opinion, the 2008 crisis wasn't a housing crisis but a transatlantic shadow banking crisis.

As an aside, I'm fascinated by shadow banks and have written about them in two of my previous posts.

##### How crises spread The geographical proximity of banks and interbank bank funding networks were key nodes for the propagation of crises. Emerging markets' sovereign debt is a common vector through which crises spread internationally as forced fire sales create a vicious feedback loop. Hot money inflows into emerging markets also _import _financial instability. The other important node is overseas funding sources. This was the route through which the 2008 financial crisis spread to Europe. The European banks were funding themselves in the US wholesale funding markets.

> Following the collapse of a major interbank lender in 1866 London, 17% of international banks headquartered there failed, many of which had to close their subsidiary operations abroad. Xu (2022) shows that these failures not only had a direct impact on the supply of credit where operations ended, but also that bank connections transmitted the heightened cost of credit in the London interbank market to other countries.

> Crises are often transmitted to institutions that themselves were not exposed to asset value declines. For example, runs on trust companies—the shadow banks of the era—during the 1907 Panic were triggered by fears that a few trust company directors were involved in a speculation scandal that was unrelated to their corporate clients. Frydman et al. (2015) show that non-financial firms that had board interlocks with the most affected trust companies experienced worse outcomes. These affiliations alone can account for more than 18 percent of the aggregate decline in corporate investment in the U.S. in 1908. The effects were worse and more persistent for smaller firms, pointing to a potential role for asymmetries of information in aggravating the economic contraction.

Banking Crises in Historical Perspective Monetary policy stance is also an important determinant of the severity of crises. We saw this in the recovery of Europe and the United States after 2008. Europe pursued a policy of austerity and saw anemic growth, while the United States threw the monetary kitchen sink at the crisis and experienced relatively better growth—emphasis on relative. ##### Real economy effects Financial crises lead to dramatic changes in people's political choices. As I wrote in the previous post, they can radicalize people and lead to political polarization, jingoism, and xenophobia. The more pernicious effects of banking crises are the long-lasting scars they leave. Crises can alter people's risk perceptions throughout their lifetimes, affecting everything from how they eat, and how they invest to the type of job they prefer. While the short-run effects of banking and financial crises get all the attention, the long-run effects are far more harmful. Bank failures during the Great Depression of the 1930s led to a reduction in patents, harming innovation. The other interesting observation is that cities with continued credit access at the depths of the 1930s saw a reallocation of labor to higher-paying jobs and faster recoveries. On the flip side, credit contractions in the aftermath of crises depress real economic activity for a long time—the more severe the crisis, the longer the adverse shocks last. Banking crises can also depress international trade, and the effects can linger for a long time. This was the case during the 1866 banking crisis, which started in London but spread globally through British banks, the biggest financiers of global trade. ##### Deposit insurance The evidence on whether deposit insurance stabilizes banking systems or destabilizes them is mixed. Given the SVB collapse, maybe we'll see more research on the topic.

This isn't part of the paper, but one of the interesting things about deposit insurance is that it played a key role in the rise of shadow banking or non-bank intermediaries. Since the deposit insurance cap is limited—it's $250,000 in the US and Rs 5 lakh in India—large cash pools like corporate treasuries, pensions, endowments, and others can't use bank deposits. They need an alternative to bank deposits. So capped deposit insurance led to the emergence of alternatives like collateralized repurchase agreements (repo) and money market funds. These instruments aren't regulated by the banking regulators and are prone to destabilizing runs. Nathan Tankus, who wrote about this, recently appeared on the Forward Guidance podcast to talk about it.

##### Regulatory interventions The SVB bailout led to loud and crass debates between the _let the world burn_ libertarian anti-bailout crowd, the _stop the contagion crowd, and the avoid another Great Depression_ pro-bailout Keynesian/Bagehot crowd. Historical evidence in the paper shows that timely interventions by central banks and regulators help arrest panic and stabilize banking and financial systems. One of the earlier examples was the intervention of the Bank of Amsterdam. In 1763, a major bank failed and caused a credit crunch, and merchant banks were unable to roll over short-term credit. As credit dried up, the banks were forced into fire sales. To contain the panic, the Bank of Amsterdam expanded the range of assets eligible for collateral. This is not unlike the decisions by the Fed to buy mortgage backed securities (MBS) in 2008 and backstop the corporate and municipal bond markets in 2020. A consistent theme across history is that as central banks learn from crises, they have become unhesitant to intervene and stabilize financial markets. The growing interventions of central banks have led to the topic of moral hazard becoming a permanent topic of debate among banking observers. The authors note that despite the concerns about moral hazard, there isn't much quantitative evidence.

Early central bank interventions often targeted specific institutions and were in that sense more akin to specialized rescue missions than widespread liquidity injections. For example, when the Comptoir d’Escompte found itself in financial difficulties in 1889, the Banque de France promptly provided liquidity and ensured an orderly liquidation of what was clearly an insolvent institution (Hautcoeur et al., 2014). To counter moral hazard, the Bank applied severe and observable penalties to managers and directors

> Where no central bank existed, lender-of-last-resort interventions were sometimes engineered by private organizations or prominent individuals. Prior to the establishment of the Federal Reserve, privately organized clearinghouses helped restore confidence in the banking system during American panics. The Panic of 1907 is a good example. The New York Clearing House provided loans to member commercial banks that had engaged in fraud and were experiencing runs. But “shadow banks” (trust companies) had no access to similar liquidity, and when the runs spread to them, panic ensued (Frydman et al., 2015). In the end, J.P. Morgan organized a series of timely rescues that were instrumental in resolving the crisis. Banking Crises in Historical Perspective I understand that you have an attention span of 60 seconds, but I recommend skimming the paper in full.

### The age of social media bank runs As the Silicon Valley Bank saga unfolded, a curious narrative took hold on Twitter: Silicon Valley Bank collapse was the first Twitter-fueled bank run. If you read my previous post, you know how simple stories can spread rapidly.![](/blog-images/social-media-bank-run-1-1-1.jpeg) [Anthony Cookson, Corbin Fox, Javier Gil-Bazo, Juan Felipe Imbet, and Christoph Schiller][2] published a paper showing how Twitter _fueled_ the SVB bank run. > This paper presents comprehensive evidence that exposure to social media conversation about bank stocks amplifies classical bank run risks. Our empirical tests show that banks with a large preexisting exposure to social media performed much worse during the recent SVB bank run, particularly if they have large mark-to-market losses and a large percentage of uninsured deposits. Social Media as a Bank Run Catalyst The Federal Reserve's [postmortem][3] of its supervision of SVB also highlighted the role of social media in the demise of the bank: Uninsured depositors interpreted SVBFG’s announcements on March 8 as a signal that SVBFG was in financial distress and began withdrawing deposits on March 9, when SVB experienced a total deposit outflow of over $40 billion. This run on deposits at SVB appears to have been fueled by social media and SVB’s concentrated network of venture capital investors and technology firms that withdrew their deposits in a coordinated manner with unprecedented speed. O Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank The [Cookson et al. (2023)][2] paper led to a lively debate on Twitter. While most people used the paper to perpetuate hot takes that the paper confirmed their priors that Twitter caused the bank run, banking experts like [Peter-Conti Brown][4], [Frances Coppola][5], and [George Selgin][6] posted nuanced takes. It also seems to me that this debate about whether Twitter caused the Silicon Valley Bank run is over a semantic difference or misunderstanding between "caused" and "fueled" or "contributed." I don't agree with the notion that Twitter caused the Silicon Valley Bank (SVB) run. Bank runs don't materialize just because a bunch of loudmouths on Twitter decide to cause panic. The Twitter sentiment did play a role, but that isn't the same as saying it caused it. You could point out the GameStop and AMC Entertainment incidents about how social media mobs moved stock prices, but SVB depositors didn't flee because the stock price was down. Moreover, the anecdotal evidence shows that the depositors were coordinating on WhatsApp, Slack, Discord groups, and on phone calls. All those things are unobservable. SVB depositors were savvy and informed; they monitored the bank's fundamentals and fled when they realized it was beyond redemption. To be fair, there have been historical instances of banking panic affecting sound banks, but that wasn't the case with Silicon Valley Bank.

> The way a panic unfolds can also inform models of bank runs. The failure of a savings bank triggered runs on the EISB in 1854. Although there was no evidence of insolvency, uninformed depositors were more likely to close their accounts (O Gráda and White, 2003). Once the panic unfolded, more sophisticated depositors joined in, consistent with selffulfilling runs without fundamental shocks to bank solvency (Diamond and Dybvig, 1983). Yet during widespread runs across the country in 1857, informed depositors were the first to run on the EISB. This latter case is instead suggestive that changes in bank health information in an environment with incomplete information, as in Gorton (1985) or Chari and Jagannathan (1988), may play an important role in diffusing financial instability.

Banking Crises in Historical Perspective I also loved [this money shot by Gillian Tett][7].

However, the unpalatable fact is that even if all of these steps are implemented, it might still not be enough to stop the contagion arising from social media panics. So the final move that needs to be made is for governments to recognise that the only truly effective option to quell a cyber panic in a hurry is to backstop the system themselves, by protecting depositors.

The SVB drama suggests that governments will indeed do this — if needed. But that raises two more big questions: if the only way to quell a Twitter panic is for governments to backstop depositors, does that mean banks must become utilities? And, most crucially, will governments also backstop non-banks such as money market funds if they fall prey to a Twitter run?

Wake up to the dangers of digital bank runs ![](/blog-images/Tweet-by-Phil-Bak-🎩.png)

### Curse of specialization? One of the criticisms of Silicon Valley Bank was that it specialized in catering to a narrow set of tech startups, and this concentrated business model played a role in its demise. This begs the question: is specialization uncommon, and is it bad? [Kristian Blickle, Cecilia Parlatore, and Anthony Saunders][9] analyzed the loan portfolios of 40 stress-tested US banks. They find that most banks develop a specialization in lending to certain industries and lend more to such industries.

The average bank invests 8% more of its portfolio in its most favored industry than a fully diversified bank. Moreover, banks have – on average – one or two preferred industries, in which they are over-invested to a significant degree. In all other industries, they are either not invested or invested in accordance with diversification expectations.

Moreover, banks have – on average – one or two preferred industries, in which they are over-invested to a significant degree. In all other industries, they are either not invested or invested in accordance with diversification expectations.

We can see that specialization is associated with differences in loan terms and loan performance. It appears that loans in favored industries are larger, with lower rates, have a longer maturity and – perhaps most importantly – are less likely to become non-performing. This would imply that specialized banks may have an advantage in selecting or monitoring loans in industries in which they have specialized.

![](/blog-images/Specialized-banking.jpeg)

### More good stuff **Articles and papers** [Deposit franchises as natural hedges][10] [Good (Bad) Banks and Good (Bad) Investments: At the right price...][11] [Nobody Trusts the Banks Now][12] [Bank Stocks Look Worse Than Banks Do][13] [JPMorgan: the bank that never lets a crisis go to waste][14] [Expanding the fortress: Why JP Morgan is even more important than you think!][15] [The Fed’s Monetary Tightening and the Risk Levels of US Banks][16] [Do Banks Hedge Using Interest Rate Swaps?][17] [Signals and Stigmas from Banking Interventions: Lessons from the Bank Holiday in 1933][18] [Learning from Silicon Valley Bank’s uninsured deposit run][19] **Videos and podcasts** [The Failure of Silicon Valley Bank: Everything You Need to Know about Banking and Bailouts][20][][21] [Life's Too Short][22] and [The Disrespected][23] [Is JPMorgan Chase Helping the Banking Industry or Itself?][24] [Why The First Republic Failure Is Different][25] An interesting premise worth pondering from the podcast: **Felix Salmon:** I have a reasonably strongly held belief, I'm not sure about this, but I'm, you know, I believe it to be true that if Silicon Valley Bank and First Republic had been like credit unions or not publicly traded, that they wouldn't have failed that it was actually the proximate course in both cases of the bank failure was the share price going down and the share price causing that erosion of trust in the institution, and I do worry that people are over extrapolating from volatile share prices.

[That Substack thingy][26]. [1]: https://twitter.com/mbostock/status/1653221977895882752?s=20 [2]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4422754# [3]: https://www.federalreserve.gov/publications/review-of-the-federal-reserves-supervision-and-regulation-of-silicon-valley-bank.htm [4]: https://twitter.com/PeterContiBrown/status/1651941010711384065?s=20 [5]: https://twitter.com/Frances_Coppola/status/1652102572067508225?s=20 [6]: https://twitter.com/GeorgeSelgin/status/1652097065214771203?s=20 [7]: https://www.ft.com/content/a60e543d-c950-4ebb-8da9-d6b0b359ad7b [8]: https://twitter.com/philbak1/status/1650484922912587778?s=20 [9]: https://www.nber.org/papers/w31077 [10]: https://www.bitsaboutmoney.com/archive/deposit-franchises-as-natural-hedges/ [11]: https://aswathdamodaran.blogspot.com/2023/05/good-bad-banks-and-good-bad-investments.html [12]: https://www.bloomberg.com/opinion/articles/2023-05-04/nobody-trusts-the-banks-now?leadSource=uverify%20wall [13]: https://www.bloomberg.com/opinion/articles/2023-05-05/bank-stocks-look-worse-than-banks-do?leadSource=uverify%20wall [14]: https://www.ft.com/content/af7e2188-097c-48d1-bde0-bdee30021931 [15]: https://adamtooze.substack.com/p/chartbook-213-expanding-the-fortress [16]: https://www.nber.org/digest/20235/feds-monetary-tightening-and-risk-levels-us-banks [17]: https://www.nber.org/papers/w31166 [18]: https://www.nber.org/papers/w31088 [19]: https://cepr.org/voxeu/columns/learning-silicon-valley-banks-uninsured-deposit-run [20]: https://www.youtube.com/watch?v=E9V50YSNIbI [21]: https://www.nber.org/digest/20235/feds-monetary-tightening-and-risk-levels-us-banks#share_twitter [22]: https://open.spotify.com/episode/6br6VW2kYxPTtutZQYy5l5?si=uLuDn1weS-Grcw7a5Fr6_w [23]: https://open.spotify.com/episode/3Ig5ovc3g6o3YdmaUbHvCW?si=posn9k27QYaSj5hAerdL6w [24]: https://foreignpolicy.com/podcasts/ones-and-tooze/ [25]: https://slate.com/podcasts/slate-money/2023/05/why-first-republic-bank-failed [26]: https://alittlelessdumb.substack.com/p/its-your-grandfathers-banking-crisis?sd=pf

Stories that cause bank failures and the scars they leave

Sun, 02 Apr 2023 00:00:00 GMT

On March 10th, Silicon Valley Bank (SVB), the 16th largest bank in the United States, collapsed. SVB was the bank of choice for US startups, faux libertarian tech bros, and VCs. As the bank was going under, there was a minor miracle. All the economists, policy wonks, semi-retired epidemiologists, anthropologists, futurists, and cultural archeologists on Twitter suddenly transformed into US banking experts. Since I'm on the internet, with a Twitter account and a blog, I'm a preordained banking expert. As such, it's my duty to comment on what went wrong with Silicon Valley Bank. Even though I am in Bangalore, I must write about what Jay Powell, Janet Yellen, and Joe Biden should do to stabilize the US banking system. Them's the rules. Throughout history, something broke whenever the Federal Reserve hiked rates [1, 2, 3, 4].![](/blog-images/Fed-rate-hikes-and-financial-crises-1.png) So when the Fed started hiking rates in 2022, the question on the minds of experts was, "Oh sh*t, what's gonna break this time?"![](/blog-images/koyfin_20230325_120236245-1.png) If you go back and look through the archives of IMF's global financial stability reports, the biggest concerns were about rising sovereign and corporate debt, dollar-denominated debt in emerging economies, shadow banking, high asset price valuations, high real estate prices, non-bank leverage, private markets, and hot money flows. Policymakers were more worried about the prices of monkey pictures and bottled farts than banks.![](/blog-images/Web-capture_7-4-2023_185629_www.rollingstone.com-1.jpeg) In 2022, the biggest financial stability concern on people's minds was the deteriorating liquidity in the US Treasury market, the most important bond market globally. If you had asked people in 2021 or 2022 if we would have a banking crisis in the future, they would've sent you Google search results for "de-addiction centers near me." Except for the gold bugs and crypto crazies predicting the collapse of Western financialized civilizations for the past 30 years, there was almost a uniform consensus that banks in the advanced economies were safer [post-2008][3] due to increased capital requirements. But fast forward to March 2023, and we've had 3 bank failures so far: Silicon Valley Bank (SVB), Signature Bank, and Silvergate Bank. With $209 billion in assets, SVB was the 16th largest bank in the US and the largest bank failure since 2008. These failures have sparked fears of bank runs on smaller banks. First Republic Bank has lost over $70 billion in deposits, and concerns are swirling over the unrealized losses on held-to-maturity bonds of mid-sized banks like Schwab, which is leading to a deposit flight.![](/blog-images/koyfin_20230414_040949750-1.png) On the other side of the pond, Swiss authorities forced a shotgun wedding of perennial basket case Credit Suisse with UBS. The question on people's minds now is: will Deutsche Bank, another evergreen European basket case, finally implode? As Morgan Housel [says][4], risk is what you don't see. Such has been the change in sentiment that people went from worrying about the evaporating value of their diversified portfolio of shitcoins to whispering in raspy asthmatic voices, "Oh crap, it's 2008 all over again." [Probably not][5], but famous last words and all. This crisis, if it can be called that, has once again raised the same old questions that we all ask during every crisis. From obvious questions like "Are the banks okay?" to messy questions like "What is money?" and “Why do we put up with banks if they keep messing up?" to profound questions like "Do we need banks?" Everything that can be written about why Silicon Valley Bank, Signature Bank, and Silvergate failed has been written already; I don't have anything new or useful to say. I'll include links to some brilliant analyses and opinions. What interested me about this episode were the lesser-appreciated factors like the role of narratives and the long-run implications of banking crises. Some loosely formed thoughts. ### Sensemaking Most people don't appreciate just how important narratives are, not just in markets but in real life as well. The SVB crisis once again highlighted the importance. We are storytelling creatures. Ever since our ancestors started rubbing rocks together and figured they could draw with them, they've been telling stories. [Stories][6] were pivotal in our evolution. They helped us to learn, find meaning, communicate, cooperate, build relationships, reproduce, and overcome adversity. Humans also hate uncertainty so much that it hurts—nothing is more painful than not knowing something. To deal with uncertainty, our brains constantly [look for patterns][7] and explanations to make sense of things. Our brains arrange things in a coherent manner and discard information that doesn't fit to make sense of the world. That's why we often [turn to][8] God when we struggle to make sense of something. Recent studies have shown us that reality is not necessarily an [objective truth,][9] but rather something that our brains [construct][10] or even [make up][11]. In a way, our identity is shaped by the stories we tell. We are, in a sense, [the stories we tell.][12] What was fascinating about the Silicon Valley Bank Crisis was that you had a real-time preview of how the creation and propagation of stories affected the markets, depositors, and policymakers' actions. A crude caricature of modern finance and economics is that it assumes that people are rational agents that consider all available information and make optimal choices in their self-interest. A crude caricature of criticism of economics is that it's become too [mathy][13], over-reliant on simplistic models, and ignorant about how humans behave. We can debate this until Royal Challengers Bangalore (RCB) win the Indian Premier League (IPL), but neither will RCB win nor will this debate end. But the criticism that modern finance and economics are ignorant about the nuances of human behavior and its impact on markets and economies is right. The arguments of the behavioralists confirm my priors. Our models of markets and economics don't account for the complexity of human behavior, and no, I'm not gonna use the terms "biases" and "rationality." We are not pathetic creatures incapable of picking a low-fat vegan, gluten-free sandwich. The notions of bias and rationality are complicated, and you have to think about them through an evolutionary lens [1, 2, 3, 4, 5]. But I'm digressing. Economists have been analyzing the impact of stories on markets for a long time [1, 2, 3, 4]. However, the topic received long overdue and much-deserved attention when Nobel laureate and one of the founding fathers of behavioral economics, Robert Shiller, published "[Narrative Economics][14]," summarizing his [decades of work][15]. Professor Shiller likens stories or narratives to [viruses][16] (going viral) and says similar to viruses, stories are contagious and mutate as they spread, affecting markets and economies in unpredictable ways.

> The form of the narrative varies through time and across tellings, but maintains a core contagious element, in the forms that are successful in spreading. Why an element is contagious, when it may even “go viral,” may be hard to understand, unless we reflect carefully on the reason people like to spread the narrative. Mutations in narratives spring up randomly, just as in organisms in evolutionary biology, and when they are contagious, the mutated narratives generate seemingly unpredictable changes in the economy.

Robert Shiller The idea that information can spread like a virus is not new. Social scientists, biologists, writers, and others have been using this framing since at least the 19th century. It's even central to the plot of Neal Stephenson's "[Snow Crash,][17]" published in 1992, and the movie "[Inception][18]." Neil Gaiman also touched on this idea in his awesome 2017 talk. Looking at how stories spread is a useful way to understand not just the Silicon Valley Bank crisis, but markets in general. However, I'll focus on the SVB crisis for now. It was a perfect opportunity to see in real-time how stories were spreading and causing ripple effects on markets and [the economy.][19]![](/blog-images/Narratives.jpeg) Multiple people were spreading numerous narratives, each with their own unique motivations. 1. Some people wanted o make sense of things. 2. Humans are signaling animals. Consciously or unconsciously, people do things to signal that they're rich, beautiful, strong, etc. Some created narratives because they wanted to signal to the world (and Tinder) that they were "banking experts." 3. Crises are an excellent opportunity to become famous. Some people were spreading narratives with the explicit or implicit goal of becoming popular. 4. And the strongest reason of all—self-interest. There was a small group of VCs and founders who were spreading narratives of doom and gloom because they had their money stuck in SVB. 5. And then some just wanted to watch the world burn. As the doom and gloom narratives spread, smaller regional banks sold off. Depositors started fleeing [smaller banks][21] and rushed into larger banks and [money market funds][22]. It [may][23] or [may not][24] have sped up the long pending demise of Credit Suisse.

> With the click of an iPhone, $US42 billion left one bank in one day. To give you a sense of the order of magnitude, in the financial crisis of ’08, one bank lost $US17 billion in a week,” he said. “So the rate of withdrawal was twenty times what it was then.

James Gorman, CEO of Morgan Stanley You can trace all popular narratives to what [Jean Tirole and Armin Falk][25] call "narrative entrepreneurs." These people want to get people to behave in a certain way or take advantage of a situation—like Bill Ackman shorting something and [crying][26] on Twitter. These narratives spread through both [strong][27] and [weak ties][28] we have with others. Rajkamal Iyer and Manju Puri used epidemiological models similar to Robert Shiller in _Narrative Economics_ to [analyze a bank run][29] and how the contagion spreads. They analyzed a run on a cooperative bank in Gujarat in 2001, which led to a run on a different bank that had no connection to the bank facing the run. They found that social networks played an important role in causing runs:

> We further want to understand how contagion effects of bank run behavior spreads among depositors. For this purpose we explore and employ methods from the rich epidemiology literature that spends considerable effort in examining how diseases spread. We further want to understand how contagion effects of bank run behavior spreads among depositors. For this purpose we explore and employ methods from the rich epidemiology literature that spends considerable effort in examining how diseases spread. Using these models we are able to estimate and quantify transmission probabilities. We estimate the average transmission probability is 3% via social groups (introducer network) and 5% via neighborhood (neighborhood based network). We also find that contagion due to social networks peaks in the second day of the crisis. We discuss implications in terms of timing of regulatory or preventive measures.

Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks As the crisis unfolded, you could see that the simplest narratives were spreading the most. Narratives like SVB failed because of an asset-liability mismatch, poor risk management, large unrealized losses on their HTM book, social media causing the bank run, etc. But this was the case with many other banks as well. They were necessary but not sufficient conditions. SVB's failure was a result of a confluence of factors that were a long time in the making. It started with the impact of COVID, which led to a boom in venture capital (VC) investments and a surge in deposits at SVB. This, in turn, attracted libertarian startup tech enthusiasts who were interconnected with each other. However, the subsequent rise in inflation caused the Fed to hike rates, resulting in losses on SVB's HTM bond book, which had a significant duration. These mark-to-market (MTM) losses were exacerbated by regulatory changes implemented after the 2008 financial crisis. As SVB scrambled to raise money to address the situation, falling stock prices further impeded their efforts. Panic ensued among the tech enthusiasts, leading to coordinated efforts in chatrooms to withdraw money from SVB, fueled by social media and mainstream media coverage. The resulting panic led to more requests to pull out money, forcing SVB to pledge assets to meet withdrawals, only to be thwarted by the outdated payments system of the Fed created in the [8th century.][30] Ultimately, these circumstances rendered the bank insolvent, leading to the FDIC taking the bank into receivership. But, by the time you finish this answer, you will either have been the victim of physical violence, or your friend will have driven to the nearest supermarket, bought a carton of eggs, dumped it on your head, and sprinkled some glitter for good measure.![](/blog-images/Cullen-1.jpeg) Complex events can't be explained with simple answers, the real answers always involve a lot of ifs and buts, but such answers are uncool. We always look for simple explanations for complex events because being right feels good damn it—it's just like being [high on cocaine.][32] This is the same reason fake news [spreads faster][33] than real news—because our brains [weren't built][34] for thinking. I listened to Kate Judge, law professor at Columbia Law School, and Peter Conti-Brown, associate professor of financial regulation at Wharton, talk about the SVB crisis on [Macro Musings][35]. I was struck by how many times Professor Judge kept saying that we didn't know everything yet.

I mean, clearly there's a lot of different factors going on. So you're never going to be able to have a simple narrative of, here's the one party that was at fault, or here's the one story of what went on. There were a series of missteps. And there shouldn't be a series of missteps, not only that leads to a bank failure, but leads to actually three bank failures

I hate to be a broken record on this, but again, I think we have yet to fully know.

Kate Judge Barry Ritholtz had [written a post][36] along the same lines. It's remarkable how much we despise saying, "I don't know." In our drive to make sense of things, we force order and meaning to events where none exists. You can see this tendency to make sense of things in the markets every day. This reminds me of a [wonderful article][37] on Zerodha Varsity: > What moves the market? It’s traders and investors making informed and uninformed decisions. They use sophisticated technical systems, complex fundamental approaches, tips, hunches, guesses, bad information and even astrological signs to make their decisions to buy, sell, or stand aside. All the educated and uneducated conjectures are tossed in the pits and the market is pushed or pulled to a higher or lower close. It, meaning the market, has nothing to say about the daily results. It, meaning the market, has nothing to say about the daily results. That’s why you must not anthropomorphize it. Take it for what it is—a dumb, inanimate blob.

“Chaos was the law of nature; Order was the dream of man.” ― Henry Adams

### Trust and faith I felt smart when I came up with the phrase, "Banking is a confidence game." But my smartness bubble was violently deflated as I learned that [other][38] [people][39] had said this before me. Sed 🙁 Banking is indeed a confidence trick because, as Tobias Carslile [put it][40], banks are technically insolvent all the time since they can't meet all the withdrawals at the same time_._ Trust is the glue that holds modern capitalist economies together. Loss of trust can wreak havoc. Given how interconnected the modern financial system is, a loss of trust can spread faster than a silent fart in a crowded room with closed windows. Loss of trust in banks can have devastating consequences since our everyday lives and economic activities rely on the implicit trust that banks will safeguard our money. Loss of faith in banks is not only deadly, but the distrust lingers for a long time. I don't want to litigate whether bailing out SVB and Signature Bank was the right move. The depressing thing about the debates over the bailout was the lack of nuance about the fallout from bank failures. The even more depressing thing was that the term "[moral hazard][41]" was once again in vogue. People who drank bleach to cure COVID suddenly transformed into experts on moral hazard. These people were and are insufferable 🙁![](/blog-images/Moral-Hazard.png) Critics have been shouting that guaranteeing all the deposits of Signature Bank and Silicon Valley Bank will cause banks to be reckless because they'll assume that all deposits are guaranteed. What made this bailout toxic was that some of the depositors in the case of SVB were rich venture capitalists like Peter Thiel. Forget the 2023 season of bank bailouts; we're still arguing 15 years later about whether bailing out the big banks in 2008 was the right decision. This crisis has once again highlighted the centrality of banks, not just as custodians of people's money but as central nodes through which all the money in a system flows. This reminds me of Matt Taibbi's evocative [description][43] of Goldman Sachs in 2010:

> The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

If you are a cynic, then this is a perfect description of banks, but I digress. Bailing out banks is never an easy decision, especially when the rich are presumed as the primary beneficiaries, as in the case of SVB. There's nuance to this presumption. Some startups often banked with SVB because the other banks wouldn't touch them, while others chose SVB because of the sweetheart deals they got from SVB. But you can't have tailor-made bailouts where you check every depositor's net worth to see if they're rich or poor; it can only be a blanket guarantee. ![](/blog-images/joe-wisental-SVB-bailout-1.png) Everybody is debating whether bailing out banks was right or wrong, so there's no point in beating a dead horse. Beating dead horses is not good. What was missing in this debate was the impact of bank failures on society. Even a cursory look at the history of bank failures shows that banking failures can have a devastating impact. Of course, the SVB crisis isn't systemic, but it's not hard to imagine an alternate reality where the regulators didn't act and the contagion spread to other banks.

> As many of the theoretical models and some evidence suggest, even if the bank is fundamentally solvent, bank runs can still occur because depositors can run in anticipation of a run.

Understanding Bank Runs Finally, early and widespread interventions are an important tool to arrest panics, limit the contraction of the banking sector, and ameliorate their impact on the economy. Historical crises that have not benefited from intervention have been particularly costly. Ok, how bad can bank failures really be? In a [2019 study][45], Sebastian Doerr and co-authors found that the German banking crisis starting in 1931 played a crucial role in the popularity of Hitler:

> Greater economic collapse was one important mechanism that links the banking crisis to Nazi voting. While unemployment did not affect Nazi votes, income declines driven by exposure to Danatbank and Dresdner Bank (DD) strongly increased support for the Nazi party (NSDAP) – a one standard deviation decline in income caused by DD was associated with a 4.3% rise in Nazi support (while the average change in NSDAP vote share from 1930 to 1933 was 22%). In contrast, a one standard deviation change in income (not predicted by DD exposure) increased Nazi votes by only 1.1%.

Financial crises and political radicalization: How failing banks paved Hitler's path to power. Hitler! In his magisterial book "[Crashed][46]," historian Adam Tooze paints a [sordid picture][47] of how myopic, self-defeating, and exclusionary decisions by policymakers supercharged political polarization and led to the rise of right-wing parties on both sides of the Atlantic. What's ironic is that Donald Trump, who took advantage of the simmering resentment among Americans about the 2008 crisis to come to power, [had a role to play][48] in the demise of SVB by weakening banking regulations in 2018. This is corroborated by [other evidence][49] as well:

> When the imposition of the 1933 U.S. Silver Purchase program drained Chinese banks of silver, firms reliant on those banks that were more exposed to silver outflow experienced more labor unrest and Communist Party membership growth among their workforce Braggion et al. (2020).

When the imposition of the 1933 U.S. Silver Purchase program drained Chinese banks of silver, firms reliant on those banks that were more exposed to silver outflow experienced more labor unrest and Communist Party membership growth among their workforce Braggion et al. (2020). It's no wonder that numerous surveys indicate that trust in banks never fully recovered after the 2008 financial crisis. Distrust in banks and monetary authorities can leave deep scars that persist for generations. The failure of the Freedman's Savings and Trust Company, which was established to serve black Americans in 1876, continues to have repercussions to this day. Peer-to-peer (P2P) lending and crowdfunding gained popularity in the US after 2008, partly due to the mistrust of banks. Hyperinflation and currency controls in Argentina have resulted in a thriving black market for dollars, making life tough for policymakers. In Lebanon, people rob banks not to steal money but to withdraw their own money. “All the world is made of faith, and trust, and pixie dust.” ― Friedrich Nietzsche #### Invisible scars Let's go back to the [crude caricature][50] of neoclassical economics I painted earlier. The fundamental assumption in standard economic models is that people are rational utility maximizers. They consider all available information, constantly update their knowledge based on new evidence, have perfect memory, and make optimal choices by weighing all probabilities. Around the 1950s, people started to push back against this ridiculous notion, and so began the behavioral revolution, which made economics much less dismal. Thanks to the behavioral revolution, a new generation of economists has given rich insights into the complexities of human decision-making. One of the rising stars in the field of behavioral economics is [Ulrike Malmendier][51], a professor of finance and economics at Berkeley. Professor Malmedndier has done some amazing research on experience-based learning or experience effects. Her work complements existing economic research on [similar topics][52]. All these approaches look at how past experiences shape future decision-making. Only economics can be so dumb as to ignore something that sociologists and psychologists [figured out][53] decades ago. This is similar to how economists have long neglected the role of narratives in shaping economics that Professor Shiller talks about in narrative economics. The oldest reference I know of to the idea that our past affects our lifelong behavior is in Sigmund Freud's psychoanalytic theory from the 19th century. Across multiple studies in different settings, Professor Malmendier has shown that our lived experiences affect our decision-making, risk preferences, consumption choices, and beliefs throughout our lives. Our past experiences affect everything from how we invest, the type of jobs we choose, inflation expectations, mortgage choices, how much we spend on food, etc. In what I consider a [seminal paper][54], she showed how the great depression of the 1930s shaped the risk preferences of the generation that lived through it. _Depression babies_ who lived through the 1930s had low stock market participation compared to later generations. People who experience a market crash early in their lives take lesser financial risks when controlling for major variables. The striking thing is that these aren't short-run effects; even though the effects decay over time, they still persist over the lifetime. In other words, we overweight our most recent experiences. Younger generations overweight their most recent experiences compared to older generations. ![](/blog-images/Web-capture_8-4-2023_205239_eml.berkeley.edu-1.jpeg) This is corroborated by other research as well. Christopher Severen and Arthur van Benthem found that kids who experience high oil prices during the ages of 15–18, when they typically learn to drive, tend to drive less throughout their lives. Experience-based effects don't just show up in the stock market, but across multiple domains. 1. People who have experienced high inflation in their lifetimes are more likely to buy houses with fixed-rate mortgages because they overestimate future interest rates. 2. Smart people aren't immune to experience-based effects. The Federal Open Market Committee (FOMC) members who have experienced higher inflation in their lifetimes tend to be more hawkish and vice versa. 3. People who experience higher grocery prices tend to have higher inflation expectations when compared to other households or market expectations. 4. People who have been unemployed in the past tend to be pessimistic about their future financial situation and spend less despite the lack of correlation between past experiences and future incomes. 5. People who have lived under communist rule are less likely to participate in the stock markets. To the extent they participate, they tend to invest in stocks of other communist counties and are less likely to invest in American companies, especially financials. I would love to see more studies specifically looking at the impact of the experience-based effects of banking failures and crises. But the [existing studies][56] and available data show that people who experience banking crises trust banks less. Time series data from surveys is hard to come by, but you can draw reasonable conclusions based on the available data that the countries that had the worst banking crises during the 2008 and Eurozone crises have the lowest trust in banks and financial services companies.![](/blog-images/Edelman-trust-in-financial-services-2022.png) As I was writing this post, I came across this wonderful paper bu Carola Frydman and Chenzi Xu. Here's an excerpt:

> Banking crises have large negative effects on the real economy. Shocks to financial institutions affect a wide range of outcomes, from employment and output to political participation. Although the magnitudes of the effects of disruptions to credit intermediation on real outcomes are hard to contrast across studies, they are often large and long-lasting.

> Living through a banking crisis may also affect long-term outcomes by shaping the risk preferences of a generation. Individuals that experienced low stock market returns throughout their lives report in survey data to be less willing to take financial risk and to participate in the stock market (Malmendier and Nagel, 2011). Koudijs and Voth (2016) lever a historical event to validate this view. In 1772, an investor syndicate speculating in Amsterdam went bankrupt. While distress was publicly known, lenders who were exposed but did not lose any money altered their behavior relative to unexposed ones, asking for much higher haircuts after this experience.

Banking Crises in Historical Perspective My favorite anecdotal story about trusting banks is from financial psychologist Brad Klontz. Talking about his mom and dad on the [Hidden __Brain podcast][58], he says the following:

> She grew up in Detroit and went to high school. And she went to a high school where there was half the school was poor and the other half had money. And so she was one of the poor ones and she felt extremely self-conscious about this, anxious about it. And as she's talking about it, I'm seeing, oh, okay, so I get why I'm anxious. This is starting to make sense. And then I asked her, "What was it like for grandma and grandpa growing up around money?" And this blew me away.

> So first of all, I knew we didn't have money. And so at this point, my grandparents, they're living in a trailer park community. So I know we didn't have much money, but I know everyone's really hardworking and smart. So this was one of the mysteries I had in my mind. And I found out that my grandfather went to the bank as a young man, right during the Great Depression and all the money was gone. And then my mom said that your grandfather never put a dollar in the bank again the rest of his life. Now, he lived into his nineties. He kept all of his money in a lockbox, either in the attic or under his bed.

> They absolutely do. And that's what I found to be true in my own experience. I realized that my grandfather's trauma... I mean, what does that experience tell you? What do you walk away with in terms of understanding money in the world? And it's like, well, very clearly you can't trust banks with your money. Then my mother's reticence to invest anything. She wouldn't invest in anything. She bought CDs in the bank, but she would not put money in the stock market. And all of a sudden that makes sense to me. And so then this is the real light bulb moment for me is I did what I call a dysfunctional pendulum swing, right? You see this quite often in extreme behaviors. For example, if you grew up with an alcoholic parent, some people either become alcoholics themselves or they never touch the stuff.

Past crises don't only shape individuals but also institutions—after all, institutions are collections of individuals. Another study from Professor Malmendier shows that past banking shocks affect the future risk-taking of banks. This reminds me of former Federal Reserve chairman Ben Bernake's actions in 2008. Before joining the Fed, a large body of his scholarly work was devoted to studying the great depression. You could argue that his dramatic actions during 2008 were driven not only by an incentive not to be seen as a chairman who oversaw another depression but also by his study of the depression, which would've left a lasting imprint. In the same vein, you could argue that the equally dramatic actions of the Fed under Jay Powell to backstop the entire financial system in 2020 were the result of the institutional memory of fighting the 2008 crisis.

### Further reading and listening Nathan Tankus has emerged as one of the more interesting and thoughtful thinkers about all things monetary economics. On his blog, Notes on the crises, he has published some incisive pieces on not just the SVB collapse but deposit insurance, shadow banking, and the Federal Reserve's actions. I highly recommend reading **all** the pieces. Rohan Grey is one of the most thoughtful thinkers about money and banking from an MMT lens. His Twitter feed has some brilliant observations, not just about the crisis but about the construct of money itself. I came across this podcast which I haven't heard yet but added to my playlist Elham Saeidinezhad is a term assistant professor of economics at Barnard College, Columbia University. She wrote a brilliant four-part series on the SVB crisis on her blog, and it's a must-read. She also wrote a shorter piece on Phenomenal World. One of my new rabbit holes is diving through Professor Saeidinezhad's work. Christine Desan, Lev Menand, Raúl Carrillo, Rohan Grey, Dan Rohde, and Hilary J. Allen are some of the smartest thinkers on money and banking. The LPE Project curated their incisive takes on the SVB collapse. Steven Kelly is a senior research associate at the Yale Program on Financial Stability. He's written some [interesting posts][59] about SVB and Credit Suisse. His [Twitter feed][60] is full of interesting observations about the crisis as it continues to unfold. I also enjoyed his chat with David Beckworth on the _Macro Musings_ podcast. Morgan Ricks is a professor of law at Vanderbilt University, a former Treasury official, and the author of _The Money Problem: Rethinking Financial Regulation._ This is one book I can't wait to read because Professor Ricks is damn thoughtful. He's been [tweeting][61] and [writing][62] about the crisis and, more importantly, about why getting rid of deposit insurance limits is a good idea. In a similar vein, historian Peter Conti-Brown has also been tweeting and writing some thought-provoking things about the banking crisis, banking regulation, and deposit insurance that are in disagreement with Morgan Ricks. His joint appearance on _the Macro Musings_ podcasts was really good. In the wake of the SVB collapse, a lot of people drew parallels to the Savings and Loan (S&L) crisis of the 1980s. Anna Gelpern, a legal scholar and professor of law and international finance at Georgetown University Law Center, wrote a brilliant piece on how this crisis is different from the S&L crisis. [This paper][49] by Carola Frydman and Chenzi Xu summarizing the literature on historical banking crisis is amazing and a must-read. [Jiang et al. (2023)][63] calculate the mark-to-market losses on held-to-maturity bond portfolios of banks and look at factors that lead to runs. The SVB crisis once ignited the debate over the need for a narrow bank that takes deposits and holds them at the Fed or invests only in treasuries. The Federal Reserve had in 2018 [rejected an application][64] for a narrow bank. Brian Romanchuk published an [interesting post][65] on why there's no need for a narrow bank. Saule Omorova is one of the foremost scholars on financial regulation and a professor of law at Cornell Law School. She was also nominated to head the Office of the Comptroller of the Currency (OCC) by Joe Biden, but her nomination was derailed due to a vicious smear campaign by the banking lobby that branded her a communist. One reason why her nomination was derailed was that she was a big proponent of reining in banks. In a paper titled _The People's Ledger,_ she took the idea of a CBDC to its logical conclusion and proposed that people should be allowed to directly open accounts with the Federal Reserve. In her vision, banks would be reduced to acting as agents of the Fed. Her other equally amazing paper that has shaped my own thinking about money is The Finance Franchise. These are just two topical papers related to the SVB collapse, but her entire body of work, especially on fintech, is fascinating. I highly recommend checking everything out. She was recently on the _Odd Lots_ podcast as well. [Steve Roth wrote a post with a very similar proposal][66]. Lev Menand is an associate professor of law at Columbia and one of the foremost experts on central banking, having worked at the treasury. He also recently published another book I can't wait to read, The Fed Unbound: Central Banking in a Time of Crisis. He was on the Odd Lots. I highly recommend checking out all his papers, videos, and podcasts. Of course, this list isn't complete without a mention of historian Adam Tooze. Judging by the amount of stuff he publishes, I have my doubts about whether he is human. Anyway, he's published [several amazing posts not just on SVB but on][67] banking and regulation as well. Similarly, the list cannot be complete without the awesome Matt Levine. A[ll his posts][68], not just about SVB, but **ALL** his posts are **ALWAYS** mandatory reading. Frances Coppola is one of the most thoughtful writers on modern banking. [All her posts][69] are mandatory reading as well. I always learn new things from Cullen Roche and he has a gift for simplifying complex topics. [His posts on the crisis][70] are really good. [Why markets can never be made truly safe][71]. [The IMF Global Financial Stability Report (_GFSR_)][5] [Jacobin _seems_ have a nice series of perspectives that I haven't yet read.][72] [Huw van Steenis suggests how digital bank runs can be prevented][73]. [Why Do We Even Need Private Banks?][74] [What Silicon Valley Bank and Credit Suisse tell us about financial regulations][75] [The American Prospect has a good series on what's next after SVB.][76] [Jamie Cathewood looks at historical banking runs and panics.][77] [Bank Failures in Theory and History: The Great Depression and Other "Contagious" Events by Charles Calomiris.][78] [The Great Depression, banking crises, and Keynes' paradox of thrift][79] [Bank networks and systemic risk in the Great Depression][80] [Bill Dudley on Lessons From the Banking Crisis][81] [Raghuram Rajan: Why The Banking Crisis Isn’t Over][82]

That [Substack thingy][84]. 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Institutional investors are just as stupid as retail investors

Sun, 06 Nov 2022 00:00:00 GMT

One of the oldest clichés in finance is that retail investors are "dumb money" and institutional investors are "smart money." There's some truth to the cliché. Retail investors do all sorts of [silly things][1]. They are too [optimistic][2], [trade their pants off][3], take [unnecessary risks][4], buy [shiny objects][5], [chase performance][6], form [cults][7], [cause market mispricing][8], and end up as the roadkill for [informed investors][9]. But I got a problem with the stupid cliché for a few reasons: 1. Saying all retail investors are stupid is as stupid as thinking veg biryani exists. It doesn't, it's pulav. As Terry Pratchett said: "The reason that clichés become clichés is that they are the hammers and screwdrivers in the toolbox of communication." 2. It's true that retail investors do dumb things, but painting everyone with the same brush is unfair. In many cases, the so-called dumb money is much smarter than the so-called smart money. For example, a retail investor who invests in an index or even an active fund and sticks with it will outperform most institutions. 3. It's also unfair to institutional investors because the financial media doesn't talk about all the dumb things they do. At this point, the foul deeds of retail investors are the stuff of legend. Every day, hundreds of articles and videos find dull ways to regurgitate the same old things—blah, blah, dumb money is doing something dumb, blah, blah. But is smart money smart? No. Institutional investors are also capable of dumb things. Imagine working at an institution where you work hard to do dumb things day in and day out, but the media ignores you. That's not fair, right? So, let's look at some dumb things institutional investors do. ### Manager selection The largest institutional investors manage money on behalf of others. Pension funds manage assets on behalf of their pensioners. Endowments and foundations manage the money of the organizations they belong to, such as universities, charities, and cultural institutions like museums. To meet the liabilities, these institutional investors invest in various asset classes like equities, bonds, and alternatives like private equity, venture capital, real estate, and infrastructure. They may manage the money on their own or hire external fund managers like BlackRock (public markets), Blackstone (private equity), and Sequoia (venture capital). Guess what the common metric for picking managers is? The past 3-year performance. No, I'm not kidding. I wish I were. But I am not. For all the supposed smarts, past performance is the most common strategy institutional investors use to pick fund managers. It might shock you, but this strategy is stupid because performance tends to be mean reverting. There's plenty of evidence to show that managers chosen based on good past performance underperform in the future. Institutions also typically fire managers that underperform for three years. As counterintuitive as it sounds, these institutions would've been better off sticking with the managers. Better yet, Cornell et al. (2016), and [Jeffrey Ptak][10], among others, show that hiring managers with poor past performance is a better strategy for picking managers than managers with good past performance. Sad. In 2008, Amit Goyal and Sunil Wahal wrote a seminal paper on manager selection by institutions. They looked at the performance of managers pre- and post-firing. They also decomposed the returns based on the reason for the firing, such as performance, change in fund managers, and regulatory reasons. They found that performance was the key reason for hiring and firing managers. The irony was that institutions would've been better off doing nothing. Studies by Scott Stewart [[1][11],[2][12]], Raul Leote de Carvalho, [Howard Jones, and Jose Vicente Martinez][13] showed the same. Institutions also hire fancy consultants to pick managers, but consultants are [just as bad][14] as the institutions at picking managers. Some smart money this is. ### Any price for cold comfort

Humans will do anything to avoid pain and discomfort—from murder to paying 2 and 20 to avoid mark-to-market prices.

— Swami Bhuvan. The rise of private markets has been one of the biggest trends in the financial markets over the last two decades. The United States and Europe account for most of the AUM, but Asia has grown faster.![](/blog-images/Private-vs-public-markets.png) ![](/blog-images/Asia-Private-equity.png)

Notes
1. PE and VC are also called "alternatives."
2. Private markets is a catch-all term for private equity (PE), real estate (RE), venture capital (VC), private debt, infrastructure, and natural resources.
3. Some refer to all these things as "private equity," while others define private equity as only "leveraged buyouts." In this post, I'm using the all-encompassing definition.

People attribute the growth of private markets to the low-interest rate environment, easy liquidity, and the hunt-for-yield phenomenon. These factors played a role, but there were more tailwinds. What were the factors that led to the rise of the private markets? 1. Pensions and insurers have long-term liabilities, and they need to hit specific return targets to meet those liabilities. If interest rates and, by extension, bond yields are low, it becomes harder to meet those liabilities. Declining yields and lower expected returns force them to take more risks. 2. Pensions across the world are underfunded. These shortfalls force them to seek additional returns to bridge the return gap. 3. Growth of large institutional pools of capital like sovereign wealth funds, endowments, and family offices in the last three-odd decades. These entities have become major players in financial markets. 4. Changing market structure and the decline in the number of publicly listed companies and IPOs worldwide. 5. Changing regulations and the growing cost of public markets compliance. 6. Good old herding. Institutional investors aren't immune to fads and performance chasing. The monkey see, monkey do phenomenon is prevalent not just among retail investors. 7. The regulatory changes post-2008 led to banks retrenching from a lot of areas. Players like private credit and fintechs have stepped in to fill the gap. So what does this all mean? One way of looking at this is how these factors change the way institutions invest. Based on certain return assumptions, analysts at [Callan][15] looked at what it would take to earn a 7% nominal return (5% real return). ![](/blog-images/7-percent-nominal-callan.jpeg) > The graphic below shows that the pattern of increasing complexity over time remains similar over the 30-year period, although the level of additional risk is lower. Today investors need to take on roughly 2½ times the volatility as they did 30 years ago to earn a 5% real expected return, versus over 5 times the risk when matching nominal return expectations. Things have become even trickier since the piece was published, with inflation at 7-8%. All these factors have led to institutional investors increasing their allocation to private equity, venture capital, real estate, and other alternative investments. On average, the allocation to private markets by institutional investors ranges from 10%-50% across the developed world. ![](/blog-images/Pension-fund-allocations-to-alternativesjpg.jpeg) This shift from equities and bonds to a mix of other private assets is called the endowment model. David Swensen pioneered it at Yale and inspired a generation of allocators who've tried to emulate him, with mixed results.![](/blog-images/insitutions-asset-allocation.png) Falling interest rates and the other structural issues I mentioned above have pushed pensions to increase allocations to private markets. If you still think this is a small allocation, consider that pension funds in the 22 largest countries manage over [$56 trillion][17] in assets. When you include other large investors in private markets, such as sovereign wealth funds, endowments, asset managers, and insurance companies, the number goes up to $175 trillion. Even a 1% allocation moves billions. > On average, pension funds in developed markets increased their allocations to alternatives from 7.22% of assets under management (AUM) in 2008 to 11.76% in 2017, a 63% increase. The top ten countries with the largest allocations to Alts as of 2017 were Italy (21.4%), the United States (19.6% of AUM), Canada (17.4%), South Korea (15.9%), Switzerland (14.4%), Brazil (13.8%), Germany (9.1%), Sweden (6.9%), the United Kingdom (4.9%) and Finland (3.5%). When the Tailwind Stops: The Private Equity Industry in the New Interest Rate Environment – CEPR Pension fund asset allocation in the 7 largest pension markets—Australia, Canada, Japan, the Netherlands, Switzerland, the UK, and the US.![](/blog-images/Pensions-asset-allocation.png) It's not just pensions and endowments; even [sovereign wealth funds][18] have dived head-first into private markets. ![](/blog-images/SWF-Private-markets-1.png) The rush to private markets is only getting started. ![](/blog-images/Private-equity-survey-1.jpeg) What explains the dramatic shift into private markets? The common reasons touted by allocators are: 1. Private markets outperform public markets with half the volatility. 2. They offer better diversification compared to traditional stocks and bonds. 3. They offer access to better opportunities since companies are staying private for longer. 4. Private investors can create more value because they have a much longer investment horizon than public market investors. Is private equity a fairy tale? Before we jump to conclusions, let's unpack this. The views about private equity fall on a broad spectrum. On one end of the spectrum, you have Elizabeth Warren, who likened private equity to vampires. Then you have Jeff Hooke, professor of finance at Johns Hopkins and author of _[The Myth of Private Equity][19],_ who says that believing in private equity outperformance is like believing in the tooth fairy. Ludovic Phalippou, the author of _[Private Equity Laid Bare][20]_ and professor of financial economics at the University of Oxford, calls private equity a billionaire factory. On the other end, you have people like Steve Kaplan and Steven Davis, both professors at the Chicago Booth School, who think private equity is a force for good. If you're a public markets investor, you wouldn't think much about performance measurement because you have real-time pricing and easy access to historical data. You'd think this shouldn't be an issue for a $10 trillion asset class like private markets, but you'd be wrong. Something as basic as performance measurement is a nightmare. If you ask five people about the performance of private equity, you will get ten answers. Why the disconnect? As a refresher, a private equity fund is like a closed-end fund. Private equity firms say they can acquire existing companies and improve their performance. Structure of a private equity fund.![](/blog-images/PE-Fund-structure.jpeg) **Fund** Private equity companies like Blackstone or KKR create funds that target a specific sector like healthcare, technology, energy, etc. The common fund structure is a limited liability partnership (LLP). The typical life of a private equity fund is 10 years, but it can be extended for a couple of years. **Investors** The fund then raises money from investors such as pension funds, endowments, and sovereign wealth funds. The investors in a fund are called limited partners (LP). **Management** Much like a mutual fund, a private equity fund will have a manager(s) whose job is to identify companies, acquire them, improve them, and sell them. The fund manager in a PE fund is called a general partner (GP). Unlike a mutual fund, all the money isn't invested right at the start. LPs commit money to the fund, but the GP calls for the money as and when he identifies opportunities. The GP invests the capital in the first 5 years and then starts selling the companies after, returning the money to the LPs after fees. The sales can be through IPOs, secondary sales to other companies, or private equity firms. ![](/blog-images/PE-fund-lifecycle.png) **Fees** A private equity fund typically charges a management fee of 1.5%-2% and a performance fee or carry (carried interest) of 20%. **Performance reporting** Most PE funds disclose their NAVs every quarter. Mutual funds invest in publicly traded securities like stocks and bonds that, for the most part, have real-time pricing. So measuring the performance of a mutual fund is easy. But a private equity fund holds private securities that don't trade. So, private equity firms use [fair value][21] or appraisal accounting methods to value the companies they own. It's a hypothetical price at which you can sell a company. Private equity firms have to adhere to guidelines, such as the fair value [guidelines][22] from the Financial Accounting Standards Board (FASB), but despite that, the valuation is based on the opinion of the fund manager (GP). As you can imagine, this leads to all [sorts of issues][23]. Nobody cared about this when the private markets were small. But with over $10 trillion in AUM globally, the private markets are no longer a cottage industry. Private equity manages trillions that belong to public pensions and sovereign wealth funds, which taxpayers and public workers like Govt teachers, firemen, and municipal workers fund. Knowing whether the fiduciaries managing these public pools of money are doing a good job is the least you should expect. After all, private markets are a notoriously costly asset class. Discussions about private equity lead to questions about performance, fees, whether they create value, systemic risks, and their societal impact. In this post, my objective is to see how smart, professional institutional investors are. So let's look at the performance of private equity first. Whether private markets outperform public markets has to be among the loudest debates in modern finance. Nobody agrees on anything because of the opaque nature of the asset class and the lack of accurate data. Publicly traded securities have time series data based on actual trades. This makes it easy to use models like CAPM and the Fama-French factor models to analyze risk and return characteristics. But private equity funds don't have market values because the underlying companies are private. Even though private equity funds disclose their net asset values (NAV), the valuations of the underlying companies are based on the _opinions_ of the fund manager. The NAVs are published every quarter, but they tend to be stale. There's widespread evidence that private equity funds [manipulate returns][24] and [valuations][24]. Funds are also secretive about the returns. In 2003, Sequoia [terminated its relationship][25] with the University of Michigan after the endowment was forced to disclose the returns of its private market investments. Researchers and academics use databases maintained by firms like Prequin, Burgiss, and Cambridge Associates to analyze private data, but they suffer from obvious self-selection and self-reporting issues. To give you a sense of how difficult it is to get PE data, Prequin [collects its data][26] through Freedom of Information Act (FOIA) requests to public pensions in the US and UK. To make matters worse, the fund cash flows are also irregular, and the valuations of company exits can only be determined after the exit. We're only talking about measuring returns. #### So how has private equity performed? Private equity became mainstream only in the [1980s][27]. If you remove the first 5 years and the last 5 years because that's usually the fund formation and termination stage, the industry is only 30 years old. If you only consider the period where the assets start increasing, that would further reduce the time period to just about 20+ years. The industry hasn't even seen a proper inflationary economic cycle. ![](/blog-images/pe-cycle-1.jpeg) But anyway, this is the typical image you see when people talk about private equity, especially those from the industry. The common view is that high PE returns are a compensation for holding an illiquid asset in which you're locked in for 10 years.![](/blog-images/PE-performance.webp) 3X the returns with half the volatility of the public markets. What more do you want in life? But. Yes, there's always a but. The only instrument in which you can get twice the public market returns with half the volatility is a Ponzi scheme. The popular metric used to measure private equity performance is the internal rate of return (IRR). But as Howard Marks said in his famous memo titled "[you can’t eat IRR][28]," it's a flawed measure because it assumes that the capital paid out will be reinvested at the same rate. There are numerous ways in which IRR can be [further manipulated][29] through subscription lines (borrowing), dividend recaps, or timing of the sales of underlying companies. To overcome the issues with IRR, people use modified IRR (MIRR) is used. MIRR assumed the reinvestment at a more realistic rate of return, such as a public benchmark. One of the best descriptions of the absurdity of using IRR was from a [presentation][30] used by Ludovic Pahlippou, one of the loudest critics of PE.

Founded in 199x, Big4-A presents itself as follows in its 10K filings: “As of December 31, 2019, we had total AUM of zillions, … We have consistently produced attractive long-term investment returns in our traditional private equity funds, generating a 39% gross IRR and a 25% net IRR on a compound annual basis from inception through December 31, 2019.

Note to oneself: $1bn earning 39% over 30 years would be worth $20 trillion. And $20 trillion is the GDP of the United States!

Ludovic Pahlippou ![](/blog-images/Ludovic-Phalippou-1.jpeg) The other popular measure is money multiple, or total value to paid-in capital (TVPI). It measures the multiple of capital paid out to the capital paid in. But this measure doesn't consider the time taken for the cash to be paid out. The public market equivalent (PME) is another alternative; it measures the performance of an equivalent investment in a public market like the S&P 500. Even though PME has its [shortcomings][31], it's a much more reasonable measure of PE performance compared to all the other metrics. One of the biggest issues with PME is the selection of the wrong benchmarks to make PE performance look good, like in the image above, but we'll get to that later. The results of studies analyzing the performance of private markets are all over the place. Here are a few snapshots from this excellent [literature review by Arthur Kortweg][32]. The studies are categorized by leveraged buyouts, venture capital, and mixed analyses. This goes back to the definition of private equity. For some, private equity means buyouts; for others, it's an umbrella term for PE, VC, real assets, and infrastructure.

- ![](/blog-images/annurev-financial-110118-123057-1-03.jpg) - ![](/blog-images/1-Kortweg.png) - ![](/blog-images/2-Kortweg.png)

[Steve Kaplan][33], [Antoinette Schoar][34], [David Robinson][35], [Arthur Kortweg][36], [Greg Brown][37], among others, believe private equity outperformed public markets. The alpha estimates range from 0.01% to 9.3%, and the market beta estimates range from 0.7 to 2.8. But others like [Ludovic Phalippou][38], [Jeff Hooke][39], [Richard Ennis][40], [Antti Ilmanen][41], and [Narasimhan Jegadeesh][42] disagree. But there's broad agreement that private equity returns since the 2008 crisis have [been declining][43]. This [is visible][44] even when using a flawed measure like IRR and when compared with the wrong benchmark like the S&P 500. ![](/blog-images/PE-returns-dropping.png) ![](/blog-images/Private-equity-performance-dispersion.png) The disagreement on private equity performance is in part due to data sources, methodological differences in terms of risk adjustments, leverage adjustments, pre-fee calculations, and the choice of benchmarks. But some clever studies have tried to untangle these issues in interesting ways. Let's look at the issue of benchmarks first. Most studies use the S&P 500 as the benchmark, but private equity investments are akin to small-cap companies. There's a growing body of literature [[1][45],[2][46],[3][47],[4][48],[5][49],[6][50]] that shows that private equity is just a leveraged [small-cap][51] investment. A study by D[an Rasmussen][48] showed that you can replicate private equity returns with a basket of small-cap stocks mirroring the characteristics of those acquired by private equity firms. Another [study by Erik Stafford][46] showed that you can replicate private equity by levering up small and micro-caps with leverage from your brokerage account. Studies that have tried to decompose the [factor loadings][52] of private equity have shown that private equity tends to have higher loadings toward size and value factors. ![](/blog-images/Private-equity-factor-expsoure.png) [Ilmanen et al., 2019][50] tackle this issue of benchmark selection by comparing private equity returns against the Russell 2000 small-cap index by levering it by 1.2X. When compared against this levered small-cap, the outperformance of PE all but vanishes. It's the same when you compare PE to the S&P 600 small-cap index adjusted for leverage and sector exposure. ![](/blog-images/Private-equity-returns-and-valuation-gap.png) Eric Johnson, the creator of the Modified Public Market Equivalent (mPME) methodology, published a [comprehensive study][53] of PE performance. His conclusions were similar, that the outperformance of private equity all but vanishes when compared to mid-cap, small-cap, and equal-weighted indices. You could argue that combining buyout, venture, and real estate is wrong. But [Ilmanen et al. (2019)][50] show that unlisted real estate has underperformed listed REITs. As for venture capital, if you remove the dot-com bubble period, the [performance][54] is similar to Nasdaq Composite. ![](/blog-images/private-equity-performance-across-vintages.png) ![](/blog-images/Private-equity-eric-johnson.jpeg) On an interesting note, Tiger Global partner Scott Shleifer in a recent conference, [had this to say][55] about their venture capital returns in India: “Returns on capital in India have sucked historically. If you look at the market-leading internet companies, whether it is Google, Facebook, Alibaba or Tencent, revenue for them got bigger than cost more than a decade ago. You had a great legacy of last 17-18 years of materially profitable internet companies. So returns on equity in the internet got really high and the returns for investors have been really high. But that did not happen in India,” It seems to me that the reason for the public markets vs. private markets is that people look at them from a public market lens. The private equity guys will have you believe that's wrong and that they're special. But what happens if you extend the same line of thinking? A few studies take some interesting approaches to compare the performance of private equity to public markets. Unlike public markets, private markets don't have a deep and liquid secondary market. Though the secondary market for private equity grew to $130+ billion in 2021, it's still tiny compared to the AUM. ![](/blog-images/Private-equity-secondaries.png.png) To get around the issues with private equity data, [Boyer et al. (2019)][56] used secondary deals data to build private equity indices. They find that private equity is much riskier than public equities, with a beta of over 2 and negative alpha in contrast to indices based on NAVs. This matches the recent evidence from secondary sales, even though LPs have been reluctant to mark down their portfolios. ![](/blog-images/gta-2q22-43-1.png) Jegadeesh et al. (2009) analyzed listed fund of funds (FOFs) and listed private equity companies (LPE) that invest in private equity. They found that private equity FOFs and LPEs have negative alpha, beta close to one, and positive factor loading towards small and value factors. Arpit Gupta and Stijn Van Nieuwerburgh [took a novel approach][57] to analyze private equity. They strip the cash flows of private equity funds and match the horizon with corresponding strips for public securities like dividend strips, capital gain strips, and bond strips. The intuition is that the risk and returns of private equity funds can be matched to corresponding strips on publicly traded securities to tease out the similarities. They find that growth stocks are proxies for venture capital, REITs for real estate, and small, value, and growth stocks can be proxies for buyouts at various stages of the fund. They also find that when you adjust for risk, private equity has a negative alpha compared to replicated public portfolios. #### What about the illiquidity premium? Assume that you have a choice between investing in two stocks. Icky Ltd. is a stock with deep liquidity that you can sell anytime. Gooey Ltd. is not so liquid and doesn't trade on most days. All things being equal, which of these two stocks should have higher expected returns? Gooey Ltd. is illiquid, so there should be compensation for it. This is one of the selling points of private equity. Since you cannot enter and exit private equity whenever you want, like public equities, there's an "illiquidity premium" for private equity investments. But think about it for a second. If private equity is just levered small or mid-cap equities, as we've seen so far, why would someone still invest in private equity? A few reasons come to mind: 1. Private equity managers have discovered secret deposits of alpha that public equity managers haven't. 2. Private equity provides diversification benefits. 3. Public markets are a giant distraction for institutional investors. If a pension fund is investing for 30–50 years, what's the need for real-time pricing? Real-time pricing increases the chances of people making mistakes. The evidence of private equity alpha is mixed. As for diversification, if all or most of the private equity returns can be explained by public market factors, then there's no diversification benefit. > Yet private equity funds represent equity positions in corporates. Hence this low volatility must be artificial, the product of smoothed valuations. Private equity portfolio companies are influenced by the economic tides just as much as public companies, even if they don’t want this reflected in their valuations. Nicolas Rabener What if private equity is attractive because of its illiquidity? What if investors _know_ that private equity is levered public equity, _but_ they'd prefer not to wake up in the morning to see their portfolio down by 30%? What if there was a way to get public equity returns without real-time prices? This is the theory of Cliff Asness, the founder of AQR. He even coined the term "volatility laundering," one of the greatest investing terms ever. If private equity investors are indeed paying for the lack of real-time prices, how can there be a premium? If you are paying for something, that means the returns have to decrease. The more investors want something, the lower the premium. This is [Cliff's theory][58]: > Unlike Swensen’s PE market, which was primarily about earning extra return, today’s PE market is now seemingly as much about not having to report market prices. That kind of investment should return less over the long term than the appropriate levered public equity benchmark (and I haven’t even gone into the fees on fees on fees). Admittedly, this is educated conjecture. The net of the above could be a smaller return premium for private versus public equity, as opposed to a deficit. But I do stand by my conjecture, and though the magnitude is impossible to be precise about, it’s difficult to imagine the drop-off is not directionally right and nontrivial. On second thought, the assertion that private markets help you stay disciplined because of the lack of real-time pricing doesn't make sense. Do you want to invest with a manager who cannot handle facing reality, even if it induces acid reflux and loose motion daily? Isn't the whole point of being an investment professional that you are _smarter_ than regular people? You might think that since institutional investors are goddamn smart, they won't be paying for someone to lie to them. Blake Jackson, David C. Ling, and Andy Naranjo [found that][59] private equity investors want to be lied to.

Institutional investors invest in illiquid assets because they prefer mark-to-magic valuations over mark-to-market valuations. Incentives!

The central message of our paper is that some PERE GPs manipulate interim returns in a manner consistent with their investors’ desire for such boosted returns. PERE GPs do not appear to manipulate interim returns to fool their LPs, but rather because their LPs want them to do so. This allows these LPs to report higher returns alongside lower reported volatility in the short term. This catering view of return manipulation is consistent with the overwhelming LP preference to access real estate investments through PERE funds rather than more volatile marked-to-market REITs.

We find markedly little evidence that IRR manipulations hurt GP attempts at raising capital for follow-on funds. In fact, the average GP that manipulates IRRs successfully raises capital for a follow-on fund and manages larger commitments from their LPs.

To further quote Cliff Asness: > That privates are being more prized today, at least on a relative basis compared with the past, for their hiding of the risk. They're hiding with open eyes. In the last 5-10 years, there's been a mad rush into private equity, so much so that institutions were allocating through [secondaries at a premium][60]. > For the first time, stakes in big buyout funds are this year on average being sold at “par”, or equal, to their last public net asset value, according to Triago, a company that helps arrange the trades. These stakes have traded just shy of their NAV in recent years. Funds managed by the best-known firms — such as Blackstone, KKR or Carlyle — are selling at a 5 per cent to 7 per cent premium over their NAVs, according to Antoine Dréan, Triago’s chairman.

This isn't a secret, either. Everybody knows, but nobody cares. Here are the responses when an all-star cast of finance professors, including Sheridan Titman, Stefan Nagel, Steve Kaplan, Janice Eberly, John Cochrane, and Campbell Harvey, were asked if PE had lower volatility compared to public markets.

![](/blog-images/PPrivate-equity-return-smoothign-survey.png) Not everybody agrees that private equity is "laundering volatility." There was a lively debate in the comments section of FT Alphaville recently. Cyril Demaria, an affiliate professor for private capital at EDHEC Business School, published a piece defending private equity's valuation practices and made t[his jaw-dropping assertion][61], I presume, with a straight face. But I cannot independently verify if Cyril had a straight face when writing the post. > Yes, the ebb and flow is still more muted than what you see in public markets. But that’s because private fund managers are prudent when assessing their holdings, both on the upside and the downside. As a result, the NAVs move more sedately than stock markets — especially when you consider that NAVs are effectively calculated gross of performance fees (the 20 per cent “carried interest”). > Is this approach wrong? It’s pretty clear that public markets overreact to information, and can diverge substantially and durably from their fundamentals. Instead of calling it “laundering volatility”, perhaps private market NAVs actually bring a healthy dose of prudence and reason to an otherwise wildly gyrating financial system? I’d argue that these NAVs should even be seen as a valuable source of independent financial information — although still available on average with a three- to six-month delay. As luck would have it, Cliff Asness decided to engage in the comments section, and it's glorious:![](/blog-images/2023-03-04-20.01.23-www.ft_.com-698b1ab92525.png) In summary, there's reasonable evidence that private equity is nothing but unlisted small and microcaps with a 2% and 20% fee structure. It's fair to assume you can replicate private equity returns using publicly listed stocks with leverage. Private equity is also similar to public markets in many ways. Like in public markets, there will always be some private equity fund managers that generate abnormal alpha. But just like in public markets, it's almost impossible to identify those managers in advance [[1][62], [2][14]]. Given the structure of private equity and its lack of transparency, it'll be a long time before we have clean data to put this debate to rest. Illiquidity and opacity are a salesman's best friends. So much for "smart money." #### Does it really matter? Yes and no. No, it doesn't matter to the private equity funds. By manipulating returns, private equity funds hide their actual volatility. If you agree that private equity is levered small and mid-cap equities, then how the hell can it fall less than listed equities? Private equity firms charge 2% of the AUM and 20% as carry. If they understate the volatility, the AUM doesn't change much. This means they can continue charging a 2% fee on a higher AUM base than they would have if all the assets were market-to-market. Genius! ![](/blog-images/Private-equity-drawdowns.png) Yes, it matters if you are an investor. We saw a real-life demonstration of _why_ this year. Blackstone Real Estate Income Trust (BREIT) is a non-traded real estate investment trust (REIT). On December 2nd, 2022, Blackstone limited redemptions in the fund after investors rushed to sell the REIT. The funny thing is, as of November 2022, Blackstone said that the fund had generated 8.4% while publicly-traded REITs were down 25-30%. Only [43%][63] of the redemption requests out of the total redemption requests, equal to 5.44% of the AUM were approved in December. In February 2023, only 35% of the ~$3.9 billion in redemptions were [processed.][64] Blackstone continued to sell properties and managed to get the University of California to invest [$4.5 billion][65] by promising a guaranteed [11.25%][66] return. On January 19, KKR joined Blackstone in [restricting withdrawals][67] in its non-traded REIT fund. “They love their assets like their children, they really don’t want to write down those assets,” she said. “They are also fundraising, so it’s not really going to help them to write down those assets.” Imogen Richards, global head of investment structuring at Pantheon Ventures | Bloomberg #### Fees How can anyone write a post about private equity without a pinch of populist pandering? Private equity is a costly asset class. Funds charge a management fee of 1.5–2% and a performance fee of 20%. But private equity is [lightly regulated,][68] and fees aren't standardized. The fees vary according to the [type and size][69] of investors in the same funds. Savvy investors can negotiate the fees and have private contracts that aren't disclosed. Apart from the headline fees, funds can also charge additional fees such as transaction fees, portfolio company fees, and monitoring fees. Ludovic Phalippou and his co-authors estimated that between 1995 and 2014, private equity firms charged [$20 billion][70] in such fees. All these fees came from the companies whose boards were controlled by the same private equity funds In the case of fund of funds, there's an additional layer of funds due to the structure.

All the debates over the performance of private equity are partly due to the high fee structure. As I've summarized so far, some argue that private equity [delivers alpha][71] net of fees, and others argue that [it doesn't][72], and I don't think this debate will be settled anytime soon. You have to draw your own conclusions based on the available evidence. My view is that the benefits of private equity have been overstated. The realities of private equity are much the same as fund management in public markets. Most managers are extracting rents, and a few managers that are [hard to identify in advance][73] add value. The superficial arguments touting the advantages of private markets that paper over these realities never cease to amaze me. Then there's the [carried interest loophole][74] in the United States. This taxation quirk allows private equity managers to treat carried interest or carry as capital gains instead of considering it as salary. Capital gains tax at 20% is far less than the individual tax rate of 37%. The private equity lobby has thwarted repeated attempts to close the loophole. In the salaciously [titled paper][72] _An Inconvenient Fact: Private Equity Returns & The Billionaire Factory,_ Ludovic Pahlippou notes that PE firms made over $230 billion in carry that went to a small group of rich people: > Hence, although the latest decade of funds that terminated their investment period (2006-2015 vintages) returned about the same as public equity benchmarks (about 11% p.a.), their managers still received $230bn of Carry, alongside a lot of other fees. Most of this money went to a relatively few individuals, mostly founders of large PE firms (Ivashina and Lerner (2019)). I find that the number of PE multibillionaires rose from 3 in 2005 to 22 in 2020, and are mostly affiliated to large PE firms. One of the sales pitches of private equity is that it reduces the principal-agent problem rife in the public markets. But going by the numbers, it seems they've done a brilliant job of tilting the rents generated away from the principal towards the agent. Why haven't the goddamn fees come down? In the last 15 years, fee compression in [mutual funds, ETFs][75], and [hedge funds][76] has been like the law of gravity. ![](/blog-images/Fee-compression.webp) But private equity fees have bucked this trend because of the [sheer demand][78]:

A Dutch pension sector source involved in the selection of private equity mandates told IPE about his recent visit to a private equity manager that was looking to raise €1.5bn for a fund. He says: “This manager already had €30bn in commitments. So if APG, PGGM or MN back out of a deal because of the fees, that means nothing to them.”

Cost saving in private equity also remains a difficult exercise as fees are negotiable, in reality, only at the time of the investment, Staub notes. “Nobody is really negotiating with private equity managers, fearing that they may lose access to the private equity firm,” he adds.

### So does private equity add value? Michael Jensen, the famed economist and one of the stars of management textbooks you hated reading, wrote in a [provocative piece][79] in 1987:

The publicly held corporation has outlived its usefulness in many sectors of the economy.

By resolving the central weakness of the public corporation—the conflict between owners and managers over the control and use of corporate resources—these new organizations are making remarkable gains in operating efficiency, employee productivity, and shareholder value.

He wrote that the private markets, by fixing many of the ills that plague public markets, would "eclipse" the public markets. Have they? Put another way, the question is, does private equity add value? Let's start with the key sales pitch of private equity. By taking companies private, they shield them from the short-termism that plagues public markets. Since private equity companies don't have to worry about quarterly results, pleasing shareholders, or using the word "synergy" 63 times in management conference calls, private equity managers allow companies to focus on growth. But do they? The median holding period of private equity assets is less than [5 years,][80] after which they're either taken public or sold. So, how does this solve the problem? In the same way, dipping your hand in a can of Fevicol fixes a broken hand. In a [delightful talk][81], Mihir Desai, professor at Harvard Business School and author of _The Wisdom of Finance,_ summed it up better than I can: > Private equity becomes a major asset class in the last 20 years. Why? In part, don't deal with all that garbage. I'll come along, I'll be one big owner. I will solve this for you, and I will sit on you like a hawk and watch you like a hawk. That's the private equity answer. Is that a salvation to this problem? Turns out they have their own problems cuz guess what? They're gonna monetize their investment by doing what taking their company public back into that game right there, and they're gonna make themselves look particularly good right before they do that. Everything in finance is one big informational problem, that's what this whole game is about. The people who you think of as being terrible activists and short sellers those nasty people, maybe they're the heroes. They're the only ones who will tell you the negative news, everyone else is positive. They may be the ones who will say, no, wait a second, "it's a liar." > Now, of course, they're not really heroes because they have their own incentive and information problems. Because they are allocated capital, and they have to get their returns for their funders. Life is one big daisy chain of principal-agent problems. Mihir Desai So are all private equity firms rent-seeking vampires that are sucking our economies and communities dry? After analyzing 9,800 US private equity buyout transactions from 1980 to 2013, [Davis et al][82]. (2019) more or less concluded that the answer to the question, "Is private equity good or bad?" is "it's complicated." The effects vary based on economic conditions, deal type, industry, and time. But here are some high-level observations: 1. In the case of private-to-private acquisitions, employment rose by 13%. 2. In the case of public-to-private acquisitions, employment fell by 13% and by 16% in the case of the acquisition of specific divisions. 3. Productivity rose by 7.5%, leading to increased revenues. 4. Productivity increases more in acquisitions when credit conditions are tight and less during easy credit conditions. But at the risk of stating the obvious, such broad analyses hide substantial variation. Let's look at studies that analyze the impact of private equity on specific industries. #### Healthcare Since the 2008 crisis, the healthcare industry has been a favorite of private equity firms. [Studies][83] by Eileen Appelbaum and Rosemary Batt [have shown][84] that PE firms have been buying up hospitals, emergency rooms, physician staffing firms, medical debt collection agencies, and hospital management software providers and rolling them up. This has had a devastating impact. A study by Gupta et al. (2021) found that private equity owned nursing facilities have higher deaths, higher charges, fewer caregivers, an increased prescription of antipsychotic medication, and a precipitous decline in the quality of care. This [investigative piece][85] in the New Yorker by Yasmin Rafiei on private equity owned nursing homes is heartbreaking. [Other studies][86] have come to similar conclusions. Private equity ownership leads to higher insurance claims, higher costs, lower quality care, and more injuries. This is depressing considering the fact that US citizens [spend the most][87] on healthcare.![](/blog-images/life-expectancy-vs-health-expenditure-per-capita-1.png) #### Housing The recent inflationary surge led to a dramatic increase in the cost of living worldwide. Along with everything, housing prices and rents rose sharply, affecting the poor and low-income households the most. Since housing is one of the biggest household expenditures, there was widespread outrage over rising rents. As people looked for the cause, private equity firms like Blackstone, Brookfield, and KKR emerged as the villains. They were subject to intense scorn, so much so that BlackRock had to release a [statement][88]. Unlike healthcare, private equity involvement in housing is still [small][44]. ![](/blog-images/Global-buyout-deal-count-by-secto.png) Private equity firms have long been in real estate since it's the largest asset class on the planet. ![](/blog-images/Housing-1.png) But they started getting involved in housing after the [2008 crisis][89]. As home foreclosures hit a record high, private equity firms bought single-family and multifamily rentals. Contrary to all the headlines about institutional investors gobbling up housing, institutional investors own just [1-5%][90] of rental homes in advanced economies. They might be big in some sub-regions, but they're still small overall. But the rate at which they are acquiring homes has been rising, and given the ever-increasing pools of large investors, this will only grow over time. The affordability crisis in housing isn't new; it's been decades in the making. The crisis has many country-specific causes involving a toxic mix of politics, regulations, taxation, and supply issues. But of the houses private equity firms own and manage, they've become institutional slumlords. They've jacked up rents, introduced hidden charges, exorbitant fines, cut costs on maintenance, and forced [evictions][91]. ### Media The moment the internet unbundled news and the audience, traditional news media began its [death spiral][92]. Digital media was supposed to be the savior, but news media could not compete with Google and Facebook. The result is that newspaper circulation and revenues have been in a secular downtrend across much of the world, especially in local news media. There have been countless closures, [layoffs][93], mergers, and acquisitions. ![](/blog-images/Web-capture_4-3-2023_202858_deliverypdf.ssrn_.com-1.jpeg) Private equity tends to be active in distressed industries, and media is no different. Private equity ownership of US newspapers increased from 5% in 2001 to [23%][95] in 2019. [Ewens et al. (2022)][96] analyzed the impact of private equity ownership of newspapers, and the results are depressing. Private equity ownership leads to a reduction in local news stories, a decline in circulation, and increased layoffs of reporters and editors. The fallout of this is that voter turnout is low in local body elections. #### Private equity is satan incarnate! 1. Eaton et al. (2018) show that private equity ownership of colleges leads to lower graduation rates, earnings, and student loan repayment rates. 2. A study by Brian Ayash and Mahdi Rastad shows that the bankruptcy rate of leveraged buyout (LBO) firms is 18% higher than that of non-LBO acquisitions. 3. Brian Ayash and Edward Egan show that private equity acquisitions lead to lower patents, reduced grants, and higher sales of existing patents. 4. The carried interest loophole has survived decades of assault thanks to the formidable private equity lobby. Dare I say legislative capture? 5. Private equity has been on a buying spree, buying everything from veterinary practices to pet care centers. The evidence shows that this has led to the closure of practices affecting farming communities that depend on local vets and a sharp increase in drug prices. ### Private equity is almost an angel! These are a few of the most egregious examples of how the incentive structure of private equity is geared towards exploitation and rent-seeking. But there's positive evidence of private equity ownership too: 1. Studies by Ross et al. (2021) and Bernstein et al. (2017) have shown that private equity was instrumental in containing bank failures during the 2008 crisis. The banks acquired by private equity performed much better than comparable acquisitions. 2. A recent paper by Howell et al. (2022) showed that acquisitions of airports by private equity led to marked improvements in passenger count, number of flights, airlines, and quality of service. 3. A study by Fracassi et al. (2020) showed that consumer product companies acquired by private equity see an increase in sales, products, and revenues. 4. Cohn et al. (2016) show that safety violations and workplace injuries decrease when private equity firms acquire companies. On the one hand, critics paint private equity firms as blood-sucking vampires that saddle companies with debt and strip them for parts. On the other hand, the supporters argue that by instilling modern management practices, operational expertise, trimming the fat, and easing financing constraints, private equity [adds value][97]. The truth, as always, lies somewhere in the middle. If you want to be critical of private equity, you can make an extreme case that it should be illegal, like Benjamin Braun. This line of thinking leads to the question of why private equity exists in the first place. The easy answer is that private equity is another form of risk capital. A more theoretical premise is that some companies are better off remaining private and can do well with the management and industry expertise that private equity can bring. While researching this piece, I had an "aha" moment when I read the title of this [Brookings essay,][98] "Private equity Investment as a Divining Rod for Market Failure." I realized private equity thrives because it's good at exploiting market failures and legal and regulatory loopholes. 1. Private equity firms tend to aggressively exploit payment loopholes in healthcare, leading to higher costs. 2. Private equity-owned educational firms are good at squeezing govt benefits like federal educational aid. 3. Until recently, private equity had all but escaped the antitrust spotlight, even as PE firms consolidated large swathes of industries and amassed incredible market power. 4. It's remarkable that private equity has avoided being regulated by the SEC in the US, despite being around since the 1970s and having over $10 trillion in AUM. 5. The private equity industry has its own senator—Kyrsten Sinema. After receiving millions in campaign donations from private equity firms, she repaid them by torpedoing a recent attempt to close the carried interest loophole. These are a few examples of how private equity is good at exploiting loopholes and market failures. Continuing with the same line of thinking as to why private equity exists, there's another perspective. Take the example of the news media. This space is near and dear to my heart. I track it closely because, as the slogan of the Washington Post sums it up, "democracy dies in darkness." But, news media has been in a secular decline across much of the world. Except for large organizations like the New York Times, The Times of India, and the Financial Times, everybody else is struggling or dying. Now, think of a hypothetical world where private equity and distressed funds didn't exist. What would happen to news organizations? Because there is evidence that private equity firms offer distressed companies a new lease on life or delay their impending death. Here's an excerpt [from this paper][96] by Michael Ewens, Arpit Gupta, and Sabrina T. Howell: > The bright side is that private equity ownership leads to higher newspaper survival rates and more digital content, consistent with investing to help to turn around and modernize a struggling industry. A downside is that civic engagement appears to decline because readers of newspapers and the outlets that rely on their reporting have less information about local government. The high-powered incentives to maximize profits that accompany private equity ownership may be poorly aligned with the public good characteristics and implicit contracts involved in reporting about local government. Local Journalism under Private Equity Ownership Is it better if such ailing companies die a quick and clean death or delay their demise while employing millions of people? Idealistic arguments that news should be a public good funded by taxpayers are beside the point. We don't live in an ideal world. The issue with passing moral judgments is that it leads you down the path of thinking about such messy questions. Either that or I am complicating this whole thing. There's more to this than just my naive simplification. #### Climate change as an asset class Except for academics and interested observers, most discussions about private equity are about the fees and performance of private equity. Fees and performance are important factors, but it's important to take a wider lens when thinking about an industry that has attracted trillions from public pensions belonging to teachers, firemen, policemen, and other government and blue-collar workers. Aside from the financial markets, it is important to examine private equity from a political economy standpoint. It took some time, but there's widespread acceptance, even among skeptics, that we're all going to die from climate change. If we are to have a fighting chance of not dying, we have to transition away from carbon-intensive fuels to green energy. Both the public and private sectors have critical roles to play in this transition, and this is where asset managers like private equity come into the picture. Before we get to the role of asset managers in us not dying, I think it's important to understand how asset managers and private equity, in particular, became such important actors in our society. With the doubling of global assets under management (AUM) in the last decade to over $100 trillion, asset managers have become the new masters of the universe. The growth is the result of several well-known factors, such as rising incomes, the growing penetration of retirement saving vehicles, the growth of the rich, the shift away from defined benefit pensions to defined contribution pensions, and the rise of large cash pools such as sovereign wealth funds, family offices, and corporate treasuries.![](/blog-images/Global-asset-manager-AUM.jpeg) But there are also several structural reasons. Across much of the developed and developing world, there has been a shift from bank-based finance to shadow banking or [market-based finance][100], where security markets take center stage in [credit creation][101] and new forms of shadow money. This long-term structural change accelerated after the 2008 financial crisis as [regulators forced banks][102] to shrink their footprint. Shadow banking is a term to describe non-bank financial intermediation that occurs outside the banking system. Asset managers, money market mutual funds, private equity, private credit, hedge funds, non-bank financial institutions, pensions, and insurance companies, among others, are the primary actors. Benjamin Braun's "[asset manager capitalism,"][103] Daniela Gabor's "[Wall Street consensus][104]," and Perry Mehrling's "[money view][105]" are important frameworks that explain this new paradigm. You cannot understand the evolution of the global financial system without reading the papers and books and listening to the talks of these three brilliant economists. Shadow banking has been around in one form or another for a long time, but the shadow banking system as we know it today originated in the 1970s. The system originated from political and regulatory decisions made in the United States and Europe. A few key reasons: 1. The move to separate finance ministries and central banks. This push for central bank independence and the move by sovereigns to raise money from the markets led to the birth of repurchase agreement (repo) markets. 2. The inflationary shock of the 1970s and interest rate ceilings on deposits (Regulation Q) led to the birth of money market mutual funds and the high-yield bond (junk bond) market. 3. The creation of securitization structures and derivatives like credit default swaps in the 1970s and 1980s 4. The "neoliberal assault on the old traditional welfare state," as Daniel Gabor terms it. This, along with the reduced capacity of the state to tax rich individuals and corporations, led to people relying on pensions and insurance companies to save for future uncertainties as opposed to the state. This led to the rise of institutional cash pools like large corporations, pensions, broker-dealers, and insurance companies. 5. A global hunt for yield. 6. Shadow banks rose to mediate the search for safety by large institutional cash pools and the search for yield by levered investors like hedge funds. 7. The shadow banking system, a crucial piece of the shadow banking universe, developed with the active involvement and backstop of the Federal Reserve. 8. A deliberate political project to export the American model of market-based finance around the world. But coming back to the topic, there's a profound contradiction at the heart of the green transition. The rich countries got rich because they [burned their way][106] to prosperity. They are now trying to push poor and developing countries that are starting their development journeys to cut emissions aggressively and green their economies. ![](/blog-images/Cumulative-CO2-treemap-1.png) The [irony][107] is that the poorest countries, which have to grow the most and are financially the weakest, [face][108] the [disproportionate][109] burden of climate change.![](/blog-images/impact-of-climate-chnage.jpg) All the promises made by the rich countries to provide finance to help the poor countries have been [just lip service][110]. We've known about the devastating impact of climate change [for decades][111], but we chose to bury our heads in the sand. We kept delaying action, and the bills have now come due. The cost of transitioning to a low-carbon economy is astounding. The best estimates put the number anywhere from [$4][112] to [$9][113] trillion a year. Remember, these are estimates. Humans have always had the predictive capabilities of a drunk monkey throwing darts while riding a horse with Ray-Ban sunglasses. So, how much are we spending currently? A drop in Varthur Lake! ![](/blog-images/cost-of-climate-transition-1.jpeg) The problem is, we don't care. This Saturday Night Live segment best summed up our collective apathy towards dying: > We don’t really worry about climate change because it’s too overwhelming and we’re already in too deep. It’s like if you owe your bookie $1000 it’s like okay I’ve gotta pay this dude back. But if you owe your bookie a million dollars, you’re like, ‘I guess I’m just gonna die? Colin Jost The rich countries can afford to _do_ at least something. In the last few years, America and Europe have taken breaks from their year-long political carnivals, and clown shows to do something. The US passed the $370 billion [Inflation Reduction Act][114], while Europe announced the €210 billion [REPowerEU][115] plan. It's nowhere close to enough, but it's something. The poor countries, on the other hand, are buggered. According to an [OECD estimate][116], the gap between what low-income countries need and can afford runs to $3.7 trillion per year[.][116] Again, these are estimates; the actual funding needs are orders of magnitude higher. The rich countries owe the poor countries. In an ideal world, they would've helped the poor countries transition to greener economies and cope with the effects of global warming. Even though poor countries are least responsible for global warming but at the greatest risk from it, the rich countries have abdicated their responsibility. To make matters worse, emerging and developing economies are facing severe [fiscal constraints][104], thanks to COVID-19. According to the [IMF, 60%][117] of low-income countries are in or at risk of debt distress. These countries also have unreliable [access to capital markets][118] and face a high [cost of capital][119]. Instead of helping, the rich countries are resorting to old tricks. They're once again peddling private finance and markets as the solution. It doesn't matter that they've been pushing the same thing since the 1990s and that it has failed. This time, it comes in new and improved [neoliberal packaging][120]. Leaders like John Kerry and Mark Carney and organizations like [the World Bank][121], [the International Monetary Fund (IMF)][122], [the Asian Development Bank (ADB)][123], and [the G20][124] are promising a flood of trillions from global institutional investors if poor countries can make it worth their while. It's interesting to note that Mark Carney is the chair and head of transition investing at Brookfield Asset Management, an $800 billion private equity giant. How? Institutional investors with hundreds of trillions under management are looking for investible opportunities. The problem is that low-income and emerging countries are fraught with political, social, and economic risks. At the same time, these countries need trillions to transition to a green economy. Institutional investors will be more than happy to invest indevelopment projects if developing countries can improve the risk and return profiles of the projects. How? By providing guarantees against political, demand, climate, currency, and bond market risks for institutional investors by moving them to their [own balance sheets.][125] Daniel Gabor dubs this the "de-risking state" in the _[Wall Street Consensus][104]._![](/blog-images/Wall-Street-consensus-1.jpeg) Here's an [excerpt from the IMF's][126] sustainability advisory group:

Governments, development financial institutions, and the private sector increase their collaboration to develop a pipeline of bankable projects. Development of such a pipeline must include an emphasis on private sector engagement during the project preparation phase, as well as mechanisms to advance credibility and reduce uncertainty of government commitments, plans, and policies (including offtake risk for renewables).

Governments employ blended-financing solutions to help unlock financing and address risks for long-term investments.

In short, private financiers will be more than happy to finance the green transition in low-income countries if they don't have to take risks. How gracious of them! It's remarkable that private financiers like Larry Fink openly ask governments, development banks, and multilateral institutions to insure them against market risks.

We need global solutions and international organizations that are willing to mitigate the risks of investing in emerging markets, Fink said.

If we’re going to attract the hundreds of billions of dollars of private capital for brownfields and other sustainable projects in the emerging markets, we need more solutions like those used in mortgage-backed securities where some degree of losses is absorbed before they impact private investors.

Larry Fink — Reuters Carolyn Sissoko, professor of economics at UWE Bristol, [hits the nail on the head][127]: > Our current financial markets are characterised not just by unreliable liquidity in sovereign debt markets, but also by a zeitgeist that favours what is best described as crony capitalism in advanced economies, when structural financial instability is transformed into a reason to socialise losses and bail out unsuccessful companies. The discussion of the «de-risking state» above is part of this phenomenon, and we have seen this in the responses to financial crises in 2007–2009 and in 2020. Carolyn Sissoko — Making the great turnaround work, Heinrich-Böll-Stiftung After the bailout of the banking system in 2008 and the bailout of the bond market and shadow banking system in [2020][128], moral hazard is no longer a bug but a feature. Unlike in 2008, there's no shame in asking for handouts and guarantees from the state. The private financiers think they are entitled to it now. This is where private equity comes into the picture. I know this is a roundabout way of getting to specifics about private finance, but this is an existential issue, and it's important to understand the historical context of how asset managers became so dominant. Asset managers such as mutual funds, hedge funds, and private equity funds hold trillions of dollars worth of fossil fuel assets. Given the dramatic asset growth, these asset managers have become the largest owners of large swathes of listed and unlisted equities and bonds. They also wield significant influence through their [ability to influence][129] the company's management through shareholder voting and engagement. So, how's this working out? #### What's financialization and privatization by another name? In pushing private finance as the solution to climate finance, advanced economies are repackaging the Washington consensus—more financial liberalization, deregulation, and privatization. In short, more markets, less state! It doesn't matter that these policies have had [mixed results][130]. Advanced economies and multilateral institutions like the World Bank and the IMF are pushing poor countries to shift from bank-based financial systems to securities-based, market-oriented financial systems. Private finance would be more than happy to funnel trillions into development as long as they have access to: 1. Liquid financial markets and the ability to buy and sell. 2. Derivatives and swap markets to hedge default and currency risks. Alignment of the financial system with climate and development objectives also means developing and deepening domestic financial markets and banking systems within EMDEs to help mobilize domestic resources. Developing and deepening these markets can help minimize balance of payments vulnerabilities that could arise from large external inflows of financing for climate change mitigation and adaptation. MDBs will be particularly critical in supporting an agenda along these lines, through providing technical assistance and advising on blended-financing aspects to share risk and build capacity, as outlined in the next subsection IMF The key premise of [market-based financial systems][125] is that anything can be turned into tradable securities through securitization, including development and nature itself. It's a profound irony that the prevailing consensus to tackle climate change is to transform it into an asset class. Under pressure to do more, asset managers and developmental institutions have pushed for and adopted ESG ratings to determine the sustainability characteristics of their portfolios and projects. The issue is that there are no accepted sustainable/green taxonomies. Private ESG raters are also unregulated and opaque, making their ratings [useless][131] as things stand today. This increases the risk of ESG rating shopping, greenwashing, and sustainability washing. In pushing private finance to deliver a carbon transition, multilateral institutions like the World Bank are ignoring the fact that asset managers and pensions aren't non-profits. They have return expectations and targets. The issue is that not all projects can deliver the returns private financiers seek. Necessities like affordable housing, healthcare, and education shouldn't either. > Investment will be needed not just in the places where markets can make use of the profit motives of firms alone. Funds will also need to flow into projects and investments that yield the highest social returns for people and communities, and sometimes in the absence of direct commercial interests. Carolyn Sissoko — Making the great turnaround work, Heinrich-Böll-Stiftung This opens up the risk of [cherry-picking][132] the projects that asset managers like, turning poor countries into all-you-can-eat buffets for private financiers.

Crucially, investors don’t want to buy just anything. Given a pool of public assets to choose from―hospitals, utilities, transit―private investors will cherrypick those with steady revenue streams from wealthier and more concentrated groups of citizens. Absent strict regulation, infrastructure privatization usually also permits an asset’s new owners to raise prices, lay off staff, and diminish service quality―all to maximize revenues and cut costs. Asset manager Macquarie’s ownership of an English water utility, for example, left customers paying higher prices while letting raw sewage leak into the country’s rivers, while the proposed deregulation of India’s electricity distribution sector has sparked protests over fears that it will degrade rural electricity provision and harm electricity sector workers. While the private sector profits from serving the privileged, the public sector loses money serving everyone else. This segregation is by design.

Advait Arun- Securitizing the Transition If poorer countries follow the lead of the G20 and the World Bank, they risk subordinating their developmental needs and sovereignty to the need for returns of private finance. This will further entrench the [structural power of finance][133]. Financialization also subjects poor countries to the [risks posed by hot money][134] flows. The same flows led to [devastating financial crises][135] in Latin America and Asia in the 1990s. These risks won't go away even if institutional investors finance these assets through local currency-denominated bonds. The _[original sin][136]_ will morph but won't go away. > Major EME governments have gradually reduced their reliance on foreign currency debt by borrowing more in their own currencies overall. They have also encouraged foreign investment in their domestic market, especially in local currency bonds. As a result, EMEs now finance more of their external debt in their own currency than was the case in the early 2000s. At the same time, depreciations in EME currencies often reduce returns to foreign investors, who sell local currency bonds in periods of stress. Even when EMEs rely less on foreign currency borrowing, they continue to face volatile capital flows. Onen, M., Shin, H. S., & Peter, G. V. (2023, February 21). Overcoming original sin: insights from a new dataset. Overcoming Original Sin: Insights From a New Dataset. https://www.bis.org/publ/work1075.htm By pushing more market-based solutions, private finance is seeking to financialize and [securitize development and nature itself][104]. So, how's all this working out? Not great! Despite [increasing][137] [evidence][138] that private finance isn't an unalloyed good without strong governance, legal protection, local expertise, international regulatory frameworks, and domestic protections, rich countries continue to push market-based finance as the solution to save the planet. #### Back to the asset managers By virtue of their ownership of fossil fuel assets, asset managers like private equity firms are at the heart of the green transition. While there's growing literature [[1][139],[2][140],[3][141],[4][142]] on the effects of increasing ownership of public equities by asset managers, little attention has been paid to private equity, and I hope this changes. With ~$10 trillion in assets, private equity is no longer a marginal player in the global economy. The popular yet sterile view of private equity funds as buyers and sellers of private companies and as non-bank lenders is incomplete. [Semieniuk et al.][143] (2022) traced the ultimate ownership of 43,439 oil and gas assets. They found that investors, through funds and pensions, are at risk of significant losses. In this image, private equity and pensions are broken out separately, but pensions, in turn, [allocate to private equity funds][144].![](/blog-images/Private-ownership.webp) Oil and gas companies are under intense pressure from shareholders to stop choking the planet. The pressure is forcing these companies to sell assets to appease shareholders. As of last year, assets worth [$140 billion][145] were up for sale. In 2021 and 2022 alone, private equity firms acquired oil, gas, and coal assets worth over $60 billion. According to the [Private Equity Stakeholder Project][146] (PESP), private equity firms have invested $1.1 trillion in energy assets since 2010, mostly in fossil fuels.![](/blog-images/Private-equity-oil-assets-1.jpeg) According to some estimates, [$1][148]–[11.8][149] trillion worth of oil, gas, coal, and untapped reserves are at risk of being stranded. Assets that cannot earn economic returns due to changes in regulations, demand, supply, or disasters are called "stranded assets." The risk is that private equity firms are sizable investors in distressed companies and assets. To make things worse, the oil and gas industry earned over [$4 trillion][150] in profits in 2022, compared to an average of $1.5 trillion in recent times. There's also the risk of spiking oil prices if there's a disorderly energy transition, which is very probable. Given the "profit at any cost" motive of the private equity industry, will it impede decarbonization? That would be a fair assumption. > BP announced a scaling back of its climate goals last month as it unveiled record annual profits in 2022 after oil prices surged following Russia’s invasion of Ukraine. The company’s target to slash oil output by 40 per cent by 2030 — a strategy announced amid a historic oil price crash in 2020 — was reduced to 25 per cent. FT ### Everybody is naked in hamam [We're all stupid, its just that we haven't realized it yet.][151] #### Concluding this very short piece Do we need private equity, is it a scam, or is it downright illegal? Like everything, there are positives and negatives. The million-dollar question is if the negatives outweigh the positives. My view is that there are significant and negative externalities that policymakers and regulators ignore. I'll leave you with these snippets from Luigi Zingales, professor of entrepreneurship and finance at Chicago Booth. The first is from his [2015 presidential address at][152] the American Finance Association (AFA):

When does finance help ordinary people and when does it take advantage of them?

We cannot argue deductively that all finance is good. Yet, we do not want to fall in the opposite extreme that all finance is bad or useless. To separate the wheat from the chaff, we need to identify the rent-seeking components of finance, i.e. those activities that while profitable from an individual point of view are not so from a societal point of view.

This is from a [2015 article][153] on the same topic: > We should acknowledge that our view of the benefits of finance is inflated. Although there is no doubt that a developed economy needs a sophisticated financial sector, there is also no theoretical reason or empirical evidence to support the notion that all the growth in the financial sector in the last 40 years has been beneficial to society. In fact, we have both theoretical reasons and empirical evidence to claim that a component has been pure rent-seeking. By defending all forms of finance, by being unwilling to separate the wheat from the chaff, we have lost credibility in defending the real contributions of finance. ### Funny, until it isn't! ![](/blog-images/PE-takeover-1.jpeg) ### References and further reading **Papers and articles** [Fund manager selection.][154] [The rise of private markets][155]. [Investing in private equity by Andrew Ang and Morten Sorenson][23]. [The Economist special report on private markets.][156] [When the Tailwind Stops: The Private Equity Industry in the New Interest Rate Environment,][157] edited by Victoria Ivashina [Evaluating investments in unlisted equity for the Norwegian Government Pension Fund Global (GPFG)][158] by Trond Døskeland and Per Strömberg. [The Hazards of Using IRR to Measure Performance: The Case of Private Equity.][159] by [Phalippou, Ludovic][159]. [Korteweg, Arthur G. and Nagel, Stefan, Risk-Adjusted Returns of Private Equity Funds: A New Approach (July 8, 2022).][160] [Demystifying Illiquid Assets: Expected Returns for Private Equity][50] by Antti Ilmanen, Swati Chandra, and Nicholas McQuinn. [Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting][46] by Erik Stafford. Pushback against this study by [Christine Hamilton][161]. [Private Equity Replication with Leveraged Small-Cap Value Stocks][48] by Brian Chingono and Dan Rasmussen. [Valuing Private Equity Strip by Strip][162] by Arpit Gupta and Stijn Van Nieuwerburgh. [Private Equity: The Emperor Has No Clothes][49]. [Bain Global Private Equity Report 2023.][163] [Public to Private Equity in the United States: A Long-Term Look][164] by Michael Mauboussin and Dan Callahan. [Stranded fossil-fuel assets translate to major losses for investors in advanced economies][165]. [Global Financial Stability Report, October 2014: Risk Taking, Liquidity, and Shadow Banking: Curbing Excess while Promoting Growth][166]. [What really drives inflation][167]. [The changing role of central banks by Charles Goodhart][168]. [Shadow Banking: The Money View by Zoltan Pozsar][169]. [Securitization for Sustainability By Daniela Gabor][125]. [Making the great turnaround work. Economic policy for a green and just transition.][127] [From the Washington Consensus to the Wall Street Consensus][170]. [Breaking the Deadlock on Climate: The Bridgetown Initiative][171]. [Manifesto for an ecosocial energy transition from the peoples of the South][172]. **Videos** [What Do We Know About Private Equity Performance? Guest Lecture by Steve Kaplan][173]. [Eric Johnson on Private Equity Performance and its Intricacies][174]. 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No, it isn’t

Sat, 08 Oct 2022 00:00:00 GMT

Bill Burr is one of my favourite stand-up comedians and also someone you can easily relate to. At the 2014 [all-star tribute][1] to Don Rickles—another one of my favourite comedians—Jerry Seinfeld who was hosting, started the night by saying: > On the Mount Rushmore of stand up comedy there are four faces in my opinion: Richard Pryor George Carlin, Bill Cosby and Don Rickles. Jerry Seinfeld Comedy puritans would consider it heresy, but I'd say the same of Bull Burr. He's a genius and has perfected the art of dancing around touchy topics and not getting cancelled...yet. Watching him make audiences squirm in their seats and pull back just when you think he's about to step over the line is a real treat. I highly recommend checking out his specials, and his animated show _[F is for Family][2]_ on Netflix. He was on the Tim Ferris show earlier this year (no, I am not one of those "optimize your life by life hacking" nut jobs), and I had the episode on my podcast playlist for a while now. Too many podcasts, too little time 😭 Anyway, I recently finished listening to it, and I loved it—I highly recommend listening to it. I couldn't get enough, and I started listening to other older episodes. There were a couple of things related to money that just stuck in my head. Before I share them, I want to clarify one thing. There are some really special creatures on this planet. These creatures have all the same characteristics as humans. But despite the similarities, It is unclear if these creatures are actually human. But the said creatures have an amazing gift. They can take anything and connect it to investing. They could see a cow in the Indiranagar signal, and they can write an article titled "I saw a cow cross the Indiranagar signal, here are 5 investing lessons" in 10 minutes flat. This isn't one of those posts. Now, back to the topic at hand. There were two things from the conversation that stood out for me that kinda apply to investing and life. They stuck because of who Bill Burr is. He is an overnight success, three decades in the making. He has seen the lowest lows before he got to where he's today. Whatever he says, at least to my mind, comes from a place of deep self-awareness. There's absolutely no pretence whatsoever. I mean, I can count the number of such people on one hand. **This first bit** was about being prepared for the inevitable curveballs in life from the episode [this year][3]. [][4]

Bill Burr: Because I’m self-employed. You can’t get too into this business. If you get too into this business, then you’re fucked. And then you become that guy.

Tim Ferriss: You mean just having contracts and relationships with people you

Bill Burr: No. You get in business with people, but that’s not your only thing. I’ll never stop doing standup and I have my podcast. And I don’t live a lifestyle beyond those. I live way behind those. So no matter whatever happens, whatever fucking slap on the wrist I’m ever going to get from the social media, I’m still going to be fine. It’s when you just go into this business and if you’re just an actor on a show or you just host something or whatever it is that all of a sudden, if you just did this, you didn’t have your podcast or any other way to make money, if all of a sudden there’s some bullshit rumblings, if the people above you go, “You have to go out there and apologize.”

You’re in a situation of like, or else I can become homeless. So then you have to go out there and even if you’re not sorry, you have to say you’re sorry. And I think that doesn’t look like a fun thing because I’ve seen people going out there squirming, trying to like, “How do I apologize without apologizing to the 40 drunk soccer moms who all tweeted at the exact same moment so this became a thing for eight seconds yesterday that I now have to address?” This was from the [older episode][5] in 2017: > I got this weird thing about money where I want to have it so I’m not broke, but I don’t give a shit about it. But I also don’t want to have debt, so I don’t overextend myself, but I don’t give a shit about it. I will pay extra to not go through the process. I don’t use frequent flyer miles. My wife signed me up for them but I don’t use them ever because I don’t want to go through the fucking logging in and all of a sudden I’m working for American Airlines. This also reminded me of two things Morgan Housel had written: 1. Save like an optimist and invest like a pessimist 2. 90% of individual investing is "spend less than you make, diversify, wait." The other 10% is just trying to speed that up, for better or worse. People spend thousands and lakhs on personal finance books and these utterly asinine personal finance seminars etc., but at a very high level, isn't personal this simple? If you strip away all the nonsense around personal finance, being prepared to survive is probably half of it. Despite being in finance, despite a lot of volatility in life, I had never realized this. It hit me hard during the pandemic when my family, like pretty much everyone else, had to deal with the nightmares. Being prepared is also not just about money; that's one part of it. But having adequate life insurance, health insurance, taking care of your health, developing other hobbies, being lucky enough to have a rich dad or a wife 😝—all these things can go a long way in making life a little more bearable. Most of us suck at most of these things, but we can always keep trying. The other half is just ensuring the basics are covered. The financial services industry has perfected the art of peddling bullshit and scaring you into thinking that finance is complex and you need them to save you for a reasonable price of 2% of your AUM—most people don't really need them. Everything that you need to take care of your personal finance can fit on a small index card. Of course, knowing something and implementing it are two different things. I learnt the hard way during the pandemic despite being financially literate! ![](/blog-images/index-card.jpeg)

**The second bit** was about optimism vs pessimism.

Tim Ferriss: If you could have any billboard you wanted, non advertisement, but just a message you want to get out to the world, what would you put on it?

Bill Burr: The first thing I’d probably do is “Go fuck yourself.”

Tim Ferriss: Go fuck yourself.

Bill Burr: No. I’m kidding. I’m kidding. I’m kidding. Maybe I would — I just would have “No, it isn’t.”

Tim Ferriss: No, it isn’t.

Bill Burr: No, it isn’t.

Tim Ferriss: I like it.

Bill Burr: No. So much people don’t know what the fuck they’re talking about. And they’re just so… so much time getting you into this fucking panic. And then “This is going to happen, and that, and [big dummy noises].” Just breathe. No, it isn’t. You’re going to be fine.

Tim Ferriss: All right. So —

Bill Burr: Even if you’re not going to be fine, isn’t it better to just exist thinking you’re going to be fine until it’s not fine? And then when it’s not fine, then you can just fucking handle it then. But there’s no sense to ruin right now. Right?

This is all the more important given whatever is happening in the world with climate change, floods, famines, wars, inflation, and crashing markets, among other things. At the risk of sounding flippant and [Pinkerian][6], the world is always ending, yet here we are. I hope I didn't just piss off some eco-terrorist. This isn't to minimize the existential threats we face. Our chances of dying are perhaps the greatest at any point in history—we've done well!

History is “just one damn thing after another” said Arnold Toynbee. Dan Carlin’s book The End is Always Near highlights periods – from pandemics to nuclear war – where it felt like the world was coming to an end. They exist in every era, every continent, every culture. Bad news is the norm.

Morgan Housel But is giving in to pessimism the answer? No. You need a healthy balance between pessimism and optimism to get through life. Being overly optimistic can be equally dangerous as being overly pessimistic. Too much optimism can lead to complacency, and too much pessimism can lead to resignation. Don't take it from me, I'm just another moron on the internet. This is a topic that some of the smartest people that ever lived have grappled with for centuries. Maria Popova is one of the finest curators of the internet. Her site, _The Marginalian_, is a treasure trove of perspectives on life and meaning from some of the greatest minds that ever lived. In searching the site, here are some moving thoughts on the topic that I came across. Rebecca Solnit on hope and cynicism: > It’s important to say what hope is not: it is not the belief that everything was, is, or will be fine. The evidence is all around us of tremendous suffering and tremendous destruction. The hope I’m interested in is about broad perspectives with specific possibilities, ones that invite or demand that we act. It’s also not a sunny everything-is-getting-better narrative, though it may be a counter to the everything-is-getting-worse narrative. You could call it an account of complexities and uncertainties, with openings. Rebecca Solnit Erich Fromm on faith: > Optimism is an alienated form of faith, pessimism an alienated form of despair. If one truly responds to man and his future, i.e., concernedly and “responsibly,” one can respond only by faith or by despair. Rational faith as well as rational despair are based on the most thorough, critical knowledge of all the factors that are relevant for the survival of man. The basis of rational faith in man is the presence of a real possibility for his salvation: the basis for rational despair would be the knowledge that no such possibility can be seen. Maria Popova herself summarized it best in another post: > Critical thinking without hope is cynicism. Hope without critical thinking is naïveté. Albert Camus on [tragedy and despair][7]: > Let us know our aims then, holding fast to the mind, even if force puts on a thoughtful or a comfortable face in order to seduce us. The first thing is not to despair. Let us not listen too much to those who proclaim that the world is at an end. Civilizations do not die so easily, and even if our world were to collapse, it would not have been the first. It is indeed true that we live in tragic times. But too many people confuse tragedy with despair. “Tragedy,” [D.H.] Lawrence said, “ought to be a great kick at misery.” This is a healthy and immediately applicable thought. There are many things today deserving such a kick. And then there's this from Morgan Housel: > Hearing that the world is going to hell is more interesting than forecasting that things will gradually get better over time, even if the latter is accurate for most people most of the time. Pessimism can be hard to distinguish from critical thinking and is often taken more seriously than optimism, which can be hard to distinguish from salesmanship and aloofness. Morgan Housel Talking more specifically about the markets, it's always easy to rationalize a million different reasons the markets will crash You would have heard of the pithy statement _hope is not a strategy_ a million times. The statement is largely true, but there's some truth to it. In investing, there are a million things you can't control. But there are a few that you can like being diversified, keeping your costs low, building a portfolio that suits your temperament, and sticking to a strategy that allows you to sleep at night, all the while being mindful that you're one mistake away from permanent ruin. But once you've taken care of these things, isn't investing an irrational belief the Indian economy and Indian companies will do well? How else can the markets go up in the long run? Of course, being an optimist doesn't mean you buy garbage stocks and funds and hope they do well. Since the 2008 financial crisis, the permabears have faced tremendous hardships. They were 120% sure the markets would crash—they didn't. Since they knew for sure that the markets would crash, they thought gold would go to the moon—instead, it was stuck in Silk Board. Some permabears sat on cash, thinking they could go shopping after Armageddon-cash was more useless than trash. But since the beginning of the year, the atrophied larynges of these people have had a new lease of life. It only took 14 years, but all their predictions seem to be coming true. Given the inflation, rate hikes and volatility in the markets, the macro guys have become insufferable. They are back to making apocalyptic predictions with a reckless abandon that would even make the most deluded astrologers blush. A casual glance at finance Twitter, Zerohedge and CNBC is enough to make you think that we're 8 hours away from the markets going to zero. In Feb 2022, when the first leg of the down move was underway, I made this chart for this post. ![](/blog-images/Sensex.png) There's always been a non-trivial probability that the world isn't ending in a hurry and that the Indian and US markets will climb the wall of worries. But this year, a lot of investors are acting as if Nifty is going to 50. All things considered, In the long run, betting that the Indian economy will do well and that earnings of corporate India will grow at a decent pace has been rewarded well. Will it always be? I don't know. But isn't that what we're all betting on? If that's not hope, I don't know what is. On the other hand, betting that we're headed for ruin has been the guaranteed way to end up in the poorhouse. But even otherwise, I agree with Bill Burr on this: > Even if you’re not going to be fine, isn’t it better to just exist thinking you’re going to be fine until it’s not fine? Bill Burr This line reminded me of the ending __of _[Don't Look Up][8]._ I don't know about you, but I'd rather have a steaming hot cup of strong sugarless filter coffee if I was 100% sure that apocalypse is indeed just 2 Marathalli signals away.

#### Links A recent [profile on him][9]. Bill Burr on the Time Ferris show in 2022. Bill Burr on the Time Ferris show i[n 2017][5]. "The Internet is an Abusive Relationship" Amen! He was on the Triggernometry podcast recently. [1]: https://www.youtube.com/watch?v=JSSXZcQ6Sqw&t=2160s [2]: https://www.netflix.com/in/title/80028732 [3]: https://tim.blog/2022/06/23/bill-burr-2/ [4]: https://twitter.com/morganhousel/status/1150845690567897088 [5]: https://tim.blog/2017/09/17/bill-burr/ [6]: https://www.scientificamerican.com/article/a-pep-talk-from-steven-pinker/ [7]: https://www.themarginalian.org/2015/12/28/albert-camus-almond-trees-character/ [8]: https://www.netflix.com/title/81252357 [9]: https://www.hollywoodreporter.com/tv/tv-features/bill-burr-interview-career-snl-gina-carano-1235134000/

'Revolution in a box: The extraordinary story of the ordinary shipping container'

Sat, 24 Sep 2022 00:00:00 GMT

Can you think of some of the greatest inventions and innovations in human history? 90% I’m sure you thought about things like the printing press, steam engine, and electricity. Sure, these innovations permanently altered the course of human progress. But what if I told a simple box was just as consequential in tilting the arc of human progress upwards?![](/blog-images/shipping.jpeg) If you asked 10 people the same question, I’m 100% sure that 9 out of 10 people wouldn’t think of the shipping container. But the humble steel box has played as big a role as anything in changing our lives for the better. I did my MBA internship in a company called Giftxoxo sometime around 2014, I think. Back then, they specialized in corporate gifting—those cheap diaries and mugs that your manager so generously gives you so that you don’t quit😜. Their business model was simple. If Infosys wanted 1000 branded hoodies, they’d find a vendor, get the hoodies customized, and resell it at a markup. The manager I reported to was a brilliant guy, and he handled procurement. His job was to find the fastest and the cheapest vendors for a given item. On any given day, he would have multiple orders. He’d search for items, haggle with vendors, procure items, get them customized, and deliver across India while sitting in an office in Indiranagar—It was fascinating. A few years later, a friend and I tried the same business. It flopped miserably, but we still managed to fulfill a few orders. I remember going to Avenue Road to get a few diaries customized and selling them to some startup—we made a decent profit. That was the first time I appreciated the world of logistics, and I’ve had a passing interest in it ever since. If you’ve accidentally paid attention to the news, you might have heard about the global supply chain crisis. The only time most “normal” people used the phrase “supply chain” was when they had to mug up this nonsense to pass exams in MBA. Remember the bill of getting laid?![](/blog-images/Supply-chain-google-trends.png) Or was it a bill of lading? Please don’t ask me the name of this subject. MBA is a traumatic phase of one’s life, and I don’t want to regress to a state where I go back to saying “synergy” 30 times a day. Anyway, you might have read about the massive shortages of goods and clogged ports. It’s a global issue, and pretty much everybody, from companies to pets, has been affected. Given that I’m jobless, I’ve been keeping some tabs on this crisis. The reason for this whole pointless Kannada movie-style flashback is that I came across [this old but brilliant piece][1] in the Nautilus about shipping containers. I knew a bit about surface logistics but nothing about ocean shipping. As I read the piece, I was amazed at the profound impact of shipping containers on the world. It’s all the more shocking considering the fact that it’s just a dumb metal box—no fancy technical wizardry. It’s stunning just how integral this box is to our lives, and I wanted to learn more. So I’ve been doing some Googling over the past few weeks. The history of the shipping container is absolutely fascinating. Everything we eat to wear at some point spent some time on shipping containers. Container ships and shipping containers are the circulatory systems of global trade. When we have a mild heart attack, we collapse. But when global shipping has a heart attack, factories stop, prices of goods shoot up, and entire economies suffer. Remember the _Ever Given_? It was a 400-meter ship with over 18000 containers that got stuck in the Suez Canal in March 2021. The Suez Canal is a vital artery of global trade—12% of all global trade flows through it. _Ever Given_ was stuck for a week and at one point, over 350 ships with hundreds of billions of goods were blocked, throwing a wrench into global trade. For the first time, shipping became a meme and entered mainstream consciousness.![](/blog-images/evergiven.gif) Otherwise, the only thing I remember about ships is this iconic scene from _Pirates of the Caribbean._![](/blog-images/Pirates-of-the-Caribbean.gif) The simple box has revolutionized the world, so much so that[ Human Progress named Malcom McLean][2], the father of container shipping, one of the _Heroes of Progress._ Forbes Magazine called Malcom McLean _“one of the few men who changed the world.”_ These two excerpts are perhaps the best descriptions of the shipping container: > *Think of the shipping container as the Internet of things. Just as your email is disassembled into discrete bundles of data the minute you hit send, then re-assembled in your recipient’s inbox later, the uniform, ubiquitous boxes are designed to be interchangeable, their contents irrelevant. —Nautilus* > > *Ocean shipping is the biggest real-time datastreaming network in the world. * Wired The history of contemporary shipping began on April 26th, 1956, when the _Ideal X_, an old modified World War II T-2 oil tanker, sailed with 58 33ft aluminum truck bodies from Port Newark, New Jersey, to the Port of Houston, Texas. The brain behind this operation was Malcom McLean—the father of containerization.![](/blog-images/SS-Ideal-X.jpeg) As the Ideal X sailed, Malcom McLean walked up to a couple of people watching and asked them what they thought, without revealing that he owned the ship. Freddy Fields, a top official of the longshoremen’s association, reportedly said, _“I think they ought to sink the sonofabitch.”_ Maybe he knew, maybe he didn’t, but Malcom McLean had just changed shipping forever. He had just unleashed a revolution that would alter global trade and the global economy in unimaginable ways. With that maiden voyage, he had just unshackled the ravenous animal spirits of globalization and unleashed the long boom. The modern history of shipping didn’t begin with a bang, but a son of a bitch dialogue! The story of Malcom McLean is an incredible rags-to-riches story. He was born in 1913 in North Carolina to a typical family that wasn’t rich but managed to get by. Malcom was exposed to entrepreneurship from a young age. His first job was selling eggs from his mom for a commission. After graduating from high school, he started working in a grocery store in 1931 at the depths of the great depression. But the story really began when he started managing a gas station. He figured he could make five bucks by shipping oil and told the station manager he could do it—the manager agreed. Malcom was barely in his 20s at this point. The station manager lent him an old rusty trailer, and so began Malcom McLean’s trucking empire. By 1934, he had saved enough money to buy another truck for $120 and hired a driver. He started transporting dirt for the government, and he was still able to save some money after paying the driver. Maxton, North Carolina, was a farming community without proper transport. Malcom bought another truck with the savings to transport vegetables. By the age of 22, he already owned a few trucks. By 1940 he had 30 trucks and revenues of over $230,000. By the 1950s, he had between 600 and 1770 trucks based on various accounts, 2000+ employees, and 37 trucking terminals. The McLean trucking company was the 5th largest trucking company in the US, with $12 million in revenue. The two defining traits of Malcom were his audaciousness and his eye for detail. He was constantly searching for things that could make things efficient—this was one big reason why he had better margins than his competitors. One example of this relentless pursuit to be better was roughening (crenelating) the sides of truck trailers to reduce wind resistance, which meant increasing the fuel efficiency of his trucks. He also took immense risks by borrowing heavily. By the 1950s, he already had millions in debt. That wouldn’t be the last time he borrowed, either. But thanks to the dramatic World War 2 spending in the 1940s and the ensuing economic boom, there were nearly 9 million trucks on the roads from a million in the 1920s. By the 1950s, the traffic was getting worse, and the roads weren’t built to handle the traffic. Around this time, several states had started to impose tolls on out-of-state trucks and weight restrictions, making it hard to do business. Pre-containerization, shipping was called breakbulk shipping, and the ship itself was a shipping container. Breakbulk was slow and tedious. Every individual item had to be shipped on a truck or train and stored at the dock warehouses. Each item had to be manually loaded onto the ship by dockworkers and had to be stored in several levels of empty spaces below the decks.![](/blog-images/Stevedores.jpeg) Ships used to transport thousands of items; some of the large ships would even transport up to 200,000 items. This was incredibly costly, time-consuming, and risky. A good chunk of the goods used to get damaged, and theft at ports was a huge issue. Theft and pilfering were widespread that there was a joke: > *“twenty dollars a day and all the Scotch you could carry home”.* Ships would often spend up to two-thirds of their transit time in ports. The [story][5] Malcom McLean told was that he had the lightbulb moment for a shipping container when he had to wait hours to unload the cotton bales he was transporting. He thought, why to load and unload everything, and why not transport the entire truck on a ship: > *I had driven my trailer truck up from Fayetteville . . . with a load of cotton bales that were to go on an American Export ship tied up at the dock. For some reason or another, I had to wait most of the day to deliver the bales, and as I sat there, I watched all those people muscling each crate and bundle off the trucks and into the slings that would lift them into the hold of the ship. On board the ship, every sling would have to be unloaded by the stevedores and its contents put in the proper place in the hold. What a waste in time and money! Suddenly, the thought occurred to me: Wouldn't it be great if my trailer could simply be lifted up and placed on the ship without its contents being touched?'* Marc Levinson, the author of _[The Box][6]_, the definitive book on the history of the shipping container, thinks Malcom made up the story for the press. He says Malcom had the idea for the shipping container much later in his life. The shipping container wasn’t an invention as much as an innovation. I mean, it’s just a box. Containers have been used in some form or the other for centuries. You can trace the usage of some form of standardized containers to the [Mediterranean basin][7] going back 5000 years. The Greeks and the Roman used ceramic containers called _[Amphorae][8] _to transport wine, oil, nuts, and herbs going as far back as the 3rd century BC.![](/blog-images/Amphoras.jpeg) There were several precursors to the modern shipping container in the early 1990s in Europe and the US, but they were very limited. Both shippers and railway companies had some version of containers. In the 1940s, the US army started using small containers called [CONEX][10] boxes. They were 8 ft 6 in long, 6 ft 3 in wide, and 6 ft 10 in high. The White Pass and Yukon Corporation of Canada, a railway company, had built its own ship for coastal shipping small 8’ x 8’ x 7’ sized containers. It was one of the first relatively [large-scale container operations][11].![](/blog-images/CONEX-Box.png) ### The revolution begins By the 1950s, Malcom McLean had two problems: 1. The rising traffic, congestion, and poor road infrastructure 2. The Interstate Commerce Commission (ICC) regulated trucking and rail, and it set the rules for pricing, etc. Malcom had several run-ins with the ICC when he wanted to reduce prices and had been fined for weight restrictions. Given the issues with rising traffic and regulations, Malcom saw shipping as the solution. His vision was to integrate both trucking and shipping and provide seamless service. By 1955, Malcom had come across a company called Waterman Steamship Corporation, and it had a subsidiary called Pan-Atlantic Steamship Corporation, which had 16 routes from Boston to Houston. The problem was that the ICC didn’t allow ownership of both trucking and shipping. To get around this issue, he moved the ownership of McLean Trucking to a trust controlled by his family. He immediately took control of Pan-Atlantic, the subsidiary of Waterman. His competitors complained to the ICC, but by then, he had sold off the entirety of McLean trucking for anywhere between $6-14 million. He later acquired Waterman itself in what was probably one of the first leveraged buyouts (LBO). He took a $42 million loan, acquired Waterman, and used the cash on Waterman’s books to pay the loan back. Again, to reiterate how bold he was before the acquisition, Waterman was a debt-free company, but it had $22 million in debt post the acquisition. He later realized that lifting entire trucks onto ships with their wheels was pointless, and detaching their trailers was the best way to go about it. He bought two World War II oil tankers from the Govt for cheap and modified them to carry the truck trailers detached from their chassis and wheels. Malcom figured if this didn’t work, he could use the tankers to carry oil. With the help of Keith Tantlinger, an engineer at Brown Industries, he figured 33ft aluminum containers would work for the maiden voyage. They were several other issues, but by 1955 McLean was ready to sail, but they had to delay to convince the ICC and the coast guard. But finally, after much drama, the _Ideal-X _set sail on April 26th, 1956, and so began the containerization revolution.![](/blog-images/Malcom-McLean.jpeg) ### Revolution delayed The revolution would take a few more years to take hold. Shipping containers were obviously a good idea, and they were steadily proliferating. But the problem was that people in both the US and Europe had their own dimensions, and there was no standardization. Some containers were 7ft wide in Europe and 8ft in the US. If everybody had their own dimension, multimodal shipping—using the same container on boats, trucks, and railways—wouldn’t be possible, and containers would never become mainstream. Soon, the United States Maritime Administration and Federal Maritime Board, which regulated the maritime industry, got involved in 1958 to set standards with the Navy’s support. After a while, the American Standards Association, an industry body, and The National Defense Transportation Association also got involved. In 1961 the International Standards Organization (1S0) got involved, and it was an all-out battle to set the standard. It was 1962, and along with the dimensions of the container, there was also a battle brewing over corner fittings. These were steel weldings meant for loading containers and locking them on truck chasing. All shipping companies, including Malcom McLean’s Sea-Land, had their own patented corner fittings, and they all were lobbying to impose their standard because royalties were at stake. Keith Tantlinger, the engineer who designed the first container that sailed on _Ideal-X _had designed Sea-Land’s patented corner fitting. He convinced Malcom to release the patents to break the deadlock. Malcom saw the bigger picture and released Sea-Land’s patents. It took up until the 1970s for the standards on the dimensions of containers to be agreed upon after hundreds of committees, back-alley deals, and fights in congress. Eventually, 20 ft and 40 ft containers became the standard across the world.![](/blog-images/Euromed.jpeg) Now that the containers were standardized, they could easily be shipped on boats, trucks, and trains without the need for any modifications. Standardization is what really led to shipping containers becoming the operating system of global trade. This was Malcom’s greatest contribution. No wonder Forbes Magazine called Malcom McLean _“one of the few men who changed the world.”_ Containers were steadily becoming popular but still had a small share of trade. ### The Vietnam War By the 1960s, the US had already been waging war in Vietnam, albeit in a limited capacity. But in 1965, there was a massive troop build-up, and the US Army was shipping a vast amount of military gear, food, and aid to Vietnam. The problem was that Vietnam barely had any ports and the infrastructure needed for shipping. Goods being shipped into Vietnam were clogging up makeshift ports. They were just sitting at the ports, and the Army wouldn’t even know. This soon became a media scandal. Malcom McLean spent an insane amount of time and energy convincing the US Army that he could solve the problem with containers. After years of convincing and cajoling, he won a $70 million contract. He soon built a port at Cam Ranh Bay, and the logistics issues improved dramatically in Vietnam. The US Army soon became Sea-Land’s biggest customer with about $450 million in revenues, accounting for 30%-50% of Sea-Land’s business. ### The birth of globalization Sea-Land was shipping full containers to Vietnam but was sailing back empty, but the Army was paying for both the legs of the journey. So Malcom thought, why not make an extra profit? By the late 60s, Japan was quickly becoming the biggest consumer electronics manufacturer in the world. On the way back from Vietnam, Malcom McLean’s ships started exporting electronics to the US. This was when containerization went global. Containerization arguably kickstarted globalization by shrinking the world and reducing t[ransportation costs][15]. By some estimates, containerization has reduced shipping costs by as much as 90%. > *The effects of containerization have also been measured by the reduction of transport at ion costs across the globe. For example, controlling for fluctuations in fuel costs, Hummels (2007: 142) provides a con servative estimate that the price of bulk shipping, measured in real dollars per ton, is roughly half than it had been in 1960, and a third of its price in 1952. However, Levinson ( [ 2006 ] 2016) estimates that the decline in shipping costs was much larger. Whereas the cost of shipping cargo was roughly $5.83 per ton in 1956, on the maiden voyage of the first container ship, McLean’s Ideal-X, the cost of shipping cargo was merely $0.16 per ton (Levinson [2006] 2016: 68).* Without the shipping container and the dramatic reduction in transport costs, it’s hard to imagine today’s [globalized world][16].![](/blog-images/World-merchandise-trade.png) Daniel M. Bernhofen, Zouheir El-Sahl, and Richard Kneller [analyzed][17] the impact of containerization. Their conclusions were stunning: > *Looking at 22 industrialised countries, it found that containerisation was associated with a 320% increase in bilateral trade over the first five years and 790% over 20 years. A bilateral free-trade agreement, by contrast, boosted trade by 45% over 20 years, and membership of GATT raised it by 285%. In other words, containers have boosted globalisation more than all trade agreements in the past 50 years put together. Not bad for a simple box. — Economist* [Trade cost][18] is a broad measure that includes everything from tariffs, freight, and communication to distribution costs. [20% of the fall][19] in trade costs came after 1960. [The 2nd image][20] shows the cost of shipping dry bulk such as oil, coal, and ore. It’s been on a steady downtrend since 1850-60. You can extrapolate that to container costs.![](/blog-images/trade-costs.png) The abstract of [this book][21] goes as far as to say that globalization would’ve been a pipe dream without the shipping container: > *This book maintains that container shipping is vital to the actualisation of globalisation, and that without it, globalisation would remain a concept rather than reality.* At the very least, the shipping container has an outsized impact on shrinking distance across countries and enabling low-cost trade. Check out [this stunning visual][22] of global shipping to get a sense of the scale: ![](/blog-images/Exports-to-GDP.png) ![](/blog-images/merchadise-trades-as-percentage-of-GDP.png) Without containers, we probably wouldn’t have seen this [dramatic growth][25] in trade.![](/blog-images/Container-volumes.png) We probably wouldn’t have seen the rise of China, and we probably wouldn’t be enjoying all the cheap goods we enjoy today. Containers dramatically shrunk the price of per-unit costs from a few dollars to cents. To imagine that we can import a few 100 t-shirts from China for peanuts—that’s stunning. ### Global supply chains Here’s a [map of][26] all the shipping routes and ports.![](/blog-images/shipping-routes-and-ports.png) The shipping container, by dramatically reducing shipping costs, has enabled sprawling and mind-bending complex global supply chains. For example, an Apple iPhone has[ components][27] from 43 countries across 6 continents. The supply chains of auto manufacturers are even mind-blowing. [Ford][28] has over 11,000 suppliers across 40 countries. Containerization enabled Just-in-time (JIT) manufacturing, and it made the old-school style of having high inventories obsolete. Thanks to cheap shipping costs, manufacturers could maintain lean inventories and order goods as needed, which increased margins and reduced inventory costs. Before containerization, manufacturers used to be mostly situated alongside ports because it made importing raw materials and shipping finished goods easier. But containerization made it possible for manufacturers to move anywhere and enabled the diffusion of industry. They could move where the land and labor are cheap. Containers led to the rise of new industry clusters like China. With containers, it’s hard to imagine China becoming the world’s factory.![](/blog-images/Global-container-trade.png) ## Bittersweet The humble container box has had a [dramatic impact][30] on the world.![](/blog-images/global-trade.png) 1. It led to the diffusion of industry, creating millions of jobs and lifting millions out of poverty. 2. A dramatic decline in the prices of goods and services across the board due to manufacturing and service offshoring. 3. Container shipping, by decreasing shipping costs, enabled capital to go where prices are low. The result is the creation of massive shareholder wealth for shareholders in companies that exploit a globalized world. 4. Improved infrastructure around port cities in developing and low-income countries. This also leads to other economic spillover effects in terms of employment etc. But it’s not all been sunshine and roses. Every choice in life is a trade and off, and the same is the case with containerization. While they played a tremendous role in increasing global prosperity and living standards, there have been side effects too. #### Labor Shipping pre-containerization was quite labor-intensive. Hundreds of longshoremen would work on a single ship at a time. But shipping containers and the automation at port terminals made most longshoremen and other port workers redundant. Millions of longshoremen lost their jobs around the world. Some estimates put this at 90%. Not just longshoremen, the biggest container ships that carry tens of thousands of containers have crews of 20-30 people. #### Port cities, shipping communities, and local businesses In the breakbulk era, the housing for longshoremen was located around the ports. They were sprawling communities, but containerization decimated a lot of these port cities and communities. Businesses like shops, bars, restaurants, and other businesses catering to dockworkers also had to shut down or move. Several port cities like New York and London, which were once some of the biggest port cities, declined terminally and transformed. #### Labor arbitrage Shipping containers made it possible for manufacturers to find the cheapest places to manufacture their goods. This meant that domestic manufacturing declined, leading to job losses, the decimation of manufacturing towns and communities, declining social mobility, and other economic spillovers. [David Autor et al.][31] have vividly illustrated the impact of the China shock on US labor and [communities][32]. > *Autor, Dorn and Hanson's first peer-reviewed papers from their China Shock saga were published in 2013. The economists found that between 1990 and 2007, trade with China killed about 1.5 million American manufacturing jobs, or about a quarter of all manufacturing jobs lost during that period. But what was even more startling: These losses were heavily concentrated in small- and medium-size communities dotting America's heartland — and workers who lost their jobs in those areas struggled to find other work. The China Shock created what looked like miniature Great Depressions in these places.* While this has led to cheap goods and services, it has led to the [mass exploitation of labor][33] in places like China, India, Bangladesh, and Vietnam. Workers are underpaid, get little to no benefits, and toil away for peanuts. Child labor in rare earth raw material supply chains to feed the growing demand for electronics [is rampant][34]. #### Pollution The shipping industry is one of the biggest polluters—it’s responsible for about 3% of total greenhouse gas (GHG) emissions, or as much as Japan. Containerization led to a dramatic increase in the size of ships. Some of them resemble mini-cities. Ever Ace, one of the largest ships, can carry 23,992 TEU (twenty-foot equivalent unit). According to J[ames Corbett][35], the 200 largest ships produce almost as much sulfur as all the cars in the world. It’s so bad that shipping emissions are changing the weather on major shipping lanes. [Researchers observed][36] twice the number of lightning strikes on shipping lanes compared to other areas. ## It’s not just containers Containers unleashed a revolution, but they still needed a few other ingredients. As I was writing this post, I just realized just how important pallets were. Yes, these boring wooden thingies.![](/blog-images/pallets.jpeg) Similarly, communication technologies enabled the real-time coordination of global supply chains. ## Parting thoughts. The more I dug into this, the deeper the rabbit hole was. In the interest of brevity, I’ll break this post into two pieces and end part one here. I’ve also been following the supply chain crisis that’s still evolving, and I’ll write about it in the next post. ### References 1. The Box – How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson This is the definitive book on containerization, and I highly recommend reading it. 2. Sinews of War and Trade: Shipping and Capitalism in the Arabian Peninsula by Laleh Khalili. I came across this book as I was doing some research. I also head a couple of podcasts of Laleh Khalili, the author, and she’s fantastic. This book traces the imperial and colonial underpinnings of trade which is another rabbit hold unto itself. I’ve added this book to my reading list. 3. A Splendid Exchange: How Trade Shaped the World by William Bernstein. This was the first time I really dug into how global trade worked, and I’ve only gently caressed the surface. I’m a huge Bernstein fan, and I’ve heard good things about this book. Hoping to read this soon. 4. Gamechangers: Thinking inside the box 5. Big Ship Capitalism with Laleh Khalili 6. Container Shipping and the Decline of New York, 1955-1975 7. Globalization of American Infrastructure by. Matthew ... Matthew W. Heins 8. Looking into the future ten years later: big full containerships and their arrival to south American ports 9. The Metal Box That Transformed Global Trade: The Innovative Vision of Malcom McLean behind the Container Revolution 10. The Box That Shrank the World [1]: https://nautil.us/the-box-that-built-the-modern-world-784/?utm_source=pocket_mylist [2]: https://www.humanprogress.org/heroes-of-progress-pt-17-malcom-mclean/ [3]: https://en.m.wikipedia.org/wiki/SS_Ideal_X [4]: https://stevedoring.com/ [5]: https://www.joc.com/malcom-mclean-persistence-vision_19960425.html [6]: https://www.amazon.in/Box-Shipping-Container-Smaller-Economy/dp/0691136408 [7]: https://www.journals.uchicago.edu/doi/10.1086/677034?mobileUi=0 [8]: https://www.nature.com/articles/news.2011.594 [9]: https://commons.m.wikimedia.org/wiki/File:Greek_Amphoras_for_Wine_and_Oil_-_British_Museum_(2).jpg [10]: https://www.container-xchange.com/blog/conex-box/ [11]: https://deepblue.lib.umich.edu/handle/2027.42/102480 [12]: https://en.m.wikipedia.org/wiki/Conex_box [13]: https://en.wikipedia.org/wiki/Malcom_McLean [14]: http://euromed-uk.com/container_types.php [15]: http://malcom%20mclean%2C%20containerization%20and%20entrepreneurship/ [16]: https://www.economist.com/finance-and-economics/2013/05/18/the-humble-hero [17]: https://economics.fiu.edu/events/2013/seminar-daniel-bernhofen/bek_container_feb-3-2013.pdf [18]: https://www.wto.org/english/res_e/booksp_e/anrep_e/wtr08-2d_e.pdf [19]: https://voxeu.org/article/trade-globalisation-last-two-centuries [20]: https://www.dallasfed.org/research/economics/2021/0504 [21]: https://liverpool.universitypressscholarship.com/view/10.5949/liverpool/9780973007336.001.0001/upso-9780973007336 [22]: https://www.vox.com/2016/4/25/11503152/shipping-routes-map [23]: https://cepr.org/content/two-free-dp-downloads-07-february-2020-globalisation-cycles-new-depiction-shifts-world [24]: https://data.worldbank.org/ [25]: https://lloydslist.maritimeintelligence.informa.com/LL1130450/The-Container-Outlook [26]: https://nicolasrapp.com/studio/portfolio/the-shipping-news/ [27]: https://www.thomasnet.com/insights/iphone-supply-chain/ [28]: https://www.epa.gov/sites/default/files/2018-10/documents/ford_write_up_draft_100518_final.pdf [29]: https://www.oecd-ilibrary.org/sites/508bfb5b-en/index.html?itemId=/content/component/508bfb5b-en#tablegrp-d1e580 [30]: https://www.piie.com/microsites/globalization/what-is-globalization [31]: https://chinashock.info/ [32]: https://www.npr.org/sections/money/2021/11/02/1050999300/how-american-leaders-failed-to-help-workers-survive-the-china-shock [33]: https://www.opendemocracy.net/en/beyond-trafficking-and-slavery/confronting-root-caus-1/ [34]: http://chrome-extension//efaidnbmnnnibpcajpcglclefindmkaj/viewer.html?pdfurl=https%3A%2F%2Fwww.ilo.org%2Fwcmsp5%2Fgroups%2Fpublic%2F---asia%2F---ro-bangkok%2F---ilo-manila%2Fdocuments%2Fpublication%2Fwcms_720743.pdf&clen=1353199&chunk=true [35]: https://www.ft.com/content/642b6b62-70ab-11e9-bf5c-6eeb837566c5 [36]: https://www.economist.com/science-and-technology/2017/10/07/pollution-from-ships-is-changing-maritime-weather

Dear fintechs, please stop hurting India

Sun, 10 Jul 2022 00:00:00 GMT

Sometime in the last decade, _software is eating the world_ became _fintech is eating the world_. The term “fintech” is a portmanteau of “finance” and “technology” and was coined in the 1990s but became popular after 2010. It's a catchall term for companies that use technology to deliver better financial service experiences. In popular discourse, the term fintech often conjures images of new-age tech-first startups kicking old-school arthritic financial services businesses in their knees. But like all buzzwords, it’s largely a meaningless term. Fintech is nothing new; if you think about it, everything, including the things we now take for granted, is fintech. The telegraph, invented in the 1840s, was the original fintech. It [reduced the time][1] to transmit stock quotes from New York to London from 16 days to 20 minutes. Actually, if you think about it, clay tablets were the original fintech. They were used in [Mesopotamia and Sumeria][2] to record loans as far back as 5000 years. The telex, mutual funds (unit trusts), credit cards, SWIFT, ATM, screen-based trading, ETFs, internet banking—everything is fintech. The current wave of fintech companies started cropping up after the 2008 crisis with the popularity of smartphones, mobile apps, and increasing internet [penetration][3]. The profound distrust in the traditional financial system after the 2008 crisis was a tremendous tailwind and an underappreciated factor in the rise of fintech. The term didn’t really become buzzy well until 2013-14. It took hundreds of KPMG, BCG, PWC, and McKinsey reports with numbers and projections unsullied by reality for the term to catch on. Fintechs promised to revolutionize finance by delivering better financial services at lower costs with more transparency to the masses around the world and bring about financial inclusion in 8 days flat. In the process, they also promised to euthanize the traditional financial services out of an abundance of mercy. Did they? Absolutely yes! Fintechs have been nothing short of revolutionary. 1. Fintech lending companies have built amazing apps for payday and predatory lending and are changing people’s lives. They charge 50%+ interest, but the apps have the best UI and UX. 2. Fintechs are also solving the unemployment crisis in India. They will call you 13 times a day to offer you a credit card you don’t need, a personal loan you can’t repay, and offer to manage wealth you don’t have. It's not spam; they just care too much. 3. Everything is fintech now. You can buy life insurance on apartment management apps you typically use to search for plumbers when your toilet is clogged. You can also invest in mutual funds on dog walking apps. I don’t know about you, but I always make my personal finance decisions when searching for a dog walker. 4. Fintechs have inspired an entire generation of thought leaders with #fintech on their Twitter and LinkedIn bios. It’s a delight to hear these people use blockchain and digital transformation every third word. 5. Fintechs are also using artificial intelligence. They don’t know what it is, nor can they explain how, but they use it. How do I know? They told me. 6. More importantly, fintechs are solving world hunger by integrating loans on food ordering apps. Innovation! Revolution! [Jim Chanos][4] and Matt Stoller put it best. > And then other mechanisms, we haven't talked about fintech, but you know, sort of the shadow banking world of fintech, which, you know, I've been joking now for a while is just simply subprime lending. JIM CHANOS At the peak of the fintech buzz, obituaries were written for banks, insurance companies, financial advisors, and other traditional financial services businesses. But a decade after, fintech became a buzzword, it’s unclear what the fuss was all about. The promise that fintechs would replace traditional financial institutions turned out to be hollow propaganda. Instead, they either willingly partnered with traditional finance or were unwillingly co-opted. These companies have a serious case of Attention-deficit/hyperactivity disorder (ADHD). 2015: Revolutionizing payments 2016: Revolutionizing mutual funds 2017: Revolutionizing insurance 2018: Revolutionizing loans 2019: Revolutionizing broking 2020: Oh, no. We're going to die 2021: Revolutionizing everything all at once 2022: ~~Revolutionizing predatory lending~~, sorry, fintech lending **Fintechs, as it turned out, were just glorified call centers with good-looking apps.** ![](/blog-images/Dilbert.jpeg) There’s a long-running joke that fintech is just regulatory arbitrage. It’s a tired trope, but it’s largely true. Jamie Dimon had written about this in his [2020 letter][6]:![](/blog-images/Fintech-regulatory-arbitrage.png) We saw this just a few weeks ago when RBI issued a notification saying credit lines can’t be loaded onto prepaid payment instruments (PPIs). Fintech companies had found a sneaky way to simulate credit cards without issuing credit cards to offer Buy Now Pay Later (BNPL) loans. They had partnered with banks to issue prepaid cards and with NBFCs to issue credit lines which would be loaded onto the card, and voila, you have a credit...ish card. Several startups were doing serious business, and in one fell swoop, RBI [killed][7] the model. There are countless other examples. 1. Indian neo banks are just good-looking wrappers over existing banks and don’t make any money directly from the banks. But US Neo Banks do, and that’s because of an arbitrage in the interchange that commercial banks and small community banks can charge. Small community banks in the US can charge a higher interchange than large banks, thanks to a post-2008 crisis regulation. This allowed neo banks to make more than they otherwise would've if they had partnered with large banks. 2. The entire shadow banking system of private lenders, NBFCs, asset managers, and digital lenders is a prime example of regulatory arbitrage. They can do most things banks do with far lesser capital requirements and fewer regulations. 3. Indian platforms like Leadoff and Tyke that offer unlisted shares exist because the regulations on the sale of unlisted securities are unclear. If tomorrow, SEBI were to say, only brokers can facilitate unlisted securities on a separate platform to be operated by exchanges like a Request for Quote (RFQ) platform, these startups will vanish in a heartbeat. 4. It’s the same with the so-called alternatives platforms that are offering securitized products that package loans, bill discounting, asset leases, etc. These platforms are not directly regulated by SEBI or RBI and are today able to sell investment products that are, in some cases, listed on the exchanges. They perform many functions of banks, advisors, and lenders. There's also a more subtle difference. These platforms can get away with peddling absurd returns like 25-30% based on misleading claims. But if regulated brokers were to do that, they'd get a notice in a heartbeat—arbitrage. 5. Indian brokers offering US investing by partnering with US-based brokers is another example of this arbitrage because regulations are unclear. 6. SEBI recently stopped Indian brokers and advisors from selling unregulated products like digital gold. 7. Another example is platforms like Strata that offer unregulated products like fractional real estate investing. I could keep going, but the point is, that a vast majority of fintech business models are based on such arbitrages, and they are just one regulatory change away from knocking on heaven's door. The [removal][8] of the Merchant Discount Rate (MDR) on UPI payments is a case in point. In some cases like the NBFCs, the regulators acknowledge this arbitrage and even tacitly [give their blessing][9]. Of course, I’m not saying all of this is uniformly bad and I know this sounds polemical. Innovation often precedes regulation. I’m also not saying all these companies are useless. There are plenty of fintechs that are doing useful things. For example, all the payment apps have made paying for things infinitely better. Companies like Zerodha (I work here), Razorpay, Setu, Instamojo, Open, Acko, Zeta have actually built things that people and small businesses use. Of course, you could argue that most of these companies are built on [UPI, Aaadhaar, Digilocker][10], etc., paid for by the Govt, but still, credit where it is due. At a broader level, most of fintech today is adding a nice UI over financial infrastructure that is held together by duct tape and hairpins. I call it duct tape as a service (DaaS) or better known as banking as a service (BaaS), embedded fintech, or product as a service )PaaS). Despite my skepticism, I'm incredibly bullish on fintech, especially wealthtech. But history is also replete with examples of unregulated activities and regulatory arbitrages ending in disaster—[2008 crisis][11], [IL&FS crisis][12], US [S&L crisis][13], and [Wildcat banking][14]. The most recent example is the spectacular implosion of crypto platforms like [Celsius and Vauld][15] that trapped millions of investors. These fintechs often make it seem like the line between innovation and fraud is very thin. Clearly, they must have some serious eyesight issues. So if the business models are unsound and the regulators are destroying any _perceived_ moats they had, how can they revolutionize the world? Artificial intelligence, machine learning, and blockchain-powered predatory lending. In the last few months, there has been a deluge of complaints about these lending and payments “fintech” platforms. They're using every trick in the book from dark patterns to downright deception to drum up business. From adding BNPL credit balances to mobile wallet balances, payday lending to old school hiding things in the fine print. All these things make it seem like there’s no honest way for these companies to make money. A part of my soul used to die whenever I read the horrifying stories of [US payday lending][16], but I wouldn’t have imagined seeing the same disgusting practices in India so soon. A lawyer friend of mine told me a horror story recently. He had a lady client who had borrowed around Rs 1000-2000 on one of those [instant loan apps][17], and she couldn’t repay on time. By the time she repaid, the collection agents had started sending obscene doctored videos about her to the contacts on her phone. Check out all these shenanigans: The other issue is the deteriorating macroeconomic environment. All these platforms were subsidized by venture capital money for a long time. Now that the easy money is drying up, VCs have suddenly discovered the meaning of words like revenues and profitability. With funding drying up, all these VC-funded fintechs will be forced to generate revenues and show profitability. I have a feeling it’s going to get infinitely worse. Like most people, I used to watch Jon Stewart’s _Daily Show_ in the early 2010s. Listening to Jon Stewart made it easy for me to pretend to be an expert on US politics without letting minor things like not having a clue about what I was talking about getting in the way. One of my favorite Jon Stewart moments was his appearance on [CNN Crossfire][18], a silly political debate show hosted by Tucker Carlson and Paul Begala. He goes on the show and absolutely destroys the format and the hosts, leading to the show’s eventual cancellation. At one point on the show, he says: > I wanted to come here today and tell you guys—stop! Stop hurting America. This line has been stuck in my head for a long time. That's the exact thing I want to tell the founders of most of these Indian “fintech” companies. Please stop hurting India! Oh, and as I was writing this post, more fintech innovation! [1]: https://www.londonstockexchange.com/discover/lseg/our-history [2]: https://www.bbc.com/news/business-39870485 [3]: https://data.worldbank.org/indicator/IT.NET.USER.ZS [4]: https://www.bloomberg.com/news/articles/2022-06-16/transcript-jim-chanos-on-why-some-of-the-worst-hit-parts-of-the-market-still-have-more-pain-ahead?srnd=oddlots [5]: https://twitter.com/fin__tech/status/770995309027569669 [6]: https://reports.jpmorganchase.com/investor-relations/2020/ar-ceo-letters.htm [7]: https://www.vccircle.com/explainer-why-rbi-is-not-okay-with-fintech-ppis-credit-lines-from-non-banks [8]: https://www.moneycontrol.com/news/business/restore-mdr-on-upi-and-rupay-transactions-banks-payment-firms-ask-centre-report-6328121.html [9]: https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/DP220121630D1F9A2A51415B98D92B8CF4A54185.PDF [10]: https://indiastack.org [11]: https://www.bebhuvan.com/a-little-less-dumb/so-long-and-thanks-for-all-the-fish/ [12]: https://www.business-standard.com/about/what-is-il-fs-crisis [13]: https://www.investopedia.com/terms/s/sl-crisis.asp [14]: https://www.google.com/search?q=wildcat+banking&sxsrf=ALiCzsbzLOxLJFfysu42ED9Sn72UhFDFUw%3A1657425419190&ei=C07KYteYC_6OseMPu8yZ2A8&ved=0ahUKEwiXyujqtu34AhV-R2wGHTtmBvsQ4dUDCA4&uact=5&oq=wildcat+banking&gs_lcp=Cgdnd3Mtd2l6EAMyBwgAEEcQsAMyBwgAEEcQsAMyBwgAEEcQsAMyBwgAEEcQsAMyBwgAEEcQsAMyBwgAEEcQsAMyBwgAEEcQsAMyBwgAEEcQsAMyBwgAELADEEMyBwgAELADEEMyBwgAELADEEMyBwgAELADEEMyCggAEOQCELADGAEyCggAEOQCELADGAEyCggAEOQCELADGAEyEgguEMcBEKMCEMgDELADEEMYAjIMCC4QyAMQsAMQQxgCSgQIQRgASgQIRhgBUJIEWKolYLwmaANwAXgAgAEAiAEAkgEAmAEAoAEByAERwAEB2gEGCAEQARgJ2gEGCAIQARgI&sclient=gws-wiz [15]: https://fortune.com/2022/07/05/crypto-credit-crisis-lender-celsius-3ac-nexo-vauld/ [16]: http://nytimes.com/2014/04/20/magazine/how-payday-lenders-prey-upon-the-poor-and-the-courts-dont-help.html [17]: https://restofworld.org/2022/digital-blackmail-scammy-loan-apps-india/ [18]: https://www.youtube.com/watch?v=aFQFB5YpDZE

So long, and thanks for all the fish

Sun, 19 Jun 2022 00:00:00 GMT

The relative calm of 2021 feels like yesterday to me. Sure, we had a virus that was hellbent on killing us, but most of us had made peace with our impending deaths. After a while, the biggest worry for most people was getting caught on a video call wearing a suit without pants. Good times. But in a span of months, we went from worrying about partial nakedness to losing sleep over whether we’re headed for a great depression style 90% stock market crash. Until last year, everybody was a stock market genius. You couldn’t make a bad trade even if you tried. Even the most idiotic trades seemed like a stroke of genius. But since the start of 2022, people are back to looking like idiots again. Stocks, bonds, bitcoins, shitcoins, real estate, venture funding, private equity deals, IPOs, SPACs—everything is down, there’s no place to hide. Actually, that’s not true, you could hide in cash, but learned men have proclaimed cash is trash. It also feels like a Minsky moment. All the Ponzi-like activities and business models that relied on prices going up, ever more speculation and a steady inflow of suckers are unraveling spectacularly. The blow-ups are not just in crypto but, in stocks and bonds as well. November 2021: We’re going to the moon. May 2021: We’re going to hell. It’s stunning how the sentiment changed from absolute joy to despair in a matter of months. Unlike the 2020 crash, the current market fall feels different. It looks like we’re in the midst of a regime shift in the market—I don’t know what this means. I always wanted to use “regime shift” in a sentence. The markets, especially the US, are looking bad right now. All the craziness and the frothiness of the past 2 to 3 years have disappeared in the span of weeks. Just a brief spike in inflation (hopefully) was enough for the markets to fall like dominoes. ![](/blog-images/dominoes.jpg) What’s happening? How did we get here? What happens to stonks from here on? Are we still going to the moon? Here are some long, incomplete and utterly unsatisfying answers.

Do you remember the opening monologue of The Hitchhiker’s Guide to the Galaxy narrated by Stephen Fry? It’s one of my favourites. > It's an important and popular fact that things are not always what they seem. For instance, on the planet Earth, Man had always assumed that he was the most intelligent species occupying the planet, instead of the *third* most intelligent. The second most intelligent creatures were of course dolphins who, curiously enough, had long known of the impending destruction of the planet earth. They had made many attempts to alert mankind to the danger, but most of their communications were misinterpreted as amusing attempts to punch footballs or whistle for titbits. So they eventually decided they would leave earth by their own means. The last ever dolphin message was misinterpreted as a surprisingly sophisticated attempt to do a double backward somersault through a hoop while whistling the star-spangled banner, but in fact the message was this: So long and thanks for all the fish. The Hitchhiker's Guide to the Galaxy In the monologue, replace the _dolphin_ with all the sane people who warned investors not to go crazy, and the _man_ with traders and investors who ignored the same people and YOLO’d into penny stocks and weekly call options. Now, replay the monologue in your head, and it perfectly sums up the last decade and a half in the markets—especially the post-pandemic years. So, what’s happening? To understand this semi-extraordinary moment we’re living through, we must go back to 2008. Remember 2008? Of course, you don’t! It was the year in which the entire global financial system almost ended. Apart from that, it was pretty uneventful. Even before the COVID-19 shock, very few people remembered 2008, but now it’s an afterthought. Remember the opening monologue of _The Lord of the Rings_? I think it was a documentary about the 2008 financial crisis. > And some things that should not have been forgotten were lost. History became legend. Legend became myth. And for two and a half thousand years, the ring passed out of all knowledge. The Lord of the Rings It’s been 14 years, but the ghosts of 2008 still haunt us. It might be availability bias since 2008 was the first crisis of my lifetime. But the roots of all the major issues we face today either originate in or pass through 2008. The crisis also marked a tipping point that permanently changed the trajectory of the 21st century, and not in a good way. I think it’s important to look back at past crises once in a while. Even though Mark Twain [never said][1], “History Doesn’t Repeat Itself, but It Often Rhymes”, he wasn’t wrong. If you think today’s markets are uniquely crazy, they aren’t. You could see the same sort of craziness back in 2008, although in different segments. The more you read about financial crises, the more apparent it becomes that, the more things change, the more they remain the same. Here’s a 10,000-foot view of how we ended up where we are. As you read through, you’ll see several recurring themes and behaviours. By the end, you’ll realize that human stupidity is terribly unoriginal. #### Seeds of a crisis The popular narrative of the 2008 crisis is that it was just a housing crisis in the US. But that’s an incomplete view at best. 2008 was a full-blown global shadow banking crisis, and the housing crash was just the trigger. Shadow banks are non-bank entities like money market funds that function similar to banks. The roots of the 2008 US housing crash can be traced all the way back to the 1960s, but most of the developments that would cause the crisis were in the 1980s and 90s. US commercial banks were facing an existential crisis in the 90s. They were just recovering from the [savings and loan crisis][2] and were losing deposits to money market mutual funds because they offered better yields. Their mortgage businesses were also under siege. The 80s and 90s were also a fertile period for financial engineering. This was the period during which securitization structures like mortgage-backed securities (MBS), collateralized debt obligations (CDO) and financial insurance like credit default swaps (CDS) became popular. At the same time, shadow banking entities like money market funds and [repo][3] had grown substantially and had become large sources of funding for financial institutions. Commercial banks typically sold off the mortgages they originated to government-sponsored enterprises like Fannie Mae and Freddie Mac. As securitization grew, banks saw they could generate lucrative fee revenues, but regulations didn’t allow these banks to get in on this action. Luckily, the Clinton administration under Robert Rubin and Larry Summers heavily deregulated Wall Street in the 90s. In the aftermath, commercial banks quickly became vertically integrated mortgage producers. They were involved in everything from origination and securitization to investing in Mortgage-Backed Securities (MBS) and collateralized debt obligations (CDO) on their balance sheets. Investment banks like Goldman Sachs and Bear Sterns were scrappy outfits, and they couldn’t grow as fast as they would’ve liked due to regulatory constraints and the lack of cheap funding like deposits. But thanks to the rise of money market funds, they now had a cheap funding source. With securitization, they could repackage risk, and with CDS, they could insure it. [Deregulation][4] was the final piece of the puzzle and gave them the license to enter new businesses and unleashed a spectacular wave of [consolidation][5]. Investment banks quickly got in on the action and became dominant actors in mortgage origination, securitization and trading. ![](/blog-images/Deregulation.png) Investment banks tapped short-term funding in wholesale money markets like money market funds and repo markets to fund their securitization businesses. These loans ranged from overnight in the case of repurchase agreements (repo) to a few days to months in the case of commercial papers sold to money market funds. It was classic maturity transformation—borrow short term and lend long term. Eventually, European banks wanted a piece of the action, and they quickly became dominant players in the securitization business by setting up US affiliates. US housing prices were booming, and European and US banks were generating massive fee revenues from securitization. Things were looking good for the big banks. But by 2005-2006, the banks had become greedy and had lent heavily to home borrowers with poor credit scores. Housing prices started falling slowly around 2006, and by 2007, the fall was severe enough to trigger housing loan defaults among the riskiest borrowers. Suddenly, all the MBS’ and CDOs that the banks were holding became illiquid and the riskiest tranches worthless. Banks were raising short-term funding by using these securities as collateral. As the lenders in the wholesale funding markets such as money market funds sensed trouble, they dumped bank-issued commercial paper and fled. Repo markets froze as institutions started hoarding good collateral like US treasuries. Wholesale funding markets froze, and banks couldn’t borrow to service their liabilities. In a traditional bank run, depositors rush to withdraw their deposits, but 2008 was a bank run on the [wholesale funding markets][6]—money markets, repo, interbank lending and prime broking. It started in the money markets and then spread to the entire global financial system as US and European banks could not roll over their short-term debt. It’s this run on the repo markets that made the crisis so devastating. Given that banks had low equity cushions and an astonishing amount of leverage, even a tiny fall in housing prices and the vanishing of short-term funding markets were enough to turn them insolvent. It turned out that the European banks were just as [big players][7] in the securitization business as the US banks. Their local branches were borrowing [heavily in US money markets][8] to produce mortgage-backed securities on an industrial scale. ![](/blog-images/US-to-europe-funding.jpg) Given the high returns, they were also holding a significant chunk of the riskiest tranches of MBS on their balance sheets. As the money markets froze, European banks could not roll over their debt and had to resort to fire sales of their best assets to fund liabilities. The dollar funding gap ran into trillions, and this rippled out through the European banking system. As John Cochrane and Adam Tooze have pointed out, people lost more money in the dot-com crash compared to the losses from the decline in housing prices in 2008. The fall in housing prices, on its own, wasn’t enough to cause a global financial crisis. The complete disappearance of wholesale funding markets made the crisis so destructive. With the deregulation of financial markets in the 1990s, regulators assumed that the markets would reward good firms and punish the bad, ensuring everything was hunky-dory. This irrational belief in free markets was best summed up by former Fed chair Alan Greenspan’s [reply when asked][9] who he was supporting in the 2007 election: > We are fortunate that, thanks to globalisation, policy decisions in the US have been largely replaced by global market forces,” he replied of the contest between Barack Obama and John McCain. “National security aside, it hardly makes any difference who will be the next president. The world is governed by market forces. Alan GreenSpan But the regulators couldn’t have been more wrong. Even as a thought exercise, it’s hard to imagine what would’ve happened if the biggest banks and financial institutions weren’t bailed out in 2008. The US and Europe were the epicenters of the crisis, but the crisis rippled out [across the world][6]. Economies around the world contracted, global trade shrank dramatically, consumer spending collapsed, and confidence cratered. The advanced economies were on the verge of going back to the dark ages. The 2008 crisis also exposed the deep-rooted problems in the structure of the Eurozone. The tranquility of the pre-2008 crisis period masked the structural and economic imbalances. But the severity of the 2008 crisis brought them to the fore all at once and triggered the Eurozone crisis. The credit-fuelled housing bubbles in the UK, Spain, Portugal, Greece and Ireland imploded spectacularly. This also triggered the sovereign debt crisis in Greece, which already had substantial levels of hidden debt. The policymakers in the US got their act together relatively quickly and took dramatic measures to stop the imminent implosion of the financial system, but the Europeans bungled the response. Their infighting and [myopic economic thinking][10] almost ripped apart the European Union. In response to the crisis, technocratic central bankers transformed into mad monetary scientists. They turned the entire global economy into a laboratory for unconventional monetary policies to save the global economy that was teetering on the edge of oblivion. It started with slashing interest rates to zero, and the Europeans even took it to negative. Then came multiple rounds of asset purchases, quantitative easing in the US and Europe, and all the other efforts to generate growth and inflation. 14 years after the 2008 crisis, it’s very easy to forget just how terrifying the crisis was. Perhaps nothing captures the severity of 2008 as this statement at the depth of the crisis by Ben Bernanke, the Fed chair, when asking Congress for a bailout fund for the banks: > If we don't do this tomorrow, we won't have an economy on Monday. Ben Bernanke In _Harry Potter and the Goblet of Fire_, there’s a scene where Minerva McGonagall calls her unruly students a “babbling bumbling band of baboons.” That perfectly describes the European response to the 2008 and Eurozone crises. As the crisis dragged on, European financial markets were under severe stress. They needed their own Bernanke moment to calm the markets and restore confidence. Enter Mario Draghi, A.K.A. Super Mario, the ECB president. This is what he said at a conference in London: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Mario Draghi This marked a turning point in the Eurozone crisis saga. The advanced economies stumbled their way through the 2008 crisis. One key story that most people don’t know is that China unleashed [massive fiscal spending][11] as the global financial system was imploding. It is this gigantic stimulus that was responsible for softening the blow of the 2008 crisis. Without the Chinese stimulus, the world would’ve been a much different. The scale of this stimulus spending can be seen in the fact that China has accounted for over [30-40% of world GDP][12] since 2008. But much like the post-pandemic period, there was [uneven economic recovery][13]. Emerging and developing economies, particularly commodity exporters, recovered the fastest, while European growth flatlined. The US didn’t grow as fast as some emerging markets, but it still saw a decent recovery compared to Europe. The stock markets too mirrored the uneven recovery. The US has been the undisputed king since 2010, while much of the world had unsuccessfully played catch-up. ![](/blog-images/Global-markets-performance-since-2008.png) ### Narrative violation Of course, this chart poses a problem to everyone saying that we’re in the _mother of all bubbles._ It’s a good opportunity to bust some myths and clarify others. **Narrative #1: The Federal Reserve is creating a stock market bubble** Macro soothsayers will take every opportunity to argue that the US markets went up because of a Fed-driven liquidity bubble. This is the dominant narrative. The Fed has apparently inflated a global stock market bubble by printing money and keeping the interest rates low. But the narrative quickly falls apart if you just spend a minute looking at the returns of the various markets. Much like the Fed, the ECB, BOE and BOJ too expanded their balance sheets massively through quantitative easing. But European equities have gone nowhere while Japan is relatively better. There isn’t a _central bank-driven equity rally_ or an _everything bubble_—it’s just a US rally. Ok, if not the Fed _printing money_ and _inflating the mother of all stock market bubbles,_ why did the US markets rally so dramatically since 2008? Of course, this is in hindsight, but could it be that US markets had the best [fundamentals][15], robust earnings growth, and profits coming out of the 2008 crisis? Yes, but that’s a dull narrative compared to the _money printing_ and _mother of all bubbles_ narrative. ![](/blog-images/Global-earnings.png) US free cash flow margins are [twice][17] that of other developed markets. ![](/blog-images/US-free-cash-flows.png) Of course, that isn’t to say that the US market [isn’t expensive][18], but it’s expensive on the back of solid earnings and record [corporate profits][19].![](/blog-images/Forward-PEs.png) **Narrative #2: The US markets went up because of 10 stocks** The moment you say US markets have done well, people will jump like a hungry cat and tell you it’s because of the FAANG stocks. This narrative isn’t incorrect, but it needs some clarification. US markets indeed went up because of the FAANG stocks. If you remove the top 10 stocks from the S&P 500, the returns aren’t that great. But by some weird coincidence, the top 10 stocks in the S&P 500 had record [earnings growth][20] and were the largest contributors to total S&P earnings. Surely, this is a cosmic conspiracy?![](/blog-images/FAANG-earnigs.png) To the surprise of absolutely nobody, tech companies had the largest [EPS growth][21] in the post-2008 period. But this is a very bland explanation compared to _10 stocks are responsible for all of S&P 500 returns_, _it’s a narrow rally_ and whatnot. **Narrative #3: The equity flows are propping up the US markets** The other narrative is that all the money flowing into US equities, especially through passive funds, is propping up the US bubble. Umm, US bond mutual funds and ETFs have seen cumulative flows of ~$3.4 trillion, while US equity mutual funds and ETFs have had flows of ~$560 billion. There is money going into US equities, but not as much as people assume. ![](/blog-images/US-equity-and-bond-flows.jpg) The theory is that the “permanent bid” through passive ETFs, mutual funds, 401k plans and pension funds are pushing the prices up. Since these automatic flows are mostly price agnostic, there’s sustained upward pressure on stock prices. There’s a lot of nonsense in this debate. For one, there are a lot of definitional issues with what is _passive_ and what is _active._ Some people assume smart-beta funds as being passive, but they aren’t. Some of those strategies tend to have higher turnover—it’s basket-based trading, but they are by no means passive. The other assumption is that there’s no trading, but advisors and institutions are increasingly using ETFs to express views like sector bets, thematic preferences etc. There are plenty of creations and redemptions happening all the time. Of course, there’s also the argument that this basket trading is causing other distortions. The ultimate question, of course, is whether these _automatic flows_ are degrading price discovery? Flows absolutely impact prices and the market microstructure—there’s no denying that. But are the US markets at the risk of being _zombified_? Not really. Dave Nadig wrote a [brilliant piece][23] recently, summarizing the debate and evidence of this debate. **Narrative #3: Low interest and low bond yields are creating a bubble** Perhaps the loudest narrative is that by keeping interest rates and bond yields low, the Fed and other central banks are creating asset bubbles. This is a loaded narrative, but permabears aren’t fans of nuance. At the root of this narrative is a somewhat misguided notion that central banks are all-seeing, all-knowing and omnipresent entities. This is partly because monetary policy actions were by and far the most used tool to stabilize economies, generate growth and inflation since 2008 in advanced economies. Fiscal policy was consigned to the policy dustbin until the COVID-19 shock. Since monetary policy was front and center, central banks have been in the spotlight since 2008. They quickly became punching bags for anything that went wrong in the economy and the financial markets. It’s classic availability bias. Sure, central banks are powerful entities, but their omniscience is greatly exaggerated. But that’s a deeply unpopular opinion, almost bordering on heresy. As [Cullen Roche][24] puts it beautifully: > There are all sorts of crazy myths surrounding central banks. Which is strange because once you understand the operational realities of the monetary system you realize that Central Banks are actually pretty boring entities who mostly serve as bank clearinghouses with far less control over the economy than some think. But that doesn’t stop people from constantly blaming the Fed for all of our problems or expecting them to be able to solve every policy problem. Now to the question at hand: What determines interest rates, and do central banks control interest rates? Central banks set the overnight interest rate or the rate at which banks lend to each other—that’s it. Of course, you could argue that the overnight rates are the base rates that influence all the other rates and yields, but the evidence for that is [quite tenuous][25]. They don’t control all the rates—the markets determine them. Of course, central bank actions like signalling, setting expectations, bond purchases etc., do make a difference but not to the extent of the kooky theories peddled by gold bugs and permabears. [Economic conditions][26] and inflation [determine the interest rates][27] in an economy. The very simple reason interest rates around the developing economies have been low is because of the nonexistent economic growth and inflation. You don’t have to look any further than the fact that inflation and growth remain low despite central banks adding trillions to their balance sheets. You can also look at what’s happening right now. Central banks are raising rates in reaction to rising inflation and bond yields—not the other way around. But again, this is a boring narrative compared to the _central banks are creating asset bubbles by_ _keeping interest rates at zero._ People assume that low interest rates are a recent phenomenon, but they aren’t. Interest rates in advanced economies have been gradually declining for [decades][28] and even [centuries][29]. Of course, the ultimate question is whether low interest rates impact asset prices and risk-taking? They do. Interest rates are used to determine the present value of future cash flows of stocks. In the simplistic notion of interest rates people have, low rates are good for asset prices, and rising rates are bad. But this notion is incomplete. The macroeconomic backdrop in which interest rates rise is equally important. Equities tend to perform well when interest rates rise because of strong economic growth expectations, but they tend to perform poorly when rates rise due to strong inflationary pressures^1,2. More importantly, the effect of interest rates isn’t uniform on all sectors and styles. Some stocks may have [higher sensitivity][30] but the impact [varies][31] across sectors and [styles][32]. The [underperformance][33] of US value stocks for more than a decade despite the low interest rates is a case in point. You also must grapple with the question of defining what is risky? Except for the most egregious speculative activities, defining what’s risky becomes tricky. Having said that, at a broad level, if you define risk-taking as allocating capital to relatively risky assets, then yes, low interest rates have been shown to increase risk taking^1,2,3. Corey Hoffsten had [published a brilliant paper][34] looking at some of the same narratives in this post. Here’s an excerpt from that paper: The cause of this transmission is obvious when we consider that many investors – including pensions, endowments, insurance companies, and individual investors – have fixed dollar liabilities and/or fixed percentage withdrawal plans. When return targets can no longer be met with U.S Treasuries, investors must bear incremental risk to seek higher returns. Ironically, increased demand for higher risk assets may reflexively reduce risk premia, forcing investors even further out on the risk curve. In Figure 2 we can see how the blend of assets providing an expected 7.5% return has changed over time. An investor seeking to achieve a 7.5% return must now take nearly three times the risk (as measured in standard deviation) compared to an investor in 1995 The problem is with the sweeping claims that low interest rates were the sole driver of asset prices over the last decade. It’s a case of confusing correlation with causation. Having said that, low interest rates do have serious consequences. But at the same time, the impact of unconventional monetary policies has been [vastly exaggerated][35]. In scientific and academic terms, the impact of all these policies can be [summed up][36] as _they kinda, sorta work, but not really too well, but enough to have some sorta impact, but we know something but not too much and measuring is difficult but we have some sense but not a whole lot_^1,2,3. The bigger problem when analyzing the impact of unconventional monetary policies is that they’ve only been used over the last decade. To complicate matters, incentives and human foibles muddy the picture when measuring these things. There was a brilliant and hilarious paper titled “[Fifty Shades of QE][37]”, which looked at the role of incentives in research on quantitative easing (QE) published by academics and central bank researchers. The authors showed that central bank researchers tend to overestimate the impact of QE compared to academic researchers. They also showed that central bank researchers that showed a larger impact of QE in their studies had favorable career outcomes. This impact was stronger for senior central bankers. I don’t know whether to laugh or cry at this. Thankfully, there are a growing number of studies on the impact of low interest rates on financial stability, credit, inequality, market structure etc. Here are a few research papers to give you a sense of the questions researchers and academics are exploring. 1. The BIS, IMF and other researchers have published numerous studies on the financial stability implications of low interest rates. 2. Viral Acharya has shown how low interest rates work against the objective of central banks to create inflation by causing deflation. His research also shows that low interest rates incentivize banks to keep lending to useless companies, leading to zombie firms. 3. Perhaps the loudest debate is over the impact of low interest and unconventional monetary policy on inequality. There’s a growing body of research on this^1,2,3,4. 4. The impact of lower interest rates on market power and market concentration. Atif Mian et al., Romain Duval et al., Andy Haldane, Nathan Tankus, Jan Eeckout and Jan De Loecker, among others. These are just a few of the amazing people doing amazing work on the side effects of _throwing the kitchen sink_ monetary policy over the last decade. This short list doesn’t nearly do enough justice to the others. Hopefully, we’ll learn more as more research comes out. Of course, it won’t matter if that one guy who’s been 100% in gold since 2008, betting on the imminent implosion of the modern financial system, turns out to be correct. ### Ok, so there are no bubbles? This question becomes relevant only if you agree with the premise that not everything is a bubble. If you don’t, then right now, you have a full HD view of a slow-motion implosion of the greatest financial bubble in the history of humanity. But if you’re a moron like me who believes in nonsense like nuance, you would have realized by now that not everything is a bubble_._

As an aside, the other issue with screaming there's a bubble is what exactly is a bubble, and how do you define it? On the one extreme, you have people like Eugene Fama that are of the view that there's no such thing as a bubble. On the other extreme, you have people like Robert Shiller that think otherwise. This is the exact debate that led both of them to share a Nobel Prize.

So, where are the bubbles? ![](/blog-images/Biggest-bubbles.webp) #### Growthy stonks There was indeed some insanity on 10x leverage in some market segments, especially the growth stocks. Over the past decade, there were a record number of unprofitable IPOs, the bulk of which were the so-called _new-age tech companies._ These companies were sold on pitches of disruption, destruction and world domination. The fervor around these stocks was reminiscent of the dot-com bubble. As long as a company had something remotely to do with _tech,_ the IPO would be oversubscribed. Revenues and profitability didn’t matter. The more the losses, the better it was. ![](/blog-images/Unprofitable-companies-IPOs.png) Things got a little more unhinged after the pandemic. Tech and internet stocks became the new darlings due to the shift to remote work. Hundreds of tech, internet, disruptive tech, biotech, robotics, space, AI, next-gen tech and other nonsensically labelled ETFs were launched to take advantage of the demand. Nothing was more emblematic of this fetish for growthiness than Cathie Wood’s ARK ETFs. These funds are now falling as if there’s no bottom. ![](/blog-images/Internet-ETFs.png) Jeremy Grantham found that half of the growth stocks in the Russel 3000 index had negative earnings. He had been screaming about a bubble since 2010 and wanted a crash so badly that GMO created a composite growth metric, just so that he could make this [scary chart][38] 😂 No, I kid. ![](/blog-images/Growth-stocks.png) Until this year, the markets didn’t care. Buying a basket of companies with the worst possible fundamentals was the best trade. Talking about earnings and fundamentals was the surest way to look foolish. ![](/blog-images/Growth-stocks-vanguard.png) The one stock that was symbolic of the growthy craziness that immediately comes to mind is Rivian, the electric car startup. At one point after its IPO, the company had a market cap of $100 billion+, which was higher than General Motors and Ford despite having zero revenue. The other bubbly segment was SaaS companies. Some of these companies were trading at over 25 times their revenues, but as of May 2022, the median revenue multiple has fallen to [~5 times][39]. Why? This glut of _growthy_ stocks was due to the incredible growth of venture capital in the US. Every year since 2010 has been a record-breaking year for venture capital, not just in the US but worldwide. There were a record number of new funds, deals, valuations and record records. Perhaps one of the most important developments in venture capital was the entry of price agnostic [non-traditional venture investors][40] like Tiger. Capital became a commodity, and valuations became an afterthought. In the last 2-3 years, FOMO took over as funds were investing as if they were throwing blind darts. They were increasingly piling into the same set of companies and rapidly marking up the valuations. Deals were being closed in hours and days, and due diligence was a dirty word, just like fundamentals. Founders went from pitching to VC funds to getting pitched by VC funds. You could ask your grandma to pitch an idea, and Tiger Global and Softbank would get into a cat fight to fund her. There was no difference between a pump and dump scheme, and venture investing_._ All these stocks are now crashing twice as fast as they went up. I’ve been getting unconfirmed reports that the most heard song by the CEOs of these companies was _Livin’ on a Prayer_ by Bon Jovi. ![](/blog-images/IPO-ETF.png) #### SPACtacular implosion Every crazy market phase has a poster child. Nothing compared to the sheer insanity of the [special purpose acquisition company (SPAC)][41]. SPACs are blank check companies that raise money to acquire or merge with other companies. They are similar to IPOs, but with lesser regulatory hassles. The problem is that they are also costly, opaque and heavily dilute retail investors. They’re also quite lucrative for the sponsors of SPACs, who typically get 20% of the post-IPO shares for free. These skewed [incentives attracted everybody][42], from shady operators to Hollywood celebrities. > Ohlrogge and Klausner, a professor at Stanford Law School, discovered that these costs quickly added up: The dilution from warrants issued in the IPO, along with virtually free shares for sponsors and banking fees for both the IPO and the merger that ended up being two to three times higher for a SPAC than for a traditional IPO, all ate into the amount of cash the companies had once the merger happened. Because the companies passed on these costs to the remaining shareholders, the companies ended up with about 40 percent less cash than they started with. SPACs became the go-to vehicle to take companies public over the last couple of years. But most of these companies were useless and downright fraudulent in some cases. Regular IPOs can’t make projections or forward-looking statements in the US due to liability issues. But until March, SPACs could make projections because of a [safe harbor provision][41]. SPACs exploited this regulatory arbitrage to make wildly optimistic projections unsullied by reality to dump the stock of worthless companies on retail investors. SPACs raised over $250 billion in 2020 and 2021, but the party is over. Given the market sentiments, SPACs will have no choice but cancel, and [return the cash][43]. Companies that listed through SPACs have been getting a royal spanking, with most of them down by over 30-50% YTD. ![](/blog-images/De-spac-ETF-3.png) In recent weeks, 25 companies that went public through SPACs have [issued warnings][44] that they may die in the next 12 months. I think this is just the beginning. Most companies that went public through SPACs have no business models and will die eventually. Perhaps, [this from Jim Chanos][45] sums up the extraordinary scale of the SPAC delusion. > But what was really striking to me was the fact by February of 2021 for a couple week period, SPACs were raising, new SPACs were raising on average 3 billion in cash every night. And that was equal to the US savings rate. So for a brief period of time SPACs were taking the entire US savings rate, which just struck me as the height of absurdity. #### Crypto Crypto and SPACs are almost similar; both involved dumping worthless stocks and tokens on greedy investors. The only difference is that SPACs are “regulated”, and crypto isn’t. Every ~4 years, we see a new crypto hype cycle that always ends in tears, broken dreams, empty wallets and margin calls. In 2017, it was the [ICO boom][46]. Hundreds of projects raised billions by selling tokens to build everything from a blockchain-based casino, decentralized AWS, to a blockchain-based phone. There was an insatiable demand for these projects. If you could publish a white paper with utter gibberish and techno babble, you could raise millions. The ICO mania ended when [the SEC][47] began cracking down on some of the coin offerings. This time, the the rise of decentralized finance (DeFi) fuelled the mania. DeFi boosters believe that traditional financial institutions like banks, insurance companies, exchanges, and asset managers are overpriced, bureaucratic and incompetent entities. Their vision was to eliminate all these “rent-seeking” entities and replace them with smart contracts. Code is law became the mantra. This apparently would lead to borderless money and bring about financial inclusion on a scale never seen before. Sounds nice in theory, but most DeFi projects ended up being Ponzi schemes in reality. Charles Ponzi would’ve been proud of crypto; this is the dream he died for. Here’s how most DeFi projects worked. A developer would start a project that _claimed_ to _revolutionize XYZ.,_ and the project would launch by issuing a few tokens. It would also create a [liquidity pool][48] where token holders can deposit the tokens to earn interest in exchange for providing liquidity in the tokens. As an incentive for providing liquidity, the project would reward the holders with more tokens, which can be staked again in the liquidity pool to earn more rewards. This would cause the price of the tokens to rise, naturally attracting more people to buy the token. As more people piled in, more incentives would be paid out. This cycle could last as long as there were willing suckers. But the issue with the model is people bought the tokens for the rewards and not for their utility. A negative trigger like a fall in prices, hacks, vulnerabilities, or attacks would cause the projects to [spiral out of control and die][49] eventually. The speculative fervor wasn’t just limited to DeFi. The mania was such that random tokens with zero utility would rise by 100-1000% in a span of weeks. Perhaps, nothing was more emblematic of this utter insanity than Dogecoin, a token that was created as a parody of crypto. At one point, the marketcap of Doge was over $40 billion; it’s still around $7 billion. It wasn’t just random shitcoins, the other poster child of this season’s crypto madness was NFTs or “digital art”, basically pictures of rocks, dogs and monkeys that sold for millions. As long as you knew some basic coding, you could launch a token or create an NFT within 5 mins. There was an entire cottage industry dedicated to pumping crypto projects and NFTs on Telegram, WhatsApp, Reddit and Discord for a few dollars. Once the pump was in, you could dump them and [make easy money][50]. Rising crypto prices attracted more suckers, which fed the cycle, ensuring a limitless supply of victims. Crypto became a hunting ground for hackers and scammers. Unwitting investors have lost billions due to [hacks and exploits][51]. Naturally, the VCs saw an opening and co-opted crypto. They even rebranded it to “web3.” A worldwide investigation is underway to ascertain the meaning of the term. Venture capital firms like a16z, Paradigm and exchanges like FTX, Coinbase and Binance invested billions in crypto and blockchain startups. ![](/blog-images/crypt-funding.png) Of course, this wasn’t without side effects. Crypto projects went from being “community-powered” and “decentralized” to increasingly resembling traditional startups. VCs and insiders now control a vast majority of the token allocations. This has led to fears of token dumps by VCs, potentially kneecapping projects. VCs have also used their resources to engage in cringe-worthy crypto boosterism and massive self-dealing to pump prices. Many exchanges like Coinbase, FTX, and Gemini have listed tokens in which they are large investors. There have been long-running allegations of [information leaks][52] about token listings on Coinbase, leading to informed insiders building large positions and dumping them on listing day. Coincidentally, a16z is the biggest investor in Coinbase and crypto broadly. Even more importantly, the tokens listed on Coinbase [underperformed][53] dramatically. If it looks like a duck, quacks like a duck... It’s been a gratuitous display of greed, grift, shilling, self-dealing and downright fraud. Very little of what passes for web3 has valid real-life use cases today. Web3 has recreated all the traditional finance applications but only slower, scammier, and uglier. Even the most ardent crypto boosters can’t come up with a coherent use case for web3: And then you have the clinically crazy people 👇 When you question the crypto boosters about the shortcomings of web3, you’ll typically hear some spiel about innovation and the future. Here’s [Katie Haun][54], who recently left a16z and raised a $1.5 billion crypto fund: > Well, I think it’s important not to judge the current state of innovation in crypto with the end state of innovation. And people such as yourself will often tell me, well, wait a second. It doesn’t do that yet. And look, I’ll be the first to acknowledge that the applications we’re talking about — still very early days with Web 3. katie Huan on The ezra klein show Not even the most ardent crypto fanatics can deny all these things. Despite sounding negative, I’m deeply ambivalent about crypto. Maybe this is how “innovation” works, I don’t know. As things stand, crypto is getting [shellacked][55]. We’ve seen several high-profile blow-ups in a span of weeks. It started with the spectacular implosion of the $40+ billion Terra stablecoin project. Celsius, a platform that paid high interest rates on crypto deposits with over $12 billion in assets, was next—last week, it froze all withdrawals. This week, crypto venture/hedge fund Three Arrows Capital collapsed after the recent rout in crypto prices, and the demise of Terra [led to margin calls][56] it couldn’t fulfil. ![](/blog-images/crypto-marketcap.png) Some projects have survived and thrived at the end of every crypto cycle. But this time around, the risk for crypto is that it’s mainstream. They now mimic traditional financial institutions like banks, asset managers and exchanges without any oversight and billions in assets. Regulators have been spectacularly incoherent in dealing with crypto so far, but things are changing. More often than not, the preferred policy option has been to make life extraordinarily difficult for crypto, like imposing high taxes than outright banning them. But we’ll have more coherent regulations in the years to come. So what does this mean for crypto and DeFi? I think crypto will eventually become far more boring than it seems today. This will be a deeply unpopular opinion, but DeFi has seen more innovation in a few months than traditional financial institutions in a decade. I mean, sure, the DeFi boys have channelled the spirit of innovation into finding the ultimate pump and dump scheme, but it’s innovation nonetheless. Now, imagine if they channelled it productively? Heck, even The Bank for International Settlements [thinks so][57]: > The limitations of DeFi lending mask elements of genuine innovation. Smart contracts can complement automated underwriting in traditional finance and help to bring down the costs of financial intermediation (IMF (2022)). Composability – the ability of DeFi protocols to interact with one another – allows end users to combine various “money legos” to build customised financial products. This possibility can be particularly relevant in complex chains of transactions such as trade finance. > DeFi lending: intermediation without information? Or maybe we’re all skeuomorphic dolts, we don’t get what crypto is, and we’re not going to make it. #### The great detox Maybe all these crazy people thought this could go on forever or at the least for longer, but the virus had other plans. One of the reasons for the slow recovery post the 2008 crisis is that the US did almost nothing to help the people directly. The Fed was left to do the heavy lifting through monetary policy. Things were worse in Europe. Austerity was the only policy option during the 2008 and the Eurozone crisis. The European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) forced the crisis-hit countries to cut spending, slash social security programs, privatize state assets and tighten their belts. This monumental stupidity lengthened and deepened the crisis. The absence of fiscal measures was one of the big reasons for the slow recovery after 2008. But in 2020, it was different. As the pandemic hit, countries around the world—especially the developed countries—unleashed economic stimulus programs on a scale never seen before to stop the global economy from going back to the dark ages. Advanced countries threw the kitchen sink, including handing out free cash to people, to put a floor under the economy. Countries unveiled [trillions][58] worth of programs in weeks. Here’s a stunning chart that shows the total savings of Americans. US consumers got [~$2 trillion][59] for free from the government. This stimulus was designed to bridge the economic output gap due to the shutdowns. With the luxury of hindsight, people now argue that the stimulus was way too much and inflation is a direct result. ![](/blog-images/COvid-stimuls-US.jpg) As the economies around the world reopened, there was a tremendous rebound in consumer spending. But the world wasn’t prepared to deal with it. 1. As countries locked down, shipping companies dumped shipping containers at their destination ports as shipping demand vanished. When the world reopened, containers were stuck in all the wrong places. 2. Due to the pandemic, many people dropped out of the labor force across industries due to health reasons, poor pay, poor working conditions, and mobility due to better bargaining. 3. As the factories around the world reopened, they faced severe labor shortages. At the same time, since shipping containers were stuck in all the wrong places, factories couldn’t ship finished goods and receive raw materials for production. 4. Global shipping demand and port activity were flat for nearly a decade. But the epic surge in demand was more than the slack in shipping and port handling capacity. To make things worse, both shipping companies and ports were facing labor shortages and the biggest demand surge in decades at the same time. This fed into trucking, which also faced a shortage of drivers and trailers. 5. The Russia-Ukraine crisis, rolling lockdowns in China, and trucking protests in South Korea, further intensified the pressures. 6. In short, all these factors severely disrupted the normal flow of raw materials, intermediate inputs and finished goods. 7. This manifested in shortages of everything from critical manufacturing inputs like semiconductors to toilet paper. The advanced economies have been praying for inflation since 2008, and their prayers went unanswered for well over a decade. But thanks to the idiosyncratic global reopening, the simultaneous spike in demand for goods, fall in supply, and energy shocks, [inflation showed up][60] with a vengeance. ![](/blog-images/global-inflation.png) Governments and central banks initially assumed that inflation would be transitory, and it would pass—it didn’t. Even I assumed this would be transitory, and boy was I wrong. The Russian invasion of Ukraine further intensified the inflationary pressures. The Fed and the ECB, which had kept interest rates low, could no longer sit idle. The Fed is now hiking rates aggressively, and the ECB will follow suit in July. The central banks in emerging markets had started hiking much earlier. A decade of low interest rates, increased retail participation, and pandemic stimulus cheques had led to excesses building up in some segments of the markets. But this rising rate environment has become a nightmare for these frothy corners of the markets. We’re seeing massive bloodletting across the board, but it’s particularly gory for growth stocks. It’s like popping a balloon. ![](/blog-images/global-indices.png) The [craziest segments][61] of the market, such as meme stocks, unprofitable companies and crypto, are in free fall. ![](/blog-images/meme-stocks-unporfitable-index.png) Here’s a shocking titbit. The pace of multiple compression has been brutal. All the analyst estimates that missed earnings are now getting revised. If earnings [take a hit][62], will things get [even uglier][63]? Meanwhile, thee yoots (youths) have discovered Buffett ![](/blog-images/Buffett-ark-penny-stocks.png) ### Private markets The US private markets (venture capital & private equity) are tiny compared to US public markets. But over the last decade, much of the action has been in the private markets. The public markets were largely a sideshow. Companies have [raised more capital in private markets][64] over the last decade than in the public markets. > U.S. domestic equity mutual funds manage about $8.4 trillion, with active funds controlling $5.6 trillion and index funds $2.8 trillion at year-end 2019. Buyout funds in the U.S. have $1.4 trillion in assets under management (AUM), including $560 billion in “dry powder.” Venture capital funds have AUM of approximately $455 billion, which includes dry powder of $120 billion. The equity capitalization of the U.S stock market is roughly 27 times the size of AUM for buyout funds and more than 80 times the size of venture capital funds. Public to Private Equity in the United States: A Long-Term Look The Cambrian explosion in US tech and software startups over the last decade is because of the [phenomenal growth][40] of US venture capital. Venture activity had declined significantly after the dot-com bubble in 2000-2001 but recovered spectacularly after the 2008 crisis. Without the easy availability of risk capital, the US startup scene would’ve been a pale shadow of today. We can see the counterfactual in Europe, which doesn’t even come close to the US in terms of new startup formation, let alone successful tech startups. This is largely because European Venture capital is still tiny, and the availability of risk capital is directly [correlated with][65] startup formation. ![](/blog-images/Global-venture-capital.png) Why did US venture capital grow so large compared to the rest of the world? **Narrative #3: The Fed caused the VC bubble**!!! This is the point where people typically blame the Fed. I think most people have a Moriarty or Keyser Söze-like image of central banks—shadowy entities that mysteriously control everything. US venture capital didn’t grow because of the Fed. It’s big because the US is the wealthiest country on the planet, with the largest institutional pools of capital and the highest number of rich people. That isn’t to say the low interest rate environment didn’t help. Of course, they were a [tailwind][66] for private markets, but you also have to understand how private markets work. Unlike public equities, private market [investing cycles are much longer][66], and investment decisions are much slower, not to mention the risk and the illiquidity constraints of institutional investors. Suppose a pension fund were to make an allocation to venture capital. In that case, it has to make a case to its investment committee, build the expertise, go through the manager selection process and then make the final allocation. Institutional investors aren’t exactly known for their nimbleness. On the other hand, a well-run venture fund (non-Tiger style) takes time to deploy the capital, it doesn’t happen at the same pace as public equities. In short, low interest rates alone don’t explain the growth of private markets. It’s another case of confusing correlation with causation. #### A little bit of VC history It’s important to understand a bit of venture capital history to understand the growth of US private markets. Some people argue that Queen Isabella of Spain, who funded Christopher Columbus’ voyage, was the [first venture capitalist][67]. Spain needed a faster route to Asia, and Columbus promised Isabella he would find one. So she gave him three ships and some men in return for 90% of the profits. Instead of Asia, Columbus discovered the Caribbean islands or the _new world_ and unleashed the golden age of exploration. The discovery eventually led to Spain's colonization of the Americas, and the investment paid off brilliantly. Until the 19th century, whale oil was quite valuable, and America had emerged as the leader in whaling. Whaling ventures—finding and hunting whales—were long and costly, and banks didn’t fund them. But some wealthy individuals were willing to take the risk, and on the other hand, you had ship captains who needed the capital—whaling agents emerged to intermediate these deals. As Tom Nicholas wrote in _[VC: An American History][68]_, the funding of whaling ventures, the structure of these partnerships and the return profiles were almost the same as modern-day venture funds. Before the formalization of venture capital, descendants of wealthy families like Rockefellers and Whitneys played an important role in providing risk capital to early entrepreneurs like Henry Ford and George Eastman (Kodak). The other crucial factor that led to the growth of venture capital was the massive funding of universities like Stanford, Harvard and Caltech by the US Government during World War 2 to create military technology. This would create massive spillovers in terms of new entrepreneurs, technologies and led to the birth of Silicon Valley. In 1946, Georges Doriot, a professor at Harvard Business School, set up American Research & Development Corporation (ARD)—arguably the first formal venture fund. Doriot is also called the father of venture capital. One of the most well-known investments of Doriot was in Digital Equipment Corporation (DEC). The $70,000 investment would eventually become over $350 million, cementing ARD’s status as one of the great VC firms ever. #### SBICs The other important event which laid the ground for the growth of venture capital was the passage of the Small Business Investment Act In 1958 in the US. The act allowed the creation of small-business investment companies (SBICs) to support small businesses. SBICs received various loan guarantees and tax concessions to invest in startups. Over 700 SBICs were formed, and several of the firms were listed publicly during the bull markets of the early 60s. But soon, the stock prices of SBICs tanked, and they were in serious trouble. Investigations by the Small Business Administration revealed serious regulatory violations and downright fraud. With SBICs, venture capital looked like it would hit the mainstream, but it just faded away. The program was largely a failure. This was the period in which several of today’s venture giants, such as Kleiner Perkins and Sequoia, were born. #### The most consequential change Perhaps the biggest changes that unleashed venture capital occurred in the 1978-79. The most consequential change was the amendment to the “prudent man” rule of The Employee Retirement Income Security Act of 1974 (ERISA). The rule required pension fund managers to act as fiduciaries and invest prudently. At the time, pension funds assumed that rule meant that they should avoid risky investments like venture capital. But in 1979, The Department of Labor clarified that investing a small portion of pension assets in venture capital wouldn’t violate the rule. In 1980, US pensions had $3 trillion in assets and had only about ~$200 million in venture capital investments. By 1988, this would grow to $3 billion, accounting for [46% of VC funds raised][69]. The other significant change was the reduction in capital gains tax from 50% to 28% in 1978. There is some debate over the impact of the tax reduction, given that the biggest VC investors, like pensions and endowments, were already tax-exempt. But others argue that the reduction in taxes could’ve [worked indirectly][70] by making it attractive for people to start new companies, increasing the supply. #### Underfunded pensions and the hunt for yield The other important factor that led to the explosive growth of venture capital was a hunt for yield. The growth of venture capital coincides with a dramatic increase in underfunded pensions^1,2,3 around the world. These images give you a sense of public and corporate pension in the US, but it’s the same [around the world.][71]

- ![](/blog-images/Pension-funding.png) - ![](/blog-images/Pension-funding-gap.png) - ![](/blog-images/Pension-funding-millman.png)

For a long time, US pensions and endowments had a returns assumption of [8-10%][72]. This made sense at a time when treasury yields were high. But bond yields had been in a secular decline for well over two decades across the world. At the same time, pension liabilities have increased steadily. Pensions need to hit a certain return target to meet the liabilities, or they go bust. As bond yields fell, pensions had to supplement the returns. In order to hit their targeted returns, pension funds have substantially increased their allocation to alternatives such as venture capital, private equity, infrastructure and real estate over the last two decades. The average US pension allocation to private markets went from about 5% in 2000 to over [15% today][73]. It seems like a small number, but pensions manage trillions. Even a 1% change in allocation means billions in flows. ![](/blog-images/Alternative-asset-allocation-IMF.png) It’s not just pensions—[endowments][75], sovereign wealth funds, and family offices have also dramatically ratcheted up private market exposure. This is the biggest reason behind the dramatic increase in [funds raised][76] by private equity and venture capital. ![](/blog-images/Global-VC-fund-raise.png) #### Richie rich 🤑 Over the last decade, the [number of billionaires][77] around the world has increased dramatically. These people combined control trillions in wealth. Along with the existing rich people that inherited generational wealth, the newly minted billionaires over the last decade control substantial wealth. Rich people typically operate in family office structures because it has fewer regulatory hassles than other structures. From being sleepy outfits, family offices are now twice the [size of hedge funds][78]. Given the sizable pool of money, they’ve become serious players in the financial markets. We saw this first hand with the [spectacular implosion][79] of Bill Hwang’s Archegos. ![](/blog-images/Billionnaries-around-the-world.png) Inevitably, this wealth has also flown into [venture capital and private equity][80]. The typical family office allocation to private markets ranges from 10% to 25%. Family offices are also increasingly becoming sophisticated, employing some of the best and brightest talent. They can go toe to toe with established VC outfits for deals. #### Old players, new playbook Interestingly enough, US mutual funds^1,2,3 have been the other source of venture capital funding. Though their allocations aren’t as large as pensions, it’s nonetheless an interesting trend highlighting the rise of private markets. Names such as Fidelity, BlackRock, and T. Rowe now routinely appear in startup funding announcements. These factors, in turn, have created a feedback loop, and companies stayed private for longer as capital was available abundantly. Until the last couple of years, the number of US IPOs had almost dried up. The perceived shrinking of the opportunity set in public markets has been a significant driver of the growth of venture capital.

- ![](/blog-images/Public-vs-private-companies.png) - ![](/blog-images/Public-vs-private-companies-by-revnue.png)

As an aside, private equity (PE) investors buy large and mature firms, “fix them” and try to sell them at a profit. Venture capital investors, on the other hand, invest in the early and growth stages of startups. But this definition no longer applies as the lines between PE and VC are blurring by the day. I'll explain why as we go along.

#### Rising from the shadows Most importantly, the rise of private equity and venture capital should also be seen through the lens of [the growth of shadow banking][81]. Although the term “shadow banking” sounds foreboding, it’s just an umbrella term for non-bank firms that engage in banking activities like lending etc. Broadly speaking, entities such as private equity, private credit, hedge funds, money market funds, asset managers, insurance companies, securitization vehicles and broker-dealers fall under the umbrella. Shadow banking came into the spotlight during 2008 when people discovered that money market funds, prime brokers, repo dealers, and securitization vehicles were at the heart of the crisis. After 2008, regulators in advanced economies woke up and tightened the screws on banks by increasing capital requirements, passing new regulations and oversight. Steadily, banks retreated from many lending and trading activities in the post-2008 period. At the same time, institutional pools of money from pensions, endowments, sovereign wealth funds, and family offices grew larger than ever. They were hungry for yield, given the low interest rates. ![](/blog-images/Institutional-investors-private.webp) Here are the biggest [limited partners][82] (LPs) in the US. ![](/blog-images/Venture-capital-LPs.png) The eye-popping growth of private equity and venture was also a result of two factors: the shrinking bank lending after 2008 and the rise of large institutional investors. PE and VC firms stepped in to [intermediate][83] the flow of money from institutional investors to private markets through various forms of equity and debt.

- ![](/blog-images/Private-funding-by-type-1.webp) - ![](/blog-images/Priivate-Global-capital-type.webp)

Today, private equity firms have emerged as the [biggest lenders][84] to companies in many segments that banks don’t serve anymore. Specialized firms called venture debt firms have also emerged to provide credit to startups looking for alternatives to equity financing. Of course, all this isn’t without risks. Shadow banking entities have lesser linkages to the banking system but can still cause serious mayhem. We saw a first-hand demonstration when IL&FS declared bankruptcy in 2017 and caused the Indian bond markets to freeze. We saw an even bigger demonstration during the COVID-19 crash of 2020. The investor rush to cash or _dash for cash_ led to severe strains in treasury markets, corporate bond markets, bond funds, REITs, mortgage-backed securities and bond dealers in the US, UK and Europe. It started with the massive selling of bonds and equities as people increased their cash levels. The large-scale selling led to falling yields on bonds. This split over to hedge funds and other leverage actors who started getting hit with margin calls leading to forced liquidations, further intensifying the selling pressure, and severely [degrading the market][85]. [Heightened redemptions][86] led to a [run on][87] money market funds, much like in 2008. Selling pressure in corporate bonds led to widening spreads, and large parts of markets froze. This stress spread to bond funds and ETFs. Bond ETFs were trading at substantial discounts compared to the same bond funds. If not for the significant intervention by the central banks across treasury markets, repo markets and corporate bonds markets (through corporate bond ETFs), these markets would’ve quite literally snapped like a twig. Shadow banking entities were at the heart of these dislocations. For many, the next big crisis lurks in private markets and shadow banks. It’s not hard to see why. Ok, all that’s well and good. But why are we looking at this US-centric version of private markets history? The US exports 3 crucial things: 1. **Trash** – both [actual trash][88] and white trash. 2. **Treasuries** – US treasuries are the preferred safe asset for both governments and the private sector. So, it [manufactures and exports][89] US Govt bonds. 3. **Venture capital** – Given the depth of its institutional capital pools, it’s also the world’s largest exporter of venture capital, [accounting for][90] well over half of global venture capital. The story of the growth of venture capital and private markets is a US story because it underwrote most of it. ![](/blog-images/US-venture-capital-as-a-percentage-of-global-venture-capital.png) Now, back to the main point, why did the private markets grow so large? Well, people will quickly jump up like they have a lizard on their neck and tell you that it was the central banks, low interest rates and “money printing.” Sure, these were secondary factors, but not the primary causes. The growth of the venture capital and private markets has been in the making for well over 4 decades. Things rarely happen overnight. The structural changes that create or destroy trends take decades to form and mature. But who cares about nuance? #### Prelude to the end VCs bet on unproven ideas and companies—a certain amount of irrationality is baked into the model. The default mental model that most people use to think about venture capital is to compare it to public markets investing—I don’t think that necessarily works. But one aspect where venture capital and public markets are similar is that both are super-hit businesses. A small number of winners will deliver outsized gains and pay for the rest of the duds. Given the informational asymmetries and the asymmetric payoffs in private markets, investing bets aren’t just based on available data but a bit of irrational optimism. But much like public market cycles, every VC cycle starts with some semblance of sanity and ends with utter insanity. I think the tail end of the current cycle—which seems like it’s over—feels much crazier than the dot-com madness, or at least on par with it. Over the years, the flood of capital in venture capital has also caused some serious FOMO and returns chasing among VC funds. In the later stages of a cycle, investments aren’t driven by reasonable theses, but FOMO. The flood of capital into fads and frauds in crypto over the last 3 years is a prime example of this. With so much money chasing so few companies, we’ve had a record number of deals, a dramatic increase in funds raised and deployed, [record exits, and moon-high valuations][91].

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All the lines started sloping upward sharply around 2019, and the 3 ensuing years were the craziest part of this cycle. This was partly driven by the entry of non-traditional investors like Tiger, D1, corporate venture funds and mutual funds. These investors tend to be less price-sensitive than traditional VC firms and a lot faster in closing deals than traditional VCs.

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#### The great detox Things were looking good until non-transitory inflation finally showed up. Central bankers who had been chilling for the past decade woke up suddenly and started hiking rates—something they had forgotten how to do. Since the start of the year, the US markets, especially the tech and growthy segments of the markets, have taken a brutal knock. It doesn’t look like the bloodletting is done yet. ![](/blog-images/YTF.png) The crazy multiples these stocks used to command have [shrunk quite a bit][93] in a short span of time. Analysts that had discounted cash flows of 2097 are opening the Excel sheets and changing the dates. ![](/blog-images/Public-markets-Software-Forward-Revenue-Multiples.webp) All the worthless companies that IPO’d in the last few years have been infected with gravity. ![](/blog-images/VC-spac-pitchbook-index.png) It’s a bittersweet moment for VCs. Given the mindless appetite for growthiness in the last few years, VCs had a record number of [exits][94]. But they are still stuck with plenty of private companies in their portfolios whose values are falling fast. ![](/blog-images/Global-VC-exits.png) One of the advantages of private markets is that investments don’t need to be marked to market. This allows VCs, pensions, endowments and other large private market investors to show artificially inflated returns when compared to public market equivalents. Cliff Asness of AQR calls this “volatility laundering.” VCs often use this to raise new funds. In theory, the lack of mark to market accounting in private markets was supposed to solve the short-termism that plagues the public markets. But on the flip side, VCs don’t have an incentive to quickly mark down their investments even when public market equivalent stocks are down 50%+ as they are now. Adding private investments is even more helpful for crossover funds like Tiger. Since private investments aren’t marked to market, they don’t fall as quickly as public market investments. This lag allows crossover funds to window dress their returns to show lower losses when their public markets investments tank. Tiger is apparently down 50% YTD. The image would be far worse if all their private investments were marked down to reflect public market realities. > Tiger’s write-downs of its startup bets in its venture and stock-picking funds have been modest thus far compared with its public holdings, people familiar with Tiger’s numbers said. But a venture fund’s performance often lags behind drops in public markets. Private companies are harder to value, and managers often rely on a company’s valuation at a prior fundraising round. Early this year, Tiger told investors the $2.3 billion it invested across numerous funds in ByteDance was worth about $6.4 billion—a huge win. But since, it has written down its stake by over $2 billion, estimating ByteDance’s valuation at less than $300 billion, people familiar with the numbers said. Highflying Tiger Global Humbled by Unraveling of Giant Tech Bet This is why private markets tend to lag public markets by 6+ months. VC funding has only [dropped marginally][95], and the number of down rounds hasn’t picked up yet. But this is due to the great private markets mirage. If the public markets continue their downtrend over the next few months, we’ll see markdowns. Private markets don’t adjust to the public market realities easily. They always come kicking and screaming, but they will come. Things are so bad that VCs are sending memos with filthy words like “sustainability”, “profitability”, and “be alive.” The startup community should strongly condemn such language. Sequoia wants startups to adapt and even published a memo titled “adapting to endure.” Lightspeed declared, “the boom times of the last decade are unambiguously over” in a post titled “the upside of a downturn.” In a [CNBC-styled memo][96], Y Combinator asked startups to reach a state of “default alive.” The head of Sequoia India keeps forgetting that he is a VC and uses the F word every few months. This tweet sums up the dramatic shift in sentiment. Though private markets time to come back to reality, we’re already seeing the damage: 1. Term sheets are getting pulled, and deals are being renegotiated with investor-friendly terms that had gone out of fashion. 2. IPOs are done. 3. Deals on private markets exchange Carta were down 38% in Q1. 4. Over 17000 employees have been laid off by tech companies globally, and startups are cancelling offer letters. 9500+ people have been laid off in India alone. 5. Fidelity has marked down several of its holdings by 13-50%. 6. Private companies like Klarna, Chime, FTX and GoPuff are trading anywhere between 20-70% lower in private markets. 7. Series A rounds have been cut in half. The one thing I keep hearing is that there’s a lot of money on the sidelines. In some sense, it is true, given that venture funds had record distributions in the last 3 years. All of this money has to be put to work somewhere. So, does this mean that even if the public markets tank, venture activity won’t fall as badly as it could have in the absence of this dry powder? I don’t know. This [Bain report][97] put the total private markets dry powder at $3.4 trillion. [Pitchbook][98] estimates $222 billion of this dry power in venture capital alone, while [Prequin][99] puts it at $478 billion. But not all of this capital will be called by the VC funds and deployed. More importantly, if this market crash becomes as bad as 2008 or 2020, limited partners may default even if the capital is called. ![](/blog-images/Dry-powder-VC-PE.png) ### More craziness? Venture capital and private equity aren’t the only crazy segments of the private markets. “Some parts of private equity look like a pyramid scheme in a way,” Amundi Asset Management’s chief investment officer Vincent Mortier said in a presentation on Wednesday. “You know you can sell [assets] to another private equity firm for 20 or 30 times earnings. That’s why you can talk about a Ponzi. It’s a circular thing.” “Just because there’s no mark to market doesn’t mean there’s no risk,” said Mortier. “There are some very, very good opportunities, but there are no miracles. Eventually there will be casualties, but that might not be for three, four or five years.” FT 1. Since 2008, there’s been dramatic growth in leveraged loans. Over 90% of leveraged loans are the so-called covenant-lite loans. These loans have very minimal lender protections. 2. Global junk bond issuance has been making new highs since 2008. But rising interest rates are kryptonite for high-yield issuers. 3. Direct lending by private equity has seen dramatic growth. These are just some things at the top of my head—there’s a lot of craziness in other pockets of the market. But given the brutality of the markets so far, the bubbles are popping faster than they formed. But we’re in for some fascinating times. Remember that old Chinese guy who said, “may you live in interesting times”? I hope he died a miserable death. ### Leftovers This might sound lame, but as I was writing this post, I couldn't help but wonder about the sheer amount of research that's available for free. Even if you want to learn about some weird and arcane corner of the markets, you'll find a ton of resources. I thought I'd highlight a few amazing papers, videos and podcasts I discovered as I was writing this. None of what I've written is original. It's just a quick summary based on the amazing work done by academics, researchers, and journalists. Most of what I know about the 2008 crisis is based on Adam Tooze's _[Crashed][100],_ and the amazing research by Neil Fligstein^1,2, [Darrel Duffie][101], [Gary Gorton and Andrew Metrik][102]. In November 2008, Queen Elizabeth, visiting the London School of Economics, asked the economists _why did no one see it coming?_ Andrew Hindmoor Allan Mcconnell had [a brilliant paper][103] looking at the messiness of heeding the warnings about crises in real time. The other paper that stood out for me was [_Fifty Shades of QE_][37] by Brian Fabo, Martina Jančoková, Elisabeth Kempf and Ľuboš Pástor. Just like gravity makes the Earth orbit the sun, incentives are by far the most powerful force that moves people. This paper is a masterclass on the power of incentives. I'm a little embarrassed that I didn't know about Viral Acharya until he became the deputy governor of RBI. His [body of research is insane][104], especially his analyses of the 2008 crisis. I learned a tremendous amount from reading his papers. Two other names that kept coming up as I read more about the crisis were [Perry Mehrling][105] and [Markus Brunnermeier][106]. Again, I'm embarrassed that I didn't know of them before. That stupid econ class in my MBA was an utter waste. Most people don't appreciate the research published by the Bank for International Settlements (BIS). It's a [veritable goldmine][107] of all things finance and markets. The bulletins and quarterly reviews are particularly informative. [This paper][8] should be mandatory reading for anyone interested in learning about the crisis. Similarly, [VoxEU][108] is another amazing portal for economics research. Until I started writing this post, I hadn't appreciated just how important shadow banking entities like money market funds, repo dealers and private equity firms are. Daniela Gabor is a leading expert on shadow banking, and her research is bloody amazing^1,2,3. She is also a must follow on [Twitter][109], and her [videos][110] are incredibly insightful. In a similar vein, [Zoltan Pozar's][111] notes on US repo markets and [papers][112] are mandatory reading. Andy Haldane's [_The age of asset management?_][113] speech way back in 2014 was really prescient. It foreshadowed the loud debate about the power wielded by modern asset managers, who are now the biggest owners of large swathes of public markets. 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The boy who cried wolf about an emerging markets sovereign and corporate debt crisis

Fri, 29 Apr 2022 00:00:00 GMT

These are good times for all those who've been crying wolf about market crashes and economic crises for the past couple of decades. It just took two decades, but it seems like most of those apocalyptic predictions are partially starting to come true. The Weimar Republic people had been crying wolf about inflation since 2008. It only took 14 short years, but they were finally proved right. They were heard whispering, “I told you so.” They couldn't shout because their throats had gone hoarse from crying wolf for 1.4 decades. The “a sovereign debt crisis is coming” people have been crying wolf for longer, but a crisis never came. But it finally looks like their time is about to come. For the past few months, I've been listening to the who's who of macro. A recurring theme among these people is the looming sovereign and corporate debt crisis in emerging and advanced countries. I'm reliably told by certain genius macro commentators this is just a few months away. They were also generous enough to suggest I sell everything, invest in gold, buy an underground bunker and stock up on canned food and ammo. Very nice people. Now that the US Fed raising rates, the sovereign debt crisis chatter has been getting louder—especially in emerging markets. The [World Bank][1] and [IMF][2] have joined the chorus. So, is there a looming emerging markets sovereign debt crisis? I had no clue. So, over the past couple of weeks, I've been googling to get a sense of the situation in emerging markets is. This post is a collection of some interesting things I came across. This isn't meant to be a definitive post. It's just a 10,375-foot view of emerging markets. But before that, how often do sovereigns default? Here's [a history][3] of global sovereign and corporate defaults. Over the long arc of history, sovereign defaults have fallen sharply: Defaults had the biggest global impact in the 1980s, reaching US$450 billion, or 6.1 percent of world public debt, by 1990. The scale of defaults has fallen substantially since then. Over the past decade, between 0.3 and 0.9 percent of world public debt has been in default. In 2020, the amount was estimated at 0.5 percent. Total sovereign debt in default increased by 48 percent in 2020, considerably outpacing the 13 percent increase in gross world public debt

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Emerging markets saw a series of sovereign debt crises from the 1970s to the early 2000s. The first wave of crises occurred between 1970-80 in Latin America. In the early 1970s, real interest rates were low and even negative. At the same time, thanks to the OPEC oil shocks, oil-exporting countries were enjoying record surpluses. Since oil was denominated in dollars, these surpluses were mostly parked with US banks looking for yield. During the 70s, Latin American economies were growing at a fast clip. Thanks to the low real rates, dollar funding was cheap. US banks were more than happy to lend these petrodollars to Latin American countries that wanted to invest in infrastructure, military and other public spending. These countries borrowed heavily. They were running large fiscal deficits and could sustain them since the GDP growth was high. External debt in Latin America shot up from $32 billion in 1970 to $332 billion in 1983. Latin American debt accounted for [176%][4] of the capital of the 9 of the largest US banks. ![](/blog-images/Latin-american-debt-crisis.png) The 70s and 80s were a stubbornly high inflationary period in the US. In 1979, Paul Volcker was appointed as the Fed chair to tame inflation. Volcker promptly raised the interest rates to 20%, which put the US in recession and caused a global slowdown. Most of the debt of the Latin American countries were short-term floating rate loans. Suddenly, the debt servicing costs for Latin American counties shot up, currencies saw sharp devaluations, and they had to [default][6]. ![](/blog-images/US-interest-rates-debt-crises.webp) The next major episode of the sovereign debt crisis was the Asian Financial crisis. South Korea, Indonesia and Thailand were at the heart of the crisis. Philippines, Malaysia, and Hong Kong suffered collateral damage. The 90s were a low interest rate environment and investors in developing countries were starved for yield. At the same time, Asian countries were growing rapidly, and investors made a beeline to these countries. Foreign capital inflows to Asian countries rose from $9 billion in 1990 to about $80 billion by 1996. The flows were arbitraging interest rate differentials—borrow in a low interest rate country and invest in a high rate country. At the heart of the crisis was the good old maturity mismatch. Asian banks were borrowing short term in dollars and lending long term in their local currencies. Suddenly in 1997, the flows reversed, and there were large scale outflows due to a confluence of factors. Companies that had borrowed heavily were unable to roll over their dollar debts. Money channelled into unproductive investments soured, and there was a crisis of confidence which amplified the panic, causing more outflows. Counties with fixed currencies and were unable to defend the pegs as they came under heavy attacks by speculators, given the dwindling foreign exchange reserves. Ultimately, these countries were forced to [devalue][8] their currencies, plunging the economies into deep recessions. Since these crises, emerging market and developing economies (EMDEs), particularly Asian countries, have come a long way. Many of them are in far stronger positions than they were during the 90s. At the same time, many like the Latin American and Middle Eastern countries remain vulnerable. #### What's in a name? People often talk about emerging, developing and frontier countries as if they are homogenous. There isn't a standard definition of what an emerging market is. The term emerging markets often means any country that is not a developed country. The IMF classifies 39 economies as advanced and the rest as emerging markets and developing. The J.P. Morgan emerging markets bond index has over 65 countries, the MSCI EM index has 25 countries, FTSE Russel has 23, S&P Dow has 24 and so on. Some index providers label certain emerging countries as frontier economies. But broadly, an emerging market is a fast-growing economy with good economic prospects. It could mean any country from China to Guyana. Emerging and developing economies have come a long way since the Latin American and Asian Financial crises. Many countries developed local bond markets and diversified their investor base to reduce their dependence on foreign currency borrowing. Most of them also abandoned fixed currencies and allowed their currencies to float, albeit with some intervention from their central banks. They also built substantial foreign exchange (FX) reserves to deal with sudden shocks. 70-80% of total global reserves are held by emerging market central banks. But progress has been uneven, and several emerging, low income and frontier economies remain vulnerable. So, why are people crying wolf about emerging markets? Before we get to that, here's a bird's eye view of global and EMEA sovereigns by credit rating trends and outlook. You can dunk on credit rating agencies all you want, but they're still one of the best ways to get a sense of the credit quality of countries and companies. CDS spreads, and bond yields may be better, but getting this data is a nightmare 😭 #### Global Global credit ratings have progressively worsened since the global financial crisis (GFC), and the COVID-19 shock accelerated some of that. 25% of countries rated by S&P saw [at least one rating downgrade][9] between January 2020 and September 2021.

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#### EMEA **You can get a better sense when you break it up and look at regions**. Here are the ratings for the Europe, the Middle East and Africa (EEMA) region. S&P has a stable outlook for [44 of the 54 EMEA][10] countries.

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But the balance sheets of these countries have deteriorated significantly post the pandemic. Sub-Saharan Africa (SSA) looks the most vulnerable due to a significant increase in debt servicing costs. #### Asia-Pacific [Asia-Pacific][11] region is the most stable region around the world among emerging and developing countries.

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So, the reason why are crying wolf over a debt crisis in emerging markets is because of the COVID-19 pandemic. The entire global economy virtually ground to a halt. Countries around the world, especially the developed economies, unleashed fiscal stimulus on a scale we have never seen before. Emerging markets economies, too, had to spend but had [limited policy space][12]. Given the trillions in fiscal spending across the world, 2020 saw the biggest single-year [increase in debt][13] since World War II.

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A [more granular look][14]:![](/blog-images/Global-public-and-private-debt.png) These scenarios are what permabears live and die for. They've been screaming that all this debt and money printing would lead to hyperinflation, rising interest payments, high taxes and that developed and developing economies will become fifth world countries. But a high debt-to-GDP ratio on its own [is quite meaningless][15]. It's a bit like saying the stock market is high. No two countries are the same, and comparing debt to GDP ratios is a fraught exercise. The composition of the debt, the economic growth rates, structure of the economy, institutions, the rule of law, central bank independence, interest rates, and inflation matter more. Just ask the exotic creatures who've been predicting the end for the US and Japan because of the rising debt-to-GDP ratios since the 2000s. Anyway, given the record low interest rates around the world since 2008, debt wasn't a problem. Low interest rates in developed markets caused a hunt for yield, and emerging market debt saw huge [inflows][16]. Except for the 2013 taper tantrum, the 2015 China shock and the 2020 COVID-19 crash, EM flows remained positive. But now that inflation is back in the US, the Federal Reserve has started to hike rates and is expected to continue hiking aggressively. More worryingly, for the emerging markets, the dollar has been strengthening, and this is bad news. A [strong dollar][17] is bad for emerging markets because it increases the price of imports in dollar terms and can kill demand. It also increases the interest costs on dollar-denominated debt and makes refinancing costlier.![](/blog-images/Dollar-vs-EM-flows.jpg) Boris Hofmann and Taejin Park had published [an analysis in the BIS][18] analyzing the impact of a stronger dollar. They showed that a rising dollar has a more pronounced effect on emerging markets with higher dollar debt and foreign ownership of local currency bonds.![](/blog-images/dollar-vs-EM-growth.jpg) Since the rates in the US stayed low for a long time, the emerging markets sovereign debt doomsayers had to find a second job. But now, the US is finally in a rate hike cycle, these people have rediscovered their purpose in life. But there's some nuance here. Jasper Hoek, Emre Yoldas, and Steve Kamin [published a paper][19] looking at the impact of US rate hikes and the impact on emerging markets. They found that if the US hikes rates when economic growth is good, it isn't a problem. But if inflation is rising in the US and the Fed is forced to become hawkish and hike rates, that's bad news for emerging markets. A strong dollar is [negatively correlated with global trade][20] and also leads to lower commodity prices. As emerging market currencies depreciate, [demand takes a hit,][21] leading to lower trade. And this is where the problem is. There's a [significant divergence][22] in post-pandemic economic recovery in emerging and developing economies.![](/blog-images/Emerging-markets-and-developed-economies-COVI-19-recovery.png) Commodity exporting emerging countries like Brazil, Mexico, Chile, Saudi Arabia etc., are seeing windfalls due to rising commodity prices. But commodity importing countries like Bangladesh, Vietnam, Thailand, and India have taken a hit. Tourism dependent countries like Turkey, Thailand etc., have been [hit the hardest.][23] Their economic recoveries are significantly off the pre-pandemic trend. At this point, it's important to remember that not all emerging and developing economies (EMDE) are the same. Several Asian EMDEs like India, Thailand, South Korea, and Malaysia are in a significantly better place having built substantial [FX reserves][24]. But low-income developing countries aren't in such good shape. In the recent [World Economic Outlook][25], the IMF noted that _“60 percent of low-income developing countries are already in debt distress or at high risk of distress.”_![](/blog-images/Low-income-countries-debt.jpg) > Among the 41 DSSI countries at high risk of or in debt distress, Chad, Ethiopia, Somalia (under the HIPC framework) and Zambia have already requested a debt treatment. Around 20 others exhibit significant breaches of applicable high-risk thresholds, half of which also have low reserves, rising gross financing needs, or a combination of the two in 2022. IMF For a lot of these emerging and developing countries, [debt servicing costs][2] have been going up over the past decade.

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The IMF In the report highlighted that lower growth prospects, especially for China, rising geopolitical tensions, rising energy prices and food prices are creating severe headwinds for these economies. In the [April 2022 Global Financial Stability Report,][26] the IMF noted that several emerging markets have already come under severe pressure. 25% of foreign currency (hard currency) issuing emerging economies are trading in the distressed territory.![](/blog-images/Emerging-markets-spreads.png) The World Bank also raised the alarm [on the rising variable (floating) rate debt][1] among the 74 of the poorest economies. Variable rate debt has increased from 20% in 2008 to 31% in 2022 To sum up, here's a quick overview of emerging and developing economies by vulnerability on various metrics by [The Economist][27] and [Bloomberg][28]. It's mostly the basket cases that are in the most trouble:

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The other perennial worry for emerging market watchers is foreign currency-denominated debt. After all, dollar-denominated debt was at the heart of the Latin American and Asian financial crises. It was dubbed the _“original sin.”_ Since the crises, most emerging markets have [developed local currency bond markets][29]. Foreign currency borrowing has reduced significantly.

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Just about 26% of the emerging market debt is denominated in foreign currency, mostly US dollars. Countries like Argentina, Turkey, Mexico, and Columbia are the notable exceptions. Though EMs started borrowing in local currency, they still had to rely on foreign investors to buy the debt given their small domestic investor base. As a result, foreign investors hold about 25% of the local currency sovereign debt. This didn't eliminate the _original sin_, it just shifted the risk from borrowers to lenders. Foreign investors have to worry about the appreciation and depreciation of emerging market currencies. If the currency appreciates, it increases the value of emerging market debt investments and flows increase. But if the currency depreciates, it lowers the value of their investments, forcing these investors to sell, leading to outflows and widening spreads. This selling creates a feedback loop of further selling due to portfolio limits, risk limits, and further widening of spreads^1,2,3. #### Sovereign piggybanks The other risk is the substantial increase in sovereign bond holdings by the emerging market banks post COVID-19. This was highlighted in the IMF's recent [Global Financial Stability Report.][26]![](/blog-images/Sovereign-bank-nexus.png) Banks have financed a large part of the pandemic deficit spending by emerging market countries. Bank holding of sovereign debt is highest among countries with higher debt-to-GDP ratios. The worry is that this link between sovereigns and banks could become a problem if growth slows. Slowing growth could lead to widening sovereign spreads, increased govt borrowing costs, losses for banks holding the bonds, higher financing conditions for corporates and other macroeconomic spillovers. #### Sovereign payday lender The other issue is the fact that China is now the [biggest lender][30] to many small countries across Asia and Africa. It has overtaken the IMF, World Bank and the Paris Club as the [largest creditor to nations][31]. The exact numbers are anybody's guess, but some estimates put total Chinese lending between $100 and-200 billion.This difficulty in assessing the true scale of Chinese lending is due to the [confidentiality clauses][32] in the debt agreements.![](/blog-images/China-lending.png) Given the scale of lending, It has been accused of _debt diplomacy_—a honey trap for countries by offering cheap and concessional loans. Some studies even estimate that there might be unreported debts of around [$385 billion,][33] given the lack of transparency. China has come under increasing criticism and has been blamed for the recent default in Sri Lanka. But not everyone agrees with the notion that China is entrapping countries through debt^1,2. Since a lot of these loans are unreported, it's very hard to estimate the exact scale of indebtedness in low income and poor countries. [Carmen Reinhart et al.][34] estimate that 60% of Chinese credit is to countries already in distress. They also note that these debts have led to a wave of [unreported debt restructurings,][2] and very little is known about them. If these estimates are even half true, the poorest countries are in serious trouble. Having said that, a small silver lining is that China hasn't yet started seizing collateral and taking over countries as many predicted. But if you now add rising rates to this cocktail of troubles, things can escalate very quickly in countries already under debt distress. The exact fallout from Chinese lending is anybody's guess. The worry is that this changing composition of creditors could complicate debt resolutions in case of sovereign defaults. The hope is that China won't risk ruing its reputation by being aggressive in recovering what it's owed, but at this point, hope is all it is. #### Bottom line The bottom line is emerging markets have changed a lot since the Asian and Latin American crises. A lot of these countries, especially the Asian economies, have implemented serious reforms. Barring a few small countries, foreign currency borrowing accounts for a very small share of the total emerging market debt. Emerging markets have also built up a significant amount of foreign currency reserves. Instead of a debt crisis, emerging markets may suffer various degrees of “fiscal scarring” Economist The probability of a repeat of an 80s and 90s type of crisis is very slim. Having said that, the poorest countries like Pakistan, Egypt, Tunisia, Mozambique, and Rwanda have seen a sizable increase in debt burdens. The rising food and energy prices will make things worse at a time when they are already at a high risk of defaults. It looks like the wave of defaults in poor countries might just be starting. Zambia defaulted in 2020 and Sri Lanka this year. [Nepal][35] seems to be in the same situation as Sri Lanka. As longtime EM observer David Lubin [wrote last year][36]: > Low-income and lower-middle-income countries have indeed seen an increase in their net external debt, denominated in foreign exchange, and in their debt service ratios during the past 10 years. But understood in a longer historical context, these indicators of debt-carrying capacity are still quite healthy compared to 20 or 30 years ago when debt problems really were acute. T[obias Adrain][37] of the IMF:

“There are certainly many countries that are either already in distress or will potentially be in distress in the near future,” he said in an interview with the Financial Times. The IMF on Tuesday cut its forecast for growth in emerging markets and developing economies to 3.8 per cent this year — down one percentage point from its January estimate.

“At some point, some major emerging market could also come into distress and the picture could change . . . That is not in our baseline right now, but it depends on how adverse the evolution of financial sector shocks is going to be,” Adrian added, noting that the amount of debt at risk is not “systemic in nature at this point”.

But, for the countries that do default, debt resolution will be a nightmare. After the pandemic hit, the IMF, G20 and other institutions announced a series of debt service suspension initiatives for low-income countries. The debt wasn't cancelled, just postponed, and it'll start coming due in the next couple of years, and this is where the issue is. If there are defaults, restructuring these debts won't be as easy as pre-2008 because of the diverse creditor base [Karina Patricio Ferreira Lima][38][ wrote a prescient piece][39] in 2020 explaining how notorious hard sovereign debt restructurings are. Unlike corporate bankruptcies, there's no international body for sovereign defaults. The problem is that the sovereign creditor base has changed. A few decades ago it was mostly the Paris Club lenders, banks and multilateral institutions like the IMF and World Bank. But today you have a complex mix of multilateral institutions, bilateral lenders and bondholders. Diverse creditors and competing agendas make sovereign debt resolutions incredibly hard and messy. Then there's the nuisance of [vulture hedge funds][38] like Paul Singer's Elliot Capital, whose sole job is to extract the maximum they can from sovereign creditors. This messy reality will just make life miserable for these poor and low-income countries in the event of a default. > In any case, the DSSI will likely postpone the sovereign insolvency crisis of eligible states, rather than resolve it. The payments to official creditors frozen by the G20 will all come due between 2022 and 2024, along with the accrued interest. In the meantime, without private sector involvement, the G20’s standstill and multilateral funding may divert resources necessary for recovery to the repayment of private debt.

This varied creditor base of sovereign debt includes many competing interests and few shared codes of conduct. It is now much trickier to coordinate behind closed doors through the sort of “gentlemen’s agreements“ which permitted restructuring in the past. Furthermore, the level of exposure of hedge funds to emerging market bonds indicates that holdout strategies may become more widespread than in previous crises and include not only high-risk hedge funds (also known as “vulture funds”) but also traditional ones. In this context, consensus is much harder to achieve than in the past.

Karina Patricio Ferreira Lima ### Emerging market corporate debt crisis It's the same worry when it comes to emerging market dollar-denominated corporate borrowing. People worry about the high corporate debt to GDP ratio in emerging markets. But there's nuance required here. According to [BIS data][40], there's about $4.2 trillion of non-financial dollar debt in emerging markets. Sure, that sounds scary but emerging market central banks have built up substantial reserves to the tune of $6-7 trillion. Even though corporate debt increased from [56 to 96%][41] of GDP in emerging markets between 2008 and 2018, most of it was in local currency bonds. This mitigates the issue of a strengthening dollar to an extent. The US Federal Reserve conducted a stress test on emerging economies with 3 variables: falling earnings, rising interest rates and currency depreciation. The analysis found that falling earnings and rising interest rates would be the most disruptive:

In particular, the authors assume a fall in earnings of 20 percent, a rise of 100 basis points in the interest rate paid by firms, and a 20 percent depreciation of the exchange rate. This study finds that if the three shocks would occur simultaneously, the debt-at-risk in emerging economies in 2016 would rise from 25 to 41 percent. Excluding China, debt-at-risk would increase from 15 to 34 percent.

Although high, these values would still be below those on the eve of the AFC when debt-at-risk stood at 48 percent. Nevertheless, in several large emerging economies the share of debt-at-risk would get near or, even, surpass 48 percent. This would be the case of Indonesia (62 percent), Mexico (53 percent), China (48 percent), and Brazil (45 percent). In other words, in major emerging economies about half of nonfinancial corporate debt would correspond to firms with weak debt servicing capacity. According to this Federal Reserve study, shocks to earnings and interest rates would be the
most harmful.

Growth of Global Corporate Debt : Main Facts and Policy Challenges But so far, corporate default rates have remained low. In fact, they are lower than the US high and speculative yield default rates.

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The reason for concerns over emerging market corporate debt is because of the pace at which it has grown since 2008 and the COVID-19 shock to corporate balance sheets. ![](/blog-images/EM-DM-corporate-debt.jpg) But much of that growth is due to the stunning growth of debt levels [in China][42]. Corporate debt in China has grown faster than all the [other EMs combined][43]—madness!

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This has been the case [since 2008][44] when China unleashed a [massive stimulus][45] that quite literally pulled the entire world from the brink of a great depression. But if you look past the headlines, corporate fundamentals at an aggregate level aren't [apocalyptic][46].

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Having said that, not all emerging markets are made the same. Aggregates mask substantial variation among emerging market corporates. But the consensus here is that corporates in [China, Latin America][47] and other riskier emerging markets are at the highest risk of defaults. [S&P simulated][48] a 300bps interest rate hike and inflation shock on a sample of 24,445 corporates. The results showed that loss-making companies would increase to 7%, double that of last decade. Regionally, Chinese companies would be the most affected.![](/blog-images/Corporate-debt-and-earnings-emerging-markets.png) The other perennial worry was over the rise of [zombie firms][49]—entities that couldn't cover their interest payments from their earnings and profits. The argument was that a decade of low interest rates had created a massive horde of undead companies because they were able to raise cheap debt by issuing high yield debt. But that doesn't seem to be the case, at least in the [United States][50]. Zombie companies are being upgraded at twice the rate as they are being downgraded. Of course, not everybody thinks that [this will last][50].![](/blog-images/Zombie-companies.png) The bottom line is that it's highly improbable that we are set to witness a wave of corporate bankruptcies in the emerging markets. The highly levered and speculative companies will probably go bankrupt if the Fed aggressively hikes rates. But we are quite some time away from a corporate version of the great depression. So far, the Fed has hiked by 75 basis points and several EMs started way before the Fed. If you look at emerging market bond spreads, the high yield spreads have shot up quite a bit, almost to the levels seen during the COVID-19 crash. So the most speculative and leveraged companies are at the most risk of default. The broader spreads have largely remained in line with historical averages. ![](/blog-images/Emerging-markets-bond-spreads.png) US high yield spreads also haven't blowout exactly. ![](/blog-images/US-high-yield-spreads.png) ![](/blog-images/US-Junk-bond-ETFs.png) Looking broadly at the spreads as based on emerging market dollar-denominated sovereign bond indexes (EMBI) and emerging market dollar-denominated corporate bond indexes (CEMBI) from this [UBS report][51].![](/blog-images/Emerging-market-credit-spreads.png) ### Emerging markets investing Emerging markets account for 60% of the world GDP. 80%+ of the world's population lives in emerging markets. They have grown at a faster rate compared to developed economies, the growth premium is 2-3%. Developed markets are ageing and increasingly resemble old-age nursing homes, while emerging markets are full of young people in a playground. These are sales pitches you hear as reasons to invest in emerging markets. Has it worked? [Not in a long time][52]. The US has been the undisputed king for well over a decade.![](/blog-images/Emerging-markets-and-developed-markets-performace-EM-DM.png) Is the cycle turning and will emerging markets make a comeback? It's not simple. Maybe that's a topic for another day, [1]: https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises [2]: https://www.imf.org/en/Publications/fandd/issues/2022/03/Shining-a-light-on-debt-Pazarbasioglu-Reinhart [3]: https://www.bankofengland.co.uk/-/media/boe/files/statistics/research-datasets/whats-new-in-2021.pdf?la=en&hash=27F7A33FA99A3B9D74096D5FABEF7C2D16DCACFC [4]: https://www.federalreservehistory.org/essays/latin-american-debt-crisis [5]: https://www.youtube.com/watch?v=-gmq-Mfxofk&t=1151s [6]: https://dergipark.org.tr/tr/download/article-file/147598 [7]: https://www.brookings.edu/blog/future-development/2022/02/28/developing-economies-face-a-rough-ride-as-global-interest-rates-rise/ [8]: https://www.economicshelp.org/blog/glossary/financial-crisis-asia-1997/ [9]: https://www.spglobal.com/ratings/en/research/articles/220127-global-sovereign-rating-trends-2022-despite-stabilization-the-pandemic-threatens-the-recovery-12250011 [10]: https://www.spglobal.com/ratings/en/research/articles/220127-emea-emerging-markets-sovereign-rating-trends-2022-stable-overall-but-fiscal-external-and-geopolitical-ris-12247841 [11]: https://www.spglobal.com/ratings/en/research/articles/220127-asia-pacific-sovereign-rating-trends-2022-new-covid-strain-thwarts-an-earlier-recovery-12250873 [12]: https://blogs.imf.org/2021/07/27/drawing-further-apart-widening-gaps-in-the-global-recovery/ [13]: https://blogs.imf.org/2021/12/15/global-debt-reaches-a-record-226-trillion/# [14]: https://www.imf.org/en/Publications/FM/Issues/2022/04/12/fiscal-monitor-april-2022 [15]: https://carnegieendowment.org/chinafinancialmarkets/86397 [16]: https://www.cfr.org/blog/whats-store-emerging-markets [17]: https://blogs.imf.org/2022/01/10/emerging-economies-must-prepare-for-fed-policy-tightening/#post/0 [18]: https://www.bis.org/publ/qtrpdf/r_qt2012b.htm [19]: https://www.federalreserve.gov/econres/notes/feds-notes/are-rising-u-s-interest-rates-destabilizing-for-emerging-market-economies-20210623.htm [20]: https://www.piie.com/reader/publications/policy-briefs/uneven-global-rebound-will-challenge-emerging-market-and-developing [21]: https://voxeu.org/article/strength-dollar-and-emerging-markets-growth [22]: https://www.worldbank.org/en/news/feature/2022/01/11/developing-economies-face-risk-of-hard-landing-as-global-growth-slows [23]: https://www.brookings.edu/research/the-covid-19-travel-shock-hit-tourism-dependent-economies-hard/ [24]: https://twitter.com/Brad_Setser/status/1311745172045271040?s=20&t=PL2N0fu1fu7zWI0lzvCpYQ [25]: https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022 [26]: https://www.imf.org/en/Publications/GFSR/Issues/2022/04/19/global-financial-stability-report-april-2022 [27]: https://www.economist.com/finance-and-economics/three-threats-to-the-global-economic-recovery/21806535 [28]: https://www.bloomberg.com/news/features/2022-04-20/rising-food-energy-prices-are-just-the-start-of-an-emerging-economic-crisis?utm_source=twitter&utm_medium=social&utm_campaign=twitter-moments&utm_content=economics [29]: https://www.bis.org/publ/qtrpdf/r_qt2106c.htm [30]: https://www.economist.com/finance-and-economics/2019/07/13/a-new-study-tracks-the-surge-in-chinese-loans-to-poor-countries [31]: https://www.bbc.com/news/59585507 [32]: https://www.piie.com/research/piie-charts/chinas-lending-emerging-markets-became-more-secretive-after-2014 [33]: https://www.cnbc.com/2021/09/30/study-chinese-loans-leave-developing-countries-with-385-billion-in-hidden-debts.html [34]: https://voxeu.org/article/china-s-overseas-lending-and-war-ukraine [35]: https://www.orfonline.org/expert-speak/nepals-economic-crisis/ [36]: https://www.chathamhouse.org/2021/03/emerging-market-debt-covid-19-pandemic [37]: https://www.ft.com/content/b3b8e145-d77f-4e8c-a5c5-6cf376a6b209 [38]: https://lawdigitalcommons.bc.edu/bclr/vol61/iss5/5/ [39]: https://www.phenomenalworld.org/author/karina-patricio-ferreira-lima/ [40]: https://stats.bis.org/statx/srs/tseries/GLI/Q.USD.4T.N.A.I.B.USD?t=e2&c=&m=USD&p=20203&i=2.3 [41]: https://openknowledge.worldbank.org/handle/10986/34480 [42]: https://www.spglobal.com/ratings/en/research/pdf-articles/220413-emerging-markets-monthly-highlights-a-road-full-of-hazards-101489751 [43]: https://merics.org/en/report/chinas-high-and-rising-corporate-debt [44]: https://www.federalreserve.gov/econres/notes/ifdp-notes/emerging-market-nonfinancial-corporate-debt-how-concerned-should-we-be-20170601.htm [45]: https://www.worldpoliticsreview.com/articles/29498/what-the-u-s-can-learn-from-chinese-stimulus [46]: https://am.jpmorgan.com/tw/en/asset-management/institutional/insights/portfolio-insights/fixed-income/fixed-income-perspectives/corporate-fundamentals-where-do-we-go-from-here/ [47]: https://am.jpmorgan.com/content/dam/jpm-am-aem/emea/regional/en/insights/portfolio-insights/emd/emerging-market-debt-outlook-1q-2022.pdf [48]: https://www.spglobal.com/_assets/documents/ratings/research/100811674.pdf [49]: https://www.bis.org/publ/qtrpdf/r_qt1809g.htm [50]: https://www.bloomberg.com/news/newsletters/2021-06-25/the-weekly-fix-as-stars-rise-zombies-die-crypto-credit-risk [51]: https://www.ubs.com/us/en/wealth-management/insights/market-news/article.1564903.html?caasID=CAAS-ActivityStream [52]: https://www.invesco.com/apac/en/institutional/insights/equity/challenges-opportunities-emerging-market-stocks.html

What’s old is new again

Sat, 16 Apr 2022 00:00:00 GMT

A few things that made me go, _ooh, that's interesting_.

### What's old is new again The _Lindy Effect_ is this notion that the longer something survives, the less likely it is to die. When it comes to frauds, pump and dump schemes are Lindy. Pump and dump schemes have been going strong for over 400+ years since the birth of the modern stock exchange. It's a weird coincidence, but in the last month, several pump and dump schemes have come to light and surprisingly caught the attention of journos. It started in March when several popular people [started tweeting][1] that they were being offered money to promote a stock called [Salasar Techno][2]. [The Ken wrote][3] about this: > He adds that such schemes often target stocks with a share count of less than 50 million, where promoters account for the majority of shares. Such stocks typically see more volatile, low-volume trading and are easier to manipulate through coordinated efforts. Marketing agencies are contacted, and usually given a mandate to promote the company online. It’s unclear whether these agencies are contacted directly by companies or by brokers, operators, and promoters. At the end of March, [SEBI pulled Ruchi Soya][4] when it discovered SMS tips promoting FPO and the discount. Then I saw this tweet last week about a pump and dump in a new stock called [Supreme Engineering][5]. Is it just a case of enterprising entrepreneurs responding to a market opportunity?![](/blog-images/stock-tips.png) As I mentioned, pump and dumps through stock tips are as old as the financial markets themselves. [Investor Amnesia][7] by Young [Jamie Catherwood][8] is probably the best blog about financial history on the internet. The site is like a time machine for financial markets. [Here's an excerpt][9] from a post about a pump and dump as far back as the 16th and 17th century in the Dutch stock exchange, the world's oldest stock exchange:

One can readily imagine a 17th century pundit forecasting how political developments in Europe will effect the Indian economy, and ‘What it Means for Your Portfolio’.

On the Dutch stock exchange during this period, a small group of speculators realized how easily influenced their peers were by individual trader’s decisions, and the short-term news cycle. Manipulating the market, therefore, was as simple as providing traders with the ‘hot tip’ that they scoured the exchange for each day.

An effective system was quickly developed in which the savvy speculators accidentally dropped notes around the exchange that held misleading stock tips:

“If it is of importance to spread a piece of news which has been invented by the speculators themselves, they have a letter written and [arrange to have] the letter dropped as if by chance at the right spot. The finder believes himself to possess a treasure, whereas he has really received a letter of Uriah which will lead him into ruin.” — Joseph de la Vega (1688)

Lindy! From “accidentally dropped notes”, gossip, neighbours, [shoe shiners][10], SMS to influencers on YouTube, pump and dump schemes have evolved with the times. YouTube, in particular, has become a cesspool of pump and dump schemes. [The Ken published a piece on Indore][11], the stock tips capital of India. “If lured once, customers end up spending between Rs 3,00,000 ($4,000) and Rs 4,00,000 ($5,200), typically,” the executive adds, noting that advisors earn their service charges irrespective of whether the investment gains or loses. Other approaches can be as blatant as telling half the potential customers to buy something and telling the other half to sell. The subset of customers that benefit from the binary advice can then turn into consumers for more services. Today, [Livemint had a feature][12] on pump and dump scams on Telegram channels. Legend 👇 > Yet another channel is run by an individual in Bihar whose experience, before 2017, was solely marketing for retail chains. Before he began giving “super HNI calls" (tips that high networth individuals use), he was the CEO of a departmental store. Currently, his firm is dolling out stock calls to 31,000 subscribers for free. He also has a premium model—for ₹10,000, he would advise “buying the next multi bagger stock". Of course, none of this is anything new. 2018 was a particularly busy year for stock tipsters, and there was a deluge. I had written a [small post][13] tracking the performance of some of these pump and dump episodes. [My boss wrote about pump and dumps and other stock market scams a couple of][14] years ago. But with the popularity of Twitter, Telegram, Discord, and YouTube influencers, there are more places and more ways to run the scams than ever. It's scary how easy it is to run a pump and dump without getting caught. Using influencers to pump and dump stocks and crypto is proving to be by far the most effective outlet. It's a neat way for the scammers to leverage whatever trust these influencers have among their followers. My gut says we'll see a dramatic increase in pump and dumps as our markets grow. Not just with stocks, but more and more things, including our very lives, become more financialized, the number of things that can be manipulated will go up. Up until a few years, it was just stocks, now we have crypto, and soon in a dystopian world, [it'll be humans][15] 😬 I don't really see how these things can be controlled, let alone stopped. It's like playing a game of whack-a-mole in 20 different places at once.

### Crypto #### Worldcoin Crypto is like a party at 11 PM; there's always peak craziness. Like most people, I don't get most things about crypto. But I get that dismissing it entirely out of hand is foolish. So, I'd say I'm an interested skeptical observer. Crypto is fun because just when you think something is nuts, there's immediately something even nuttier. How would you like to get $20-$25 and some crypto tokens for free? This is what Worldcoin co-founded by Sam Altman, the CEO of OpenAI and the former president of Y Combinator, is promising. Wordcoin wants to bring crypto to the masses by giving free crypto tokens to every single living human being on the planet. All you have to do is get your eyes scanned by a chrome orb that looks like a murder weapon from a Kannada movie and share your biometric data? Why? From what I understand, Worldcoin wants to “promote crypto” and become the Aadhaar and UPI of WEB3. This all sounds like something George Orwell would've been proud of. Who knows, if he was alive, he might have even become a YouTube influencer for Worldcoin. But shockingly, things aren't going well. [Buzzfeed][16] and [MIT Tech Review][17] published a damning expose of the project. Contractors hired by Worldcoin are systematically targeting poor communities across Africa and Asia to collect their biometric data in dubious ways. The bigger issue is that nobody knows what the project is about, what will the data be used for, or how will the data be stored. The project has all the hallmarks of a success story.

Pete Howson, a senior lecturer at Northumbria University who researches cryptocurrency in international development, categorizes Worldcoin’s actions as a sort of crypto-colonialism, where “blockchain and cryptocurrency experiments are being imposed on vulnerable communities essentially because…these people can’t push back,” he told MIT Technology Review in an email.

Speaking to Blania clarified something we had struggled to make sense of: how a company could speak so passionately about its privacy-protecting protocols while clearly violating the privacy of so many. Our interview helped us see that, for Worldcoin, these legions of test users were not, for the most part, its intended end users. Rather, their eyes, bodies, and very patterns of life were simply grist for Worldcoin’s neural networks. The lower-level orb operators, meanwhile, were paid pennies to feed the algorithm, often grappling privately with their own moral qualms. The massive effort to teach Worldcoin’s AI to recognize who or what was human was, ironically, dehumanizing to those involved.

Here's Richard Nieva, who wrote the Buzzfeed piece, talking about his experience: #### Death by TDS The new [Indian income tax regime][18] for crypto went live this month. Income from crypto will now be taxed at 30%, and a 1% TDS will be applicable on each transaction. As if that wasn't bad enough, crypto platforms are having a tough time finding payments partners willing to work with them. All the major crypto apps have disabled UPI payments; Coinswitch Kuber seems to have completely disabled all fund transfers. Mobikwik, which was a popular payment option to transfer funds to crypto wallets, also [stopped][19] supporting crypto payments. All this happened after Coinbase proudly announced its Indian launch and said it supported [UPI payments][20], and NPCI said it had no idea about it. This month has been a case of _when it rains, it pours_ for Indian crypto. [If this data is to believed][19], and I'd take it with a few spoons of salt, crypto volumes are apparently falling off the cliff: > Crypto trading has been dealt a double whammy by tax implementation and MobiKwik withdrawing its services across exchanges on April 1 amid unclear regulations. Volumes have fallen further from the last week by over 50 percent on average across crypto exchanges, according to data shared by crypto research firm CREBACO. WazirX saw a drop of 72 percent while volumes on CoinDCX and Zebpay dropped over 52 and 59 percent respectively. The only people who must be still buying are probably the true crypto believers or people who don't understand taxes. I wonder how the Indian crypto industry is going to survive this. It makes zero sense to trade crypto anymore. You could argue that buy and hold guys might continue investing. Sure, but all the anecdotal data points in public and private toward Indian crypto ticket sizes being tiny, a few thousand at best. These crypto platforms can't survive on investors alone, they need [active traders][21]. #### Death by a thousand laws Crypto is too large and too noisy to ignore. It's also downright impossible to **effectively** impose total bans. So, that leaves the regulators with just one viable open—death by a thousand laws. This is what we're seeing across much of the world. But that doesn't mean that the crypto industry is sitting idly by. There seems to be a [concerted lobbying effort][22] to tilt the odds in their favour before federal laws are passed in the US. Crypto lobbyists have managed to get [several states to pass bills that they've crafted][23]:

The debate took less than four minutes. In the Florida House last month, legislators swiftly gave final approval to a bill that makes it easier to buy and sell cryptocurrency. The Senate followed, sending the bill to Gov. Ron DeSantis for his signature after 75 seconds of deliberations.

At least 153 pieces of cryptocurrency-related legislation were pending this year in 40 states and Puerto Rico, according to an analysis by the National Conference of State Legislatures. While it was unclear how many were influenced by the crypto industry, some bills have used industry-proposed language almost word for word. One bill pending in Illinois lifted entire sentences from a draft provided by a lobbyist.

Things are much slower at the Federal level. The only major development so far has been the executive order by Joe Biden in March asking various regulatory bodies and agencies to explore consumer protection, financial stability, illicit transactions and innovation-related aspects of crypto. [Kevin Werbach_ _had a brilliant post][24] dissecting the order. [SEC chair Gary Gensler's remarks][25] at the recent Penn Law Capital Markets Association Annual Conference, had some interesting hints. He reiterated that many of these tokens are “securities”, meaning they fall under the SEC's regulatory purview. He also mentioned that the SEC is working on figuring out if crypto platforms should be registered and regulated as exchanges.

There’s no reason to treat the crypto market differently just because different technology is used. We should be technology-neutral.

We already have robust ways to protect investors trading on platforms. And we have robust ways to protect investors when entrepreneurs want to raise money from the public.

We ought to apply these same protections in the crypto markets. Let’s not risk undermining 90 years of securities laws and create some regulatory arbitrage or loopholes.

In Europe, the European Parliament [passed new rules][26] as part of anti-money laundering regulations that make anonymous crypto transactions impossible. Exchanges will now have to collect information about buyers and sellers so that they can be traced anytime. #### Young HODLers When I was 5-years old, I was still figuring out the world. I'm not embarrassed to say that this involved licking a few doorknobs. A few tree trunks, too, might have been involved—learning by trial and error. But times have changed. Now, [kids as young as five are learning how to HODL][27] at crypto camps for kids: The weeklong camp, which costs $500, divides kids into four age groups and has them spend a set amount of time on different tech modules that follow the acronym Beastmode (that’s blockchain, evolution of money, artificial intelligence, security/cyber, technology/virtual reality, mining and machine learning, online gaming, drones, and engineering) The other shocking yet funny bit: > Teachers say they are noticing their students spending more time on platforms like Robinhood, where people can buy and trade crypto. He’s heard one story from a fellow teacher about a ninth grader at another school who made a bet on a college football game and won $500,000, then had to pretend that his father had actually made the bet. Worst case scenario, the kids learn how to rug-pull, but at least they won't be unemployed. This is going to get a lot messier, I guess 😥

### Buy now, pay never? I knew buy now, pay later (BNPL) was popular, but I didn't know that it was 15-25% of all e-commerce payments in several countries like Norway, Germany, and Sweden. Surprisingly, in India, 37% of all loans disbursed through digital channels by commercial banks and 12% by NBFCs [were BNPL loans][28]. BNPL players have largely grown thanks in part to the regulatory arbitrage. Since they aren't regulated today, they can play fast and loose with disclosures, consumer protection, data collection, and credit reporting. The regulators are aware of the risks here. Everybody from the RBI, ASIC, [CFPB][29] to [FCA][30] have made noises about regulating BNPL. Of course, like anything new, there will always be good and bad. But sometimes, the bad things can quickly get out of hand if not curtailed. BNPL is largely unregulated, leading to concerns about BNPL inducing people to borrow more and playing fast and loose with regulations. One of the biggest problems for e-commerce and other platforms is cart abandonment. Most people abandon their purchases simply because they can't afford the purchase, opaque terms and conditions or payments friction. Enter BNPL. By allowing users to pay for their purchases in instalments, often at 0% interest, BNPL has been shown to reduce cart abandonment rates. The really good UI/UX helps too. In just about 3-4 years, BNPL has quickly become a prominent payment option on shopping platforms worldwide. Like with everything, the power of defaults can be harnessed both for good and bad. The most [famous examples][31] of using defaults for good are opting-in people to save for retirement in 401K plans and donate organs by default. In the US, people weren't saving for retirement. So Richard Thaler and Shlomo Benartzi changed the choice to opt-in people [to save by default][32] instead of employees having to opt-in. Thanks to this default, millions of people are saving for their retirement. The same defaults can be used for bad too. Most 401K plans tend to have target date funds as a default investment option. So if an employee doesn't choose how he wants to invest, target date funds will be used as the default. Target date funds might not be perfect, but they are better than nothing and get the job done for most people. Studies show that a vast majority of people stick to default choices. A lot of 401K retirement plans have used leveraged this tendency to peddle [costly and useless investments][33]. Similarly, by using BNPL as a default, a lot of people might be subtly pushed to take debt they otherwise might not need to. Given that BNPL is unregulated, a lot of these BNPL players have really opaque terms and hidden charges, which compounds the problem. We've seen several examples in India. [Ola Postpaid][34] users were shocked to find that they had taken loans without knowing. Same with [Mobikwik BNPL][35]. What you see is a nice UI for BNPL, but what is really happening is that a bank is giving a loan on behalf of Mobikwik. There's also a behavioral explanation here. Studies have shown that [people tend to spend more][36] when they use digital payments than physical cash. Reducing friction everywhere isn't a universal good. In some places, a little friction is a good thing:

The cashless effect describes our tendency to be more willing to pay when there is no physical money involved in a transaction. It means that we are more likely to purchase something on a credit card than if we have to pay for it with cash.

Though BNPL is new, some preliminary data from large markets like Australia and the UK show that some people are becoming more indebted. [Data from the Australian Securities & Investments Commission (ASIC)][37] shows that people are cutting back on essentials to pay their BNPL dues. Some people are also taking more debt to pay back BNPL dues. Perhaps, the scariest thing is that over 50% of these users are in the age group of 18-29. Catch em young?![](/blog-images/BNPL-ASIC.png) A [working paper][38] looking at BNPL in the UK had similar findings. A lot of people are repaying BNPL with their credit cards. The sentence “some consumers may be entering a debt spiral” gave me the heebie-jeebies: > We find UK credit cardholders charge a BNPL transaction to their credit card: 19.5% of active credit cards in December 2021 have at least one transaction by a BNPL firm on their credit card during 2021. Charging BNPL debt to credit cards is a warning flag for consumer financial protection regulators as it raises doubts on some consumers’ ability to pay for BNPL. Some consumers may be entering a debt spiral transforming a 0% interest BNPL debt that amortizes over a few instalments transforming into credit card debt that typically incurs 20% credit card interest rates and has decades-long amortization schedules if they only pay the credit card minimum payment. But it looks like there's trouble in paradise. Most Australian BNPL stocks have fallen as much as 80-90%. This can be largely explained by rising interest rates and the cloudy regulatory environment.![](/blog-images/BNPL-stocks.png) I have a feeling we'll see a wave of shutdowns, fire sales, mergers and acquisitions. Regulatory arbitrage isn't a moat. Buy now, burn now!

### Things worth reading Pieces on how social media is running the world are nothing new. But [**Jonathan Haidt's latest post**][39] presents a sweeping view of how social media makes us and our institutions unbearably stupid. There's nothing new that we don't know of in the piece. But what makes this post brilliant is the fact that it connects so many dots at once. Most pieces about the impact of social media quickly become polemical to the point of losing whatever semblance of objectivity they start with. But in this piece, Jonathan Haidt effortlessly swings between the left and the right and tears both the camps to shreds and backs up his assertions with research. The picture he paints by the end of the piece of just how profoundly polarized and stupid people have become doesn't inspire confidence that humanity is going to make it. Yet, unlike other pieces that stop at “we're going to hell in a handbasket, and people will retweet that,” he offers some useful solutions. > An autocracy can deploy propaganda or use fear to motivate the behaviors it desires, but a democracy depends on widely internalized acceptance of the legitimacy of rules, norms, and institutions. Blind and irrevocable trust in any particular individual or organization is never warranted. But when citizens lose trust in elected leaders, health authorities, the courts, the police, universities, and the integrity of elections, then every decision becomes contested; every election becomes a life-and-death struggle to save the country from the other side. > Second, the dart guns of social media give more power and voice to the political extremes while reducing the power and voice of the moderate majority. This is an interesting piece on why [**we don't always need high-tech and complex solutions**][40] to make the world more sustainable. Plenty of low-tech solutions can significantly move the needle. [**Charlie Warzel read my mind with this piece**][41]. The big news on the internet right now is Elon's bid for Twitter. I find the news utterly pointless. Charlie is of the same view but adds that the reason why we have to pay attention to these “pseudo-events” is just in case Elon decides to follow through on his BS. More interestingly, he calls this whole episode GameStop for the rich. The Dallas Fed in March published a note warning that the US housing market [**looks like a bubble**][42] 😲. Since it was written by economists, they hedged the proclamation by phrasing it as a question, but nonetheless, the insinuation was clear. Damn economists! > Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s. Reasons for concern are clear in certain economic indicators—the price-to-rent ratio, in particular, and the price-to-income ratio—which show signs that 2021 house prices appear increasingly out of step with fundamentals. But long, time housing market observers Bill McBride and Shawn Tully think there's no bubble. Either way, this is something to keep an eye on. The last time US housing was hot, the global economy almost melted. It would be pretty funny if the US housing market were to lead to another financial crisis 😂 Inflation is behaving like a meme stock and continues to rise across the world. While some economists screaming about high inflation pre-pandemic have been vindicated and have become superstars, others are having to write “I was wrong” pieces. I don't mean that in a pejorative sense, predicting things is hard, especially inflation. Anyway, here's [**the first of many such pieces by Dylan Matthews at Vox**][43] and how he got his inflation is not an issue take wrong. On the same note, I don't get the calls for drastic rate hikes either. Here's [**a brilliant thread by JW Mason**][44] explaining why: Speaking of predicting things being hard, Jared Dillian had a nice piece [**on why the markets didn't really bother for too long**][45] about the Russia-Ukraine war. > The market is smarter than you or I. In the beginning of the war, I was tweeting about how we were all going to get nuked into glass—and the VIX was below 30. It didn’t make sense. But the market discounting machine was working just fine. It knew before you or I did that the conflict was a stalemate and that Putin wasn’t a madman. Funny how that works. A [**brilliant thread**][46] on Chinese vs European economic reforms. Tyler Cowen predicts that thanks to the advancements like AI, [**most written communication will be done by bots**][47]. > I expect most written communication will eventually be done by bots. I could train my bot by letting it read all my previous email and other writings. Eventually my bot would answer most of my email directly, though it could hold some aside to ask me whether they merited a personal response. This comment on the post was funny 😂 : > Extending this logic further, in future will we have only Blots instead of Blogs?

### Papers I know nothing about carbon taxes, carbon credits, and carbon markets. I've been wanting to learn about these things for a while. Coincidentally, I came across this paper titled [_Carbon Taxes and CO₂ Emissions: Sweden as a Case Study_][48] by Julius Andersson this week. This paper was also one of the winners of the 2022 AEJ Best Paper Award. It's a fascinating paper that shows that carbon taxes can significantly reduce emissions. > This paper shows empirically that a carbon tax can be successful in significantly reducing emissions of carbon dioxide. After implementation of a carbon tax and VAT on transport fuels in Sweden, CO2 emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone. This paper reminded me of a couple of other papers and articles that add more colour and context to the topic of carbon taxes that I had saved. Thomas Douenne and Adrien Fabre published a paper called Yellow Vests, Pessimistic Beliefs, and Carbon Tax Aversion this year. They analyzed people's perceptions towards a carbon tax during the Yellow Vests protests (_gilets jaunes_) in France that started in opposition to a green tax on fuel proposed by Emmanuel Macron. The results were bleak. 70% of people opposed a carbon tax, even if the taxes were to be redistributed back to the people. 89% of the people overestimated the negative impact of a carbon tax on their purchasing power and didn't think that a carbon tax makes an environmental difference. The most interesting part of the paper was that there was a strong case of confirmation bias among the people most opposed to the tax. They processed facts that supported their view and discarded those that showed the benefits of the tax. It goes to show that technocratic policymaking without considering how people form their beliefs is doomed to fail even if they are beneficial to the people. The Indian farm laws episode comes to mind. Here's a [**summary**][49] of the paper. Pair these papers with these articles by **[Tim Hartfor][50]**[d][50] and [**Tyler Cowen**][51].

### Podcasts and videos This was a fascinating conversation about the US Civil War and the birth of the US dollar. I had no idea about this history. [This website][52] with the history of US currency is also pretty cool. Jonathan Haidt [talking about his latest piece][53], which I linked above. It's a nice compliment to the piece. [Substack link][54] The end. [1]: https://tradingqna.com/t/beware-of-free-stock-tips-on-social-media-youtube-whatsapp-and-telegram/128087 [2]: https://stocks.zerodha.com/stocks/salasar-techno-engineering-SALA?checklist=basic [3]: https://the-ken.com/story/shady-operators-are-manipulating-indias-stock-market-through-twitter/ [4]: https://finshots.in/archive/why-is-sebi-unhappy-with-ruchi-soya/ [5]: https://stocks.zerodha.com/stocks/supreme-engineering-SUPG?chartScope=1mo&checklist=basic [6]: https://trends.google.com/trends/explore?date=today%205-y&geo=IN&q=stock%20tips,good%20stocks,best%20penny%20stocks,best%20stocks,best%20mutual%20funds [7]: https://investoramnesia.com/ [8]: https://mobile.twitter.com/InvestorAmnesia [9]: https://investoramnesia.com/2018/11/15/one-experts-opinion/ [10]: https://www.4investors.eu/post/the-shoeshine-boy-indicator [11]: https://the-ken.com/story/playing-whack-a-mole-with-indores-stock-market-scamsters/ [12]: https://www.livemint.com/market/stock-market-news/the-murky-world-of-social-media-stock-tips-11649866748442.html [13]: https://tradingqna.com/t/investing-based-on-sms-tips-can-be-costly/33286 [14]: https://zerodha.com/z-connect/tradezerodha/stock-market-scams-everyone-should-be-aware-of [15]: https://www.theatlantic.com/technology/archive/2022/02/future-internet-blockchain-investment-banking/621480/ [16]: https://www.buzzfeednews.com/article/richardnieva/worldcoin-crypto-eyeball-scanning-orb-problems [17]: https://www.technologyreview.com/2022/04/06/1048981/worldcoin-cryptocurrency-biometrics-web3/ [18]: https://blog.quicko.com/traded-crypto-stocks-or-fo-you-are-on-taxmans-radar [19]: https://www.moneycontrol.com/news/business/cryptocurrency/double-whammy-for-crypto-trading-as-mobikwik-pulls-rug-from-under-exchanges-in-wake-of-stiff-tax-laws-8342941.html [20]: https://www.moneycontrol.com/news/business/cryptocurrency/coinbase-clarifies-on-upi-after-npci-statement-says-will-work-in-keeping-with-local-norms-8332931.html [21]: https://nithinkamath.me/blog/my-reading-of-crypto-post-budget/ [22]: https://www.bloomberg.com/news/articles/2022-03-08/crypto-lobbying-skyrocketed-last-year-and-quadrupled-since-2018 [23]: https://www.nytimes.com/2022/04/10/us/politics/crypto-industry-states-legislation.html [24]: https://www.theregreview.org/2022/03/14/werbach-turning-point-digital-asset-regulation/ [25]: https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422 [26]: https://www.protocol.com/fintech/eu-crypto-kyc [27]: https://www.vox.com/the-goods/23020971/crypto-kids-nfts-web3-education-summer-camp [28]: https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1189 [29]: https://www.pymnts.com/news/cfpb/2022/the-cfpb-and-bnpl-3-things-to-watch/ [30]: https://www.fca.org.uk/news/statements/fca-drives-changes-buy-now-pay-later-bnpl-firms-contract-terms [31]: https://401kspecialistmag.com/what-nobel-laureate-thaler-told-us-about-401ks/ [32]: http://www.shlomobenartzi.com/save-more-tomorrow [33]: https://www.bloombergquint.com/gadfly/401-k-fees-are-eating-your-retirement-savings [34]: https://the-ken.com/kaching/why-ola-postpaid-should-really-be-called-ola-loans/ [35]: https://themorningcontext.com/internet/mobikwik-and-buy-now-pay-laters-consent-crisis-in-india [36]: https://thedecisionlab.com/biases/cashless-effect [37]: https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-672-buy-now-pay-later-an-industry-update/ [38]: https://www.paymentsdive.com/news/new-bnpl-study-raises-concern-about-debt-spiral/619988/ [39]: https://www.theatlantic.com/magazine/archive/2022/05/social-media-democracy-trust-babel/629369/ [40]: https://theconversation.com/low-technology-why-sustainability-doesnt-have-to-depend-on-high-tech-solutions-176611?utm_source=pocket_mylist [41]: https://newsletters.theatlantic.com/galaxy-brain/6258e039dc551a00208cc5e1/elon-musk-meme-stocks-and-retail-investing-for-the-superrich/ [42]: https://www.dallasfed.org/research/economics/2022/0329 [43]: https://www.vox.com/22996474/inflation-federal-reserve-nairu-ngdp-powell [44]: https://mobile.twitter.com/JWMason1/status/1514326168715026433 [45]: https://www.advisorperspectives.com/commentaries/2022/04/14/wheres-the-kaboom [46]: https://twitter.com/mmpiatkowski/status/1514672962066173955 [47]: https://marginalrevolution.com/marginalrevolution/2022/04/when-your-bot-is-better-than-you.html [48]: https://www.aeaweb.org/research/carbon-tax-impact-sweden [49]: https://twitter.com/S_Stantcheva/status/1467988949226475520?s=20&t=6Ad1yCxok0366VPDirfUcA [50]: https://timharford.com/2021/11/why-carbon-taxes-really-work/ [51]: https://www.bloombergquint.com/business/2018-midterm-results-is-the-carbon-tax-dead [52]: https://www.uscurrency.gov/history [53]: https://open.spotify.com/episode/6EOKX4tBN0tkYYWCkGgDpz?go=1&sp_cid=d1205ef455c2b147294477390e71d834&utm_source=embed_player_p&utm_medium=desktop&nd=1 [54]: https://alittlelessdumb.substack.com/p/whats-old-is-new-again

SPACtacular

Sun, 10 Apr 2022 00:00:00 GMT

A few things I learned this week.

The post-2008 period was like a rave party for the financial markets. The central banks around the world had the hottest parties with cheap tickets, booze, and food. The parties were all the rage for well over a decade. But, it was 5 AM in 2020, and the party had become more of an after-party. The party people were tired and wanted to go to sleep. But suddenly, the central bankers decided to keep the party going by offering free booze and free money. Suddenly, the sleepy after-party became a raging after-after-party. Every party has its share of crazy and nutty characters, and this party was no different. One of the craziest characters at this party was the special purpose acquisition company (SPAC). SPACs might have been late to the party in 2020, but they more than made up for the lost time with their craziness on 5X leverage. As the name implies, they are quite special. SPACs are shell or blank-check companies that list on the stock exchanges to raise money to acquire or merge with existing companies. In finance, you can look at everything from the lens of arbitrage—easy vs tough, opaque vs transparent, short term vs long term, dumb vs smart. In a way, SPACs take advantage of all the worst parts of all these arbitrage opportunities. If a company wants to go public, it has to deal with a lot of regulatory hassle, and there are a lot of restrictions on what it can and can't say and do. But what if you still want to go public but avoid most, if not all, the hassles of going public? Enter SPACs. A SPAC, even though it walks like an IPO and talks like an IPO, isn't an IPO but rather a merger. The rules and regulations for going public in the US are quite cumbersome. But SPACs aren't really IPOs, but rather mergers and the rules for mergers are much less cumbersome compared to IPOs. There's also a lot less liability risk. Think of SPACs as backdoor IPOs. Companies that IPO typically don't include future projections in their offer documents because they can be sued if investors don't like them. But SPACs, on the other hand, can make projections because they aren't IPOs. US mergers have a safe harbor provision that shields them from liability over forward-looking statements. SPACs take advantage of this. In general, there's also less liability risk for all the parties involved in SPACs. And SPACs have made full use of this arbitrage opportunity to make [reality-defying][1] projections that would make astrologers look like scientists and statisticians. And SPACs have made full use of this arbitrage opportunity to make [reality-defying][1] projections that would make astrologers look like scientists and statisticians. Given the lesser hassles in 2020 and 2021, we saw a SPAC boom, the likes of which we've never seen before. ![](/blog-images/SPACS-vs-IPOs.png) The reason for the boom? Another arbitrage opportunity—opaque vs transparent and dumb vs smart, i.e., wealth transfer from the informed to the uninformed. The typical narrative is that SPACs are faster and cheaper than traditional IPOs, but that's just that—a narrative. The reality is that SPACs are complex structures. They're much costlier than IPOs and much more lucrative for the sponsors of SPACs, investment bankers, lawyers, PIPE financiers, and pretty much everybody except retail investors^{1, 2, 3}. In most SPACs, retail investors typically get heavily [diluted][3] right out of the gate. Predictably, this hasn't worked out well for most investors. Pitchbook published [a note][4] on SPAC performance, and this chart is a sight to behold. It should probably be sold as an NFT because it's art! ![](/blog-images/SPAC-index-Pitchbook.png) Typically, sponsors of SPACs have about two years to find a deal. The other important thing is that SPAC sponsors get 20% of the SPAC shares for almost free for taking the trouble of creating the SPAC and finding deals. > The Lucid deal and the merger of online education company Skillsoft with Churchill Capital Corp II netted Klein $690m, while Palihapitiya made $408m from the promotes of his two Spac deals last year, according to Spac Research data. FT So, the incentives are heavily skewed right from the start. What ended up happening is that SPACs became the go-to vehicles to take worthless and, in some cases, downright fraudulent companies public. If you look at SPACs that have acquired or merged, you'll see companies with wildly optimistic projections, flawed business models, and multiples that were high on drugs. There have also been downright frauds. Most of these companies wouldn't have been able to pull off a traditional IPO. Now that we are in an inflationary environment with rising interest rates, it's the perfect storm for these companies, and they've been massacred. Growth investing has fallen all the way from the moon into the Grand Canyon. ![](/blog-images/SPAC-etfs.png) Given the craziness on steroids and other drugs in the SPAC market, the SEC has been [expressing concerns][5] over the last couple of years. It looks like they've decided to finally do something. In March, the SEC [proposed new rules][6] that bring SPACs on part with IPOs, and increase liabilities for all the parties involved. In a way, this was long overdue. These rules Though SPACs may not vanish altogether like they did post-2008, issuance is bound to come down. SPACs have been deSPACed—pun intended. There's also a story here about financialization and democratization. Contrary to what the “experts” say, increased democratization and financialization in the markets aren't an unalloyed good as they are made out to be. Some things should just be for the rich and the “sophisticated” investors to gamble. As I was reading more about SPACs, I learned that retail investors [aren't allowed][7] to trade in SPACs in Hong Kong, which seems sensible to me. I get the _“buyer beware”_ argument, but that argument in isolation stopped [making sense][8] sometime in the eighth century.

### Micro funds Speaking of democratization, there was another interesting [Pitchbook note][9] analyzing the growth of micro VC funds. Interestingly, over half of these micro funds are by first-time VCs. ![](/blog-images/Micro-VC-funds.png) This seems to be a general trend across the world, [including India][10]. It also seems like everybody wants to make early-stage investments: > It would not be proper to discuss the rise of micro-funds without discussing the rise in US market seed deals. Today, large multi-stage funds are propagating seed more often than ever before. Andreessen Horowitz raised a $400.0 million fund for seed; Greylock Partners allocated $500.0 million out of its billions of dollars in dry powder for seed deals, offering up to $20 million for each financing. Additionally, many nontraditional institutions have invested in seed deals. These larger firms’ participation in seed is more the exception than the rule. For micro-funds, on the other hand, seed is a core investment stage. Pitchbook The great rinky-dinkification of early-stage investing. Theoretically, this means that as the bigger funds get bigger, it's probably harder and harder for some founders to get their attention. This means these small nano and micro-funds can fill that space. On the other hand: > Over the past few years as deal sizes and valuations have increased steadily. The seed deal value growth from $1.0 million to $2.9 million over the past seven years will hurt smaller funds relatively more than larger, multi-stage funds active in the same range. I haven't seen much data, but I can only assume that this trend of micro-funds is a net positive for the startup ecosystem. Something to keep an eye out for.

### Russia The Jain Family Institute [hosted a really interesting discussion on with Nicholas Mulder and Javier Blas][11] on the sanctions against Russia and the turmoil in global commodity markets. Nick Mulder is the author of _[The Economic Weapon,][12]_ a book about __the history of economic sanctions that I've been really looking forward to reading as soon as I'm done with my never-ending backlog of books 😢. Javier Blas is the co-author of [_The World for Sale_][13], a book about the global commodities markets. A few interesting points: 1. Even companies that are unaffected by this crisis are self-sanctioning over fears of sanctions compliance. 2. The easy and less painful sanctions have all been imposed. There are no painless options left, and now it's a question of burden-sharing between different European countries. 3. By increasing the intensity of the military campaign, Russia can actually increase commodity prices. It's making about $1 billion a day from commodities and energy. 4. Countries have more experience restricting commodity imports than cutting exports in terms of sanctions. Countries and other intermediaries have various ways of circumventing these sanctions on commodity exports. There was also an interesting bit on the incredible stress in the commodity markets right now. It's so bad that The European Federation of Energy Traders [wrote a letter][14] asking for government support: "The same company which normally expects to experience daily margin cash flows related to price movements of around 50 million euro, now faces variation margin requirements of up to 500 million euro within a business day," Reuters When Javier isn't getting trolled for making statements like this, he does some brilliant writing on commodity markets. Here's [an excerpt from his latest piece][15] on how oil companies are finding ways to keep the Russian energy flowing into Europe: > When is a cargo of Russian diesel not a cargo of Russian diesel? The answer is when Shell Plc, the largest European oil company, turns it into what traders refer to as a Latvian blend. The point is to market a barrel in which only 49.99% comes from Russia; in Shell’s eyes, as long as the other 50.01 percent is sourced elsewhere, the oil cargo isn’t technically of Russian origin. Javier Blas, Bloomberg The new normal in Russia. A really good thread on how the Russian economy seems to be adjusting to the sanctions.

### Shanghai, China China has had a zero-tolerance policy to deal with COVID-19 since day one. They've been ruthless and have done whatever it takes to keep the cases under check. In response to rising cases in Shanghai, one of the biggest cities, China placed the entire city with 25 million people under lockdown. The result has been a [dystopian nightmare][16] with shortages of food, basic necessities, and hospital beds. A few threads that give a glimpse of life in Shanghai: The other issue is that Shanghai is also a vital part of the global economy and is tightly integrated into [global supply chains][17]. Shanghai is home to some of the largest factories and also the world's largest port, both have been seriously affected. For the global economy, it has been a case of when it rains, it pours. Shanghai port is more congested than my nose in winter right now, with [477 bulk cargo ships waiting to unload][18]. Inevitably, these delays will end up increasing inflationary pressures:![](/blog-images/Shanghai-port.png)

### Things worth reading [In a World on Fire, Stop Burning Things][19] [Mancur Olson at the end of history][20] [Let Them Eat Cake: Inflation Beyond Monetary Policy][21] [How High Energy Prices Emboldened Putin][22] [Inflation & Lost Decades][23] [Development Economics Goes North][24] [The jokes that have made people laugh for thousands of years][25] [The Ancient, Female Origins of Booze][26] [The Long Goodbye][27] [My colleague has rounded up a bunch of other interesting reads][28] ### Watch and listen Jim Chanos on fraud and short selling This one was pretty interesting. ### Giggles [On substack][29] [1]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3961848 [2]: https://www.nasdaq.com/articles/a-record-pace-for-spacs-in-2021 [3]: https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/ [4]: https://pitchbook.com/news/reports/q1-2022-pitchbook-analyst-note-spac-update-and-performance?utm_term=&utm_campaign=analyst_note&utm_medium=newsletter&utm_source=daily_pitch&utm_content=Q1_2022_pitchbook_analyst_note_spac_update_and_performance [5]: https://www.cnbc.com/2021/12/09/sec-chair-gensler-seeks-tougher-spac-disclosure-liability-rules.html [6]: https://www.skadden.com/insights/publications/2022/03/sec-proposes-significant-changes-to-rules-affecting-spacs [7]: https://www.scmp.com/business/article/3170920/aquila-acquisition-lists-its-spac-hkex-kicking-hong-kongs-embrace-blank [8]: https://www.researchgate.net/publication/259709703_Let_the_Buyer_or_Seller_Beware_Measuring_Lemons_in_the_Housing_Market_under_Different_Doctrines_of_Law_Governing_Transactions_and_Information [9]: https://pitchbook.com/news/reports/q2-2022-pitchbook-analyst-note-micro-funding-opportunity [10]: https://www.praxisga.com/PraxisgaImages/ReportImg/praxis-ivca-aws-report-micro-vc-funds-in-india-Report-3.pdf [11]: https://youtu.be/POo1qYL1KUc [12]: https://www.amazon.in/Economic-Weapon-Rise-Sanctions-Modern/dp/0300259360 [13]: https://www.amazon.in/World-Sale-Traders-Barter-Resources/dp/1847942660/ref=sr_1_1?crid=8GHB1J8Q8VO7&keywords=the+world+for+sale+by+javier+blas+and+jack+farchy&qid=1649576221&s=books&sprefix=Javier+Blas%2Cstripbooks%2C227&sr=1-1 [14]: https://twitter.com/JavierBlas/status/1504182020649504775?s=20&t=gcJe7lnFifYJqSSCPpt13A [15]: https://www.bloomberg.com/opinion/articles/2022-04-08/ukraine-war-this-backdoor-keeps-russian-oil-flowing-into-europe [16]: https://mailchi.mp/codastory.com/infodemic-march-14865949?e=7a43761a37 [17]: https://www.freightwaves.com/news/shanghai-zero-covid-lockdown-impact-summer-supply-chain [18]: https://www.bloomberg.com/news/articles/2022-04-11/477-bulk-ships-wait-off-east-china-s-ports-amid-virus-lockdowns?cmpid=socialflow-twitter-business&utm_medium=social&utm_campaign=socialflow-organic&utm_source=twitter&utm_content=business [19]: https://www.newyorker.com/news/essay/in-a-world-on-fire-stop-burning-things [20]: https://www.slowboring.com/p/mancur-olson-end-of-history?r=i2582&s=r&utm_campaign=post&utm_medium=email [21]: https://lpeproject.org/blog/let-them-eat-cake-inflation-beyond-monetary-policy/ [22]: https://prospect.org/culture/books/how-high-energy-prices-emboldened-putin-russell-review/ [23]: https://mailchi.mp/verdadcap/inflation-lost-decades?e=d77c599cb6 [24]: https://www.project-syndicate.org/commentary/rich-countries-with-developing-country-problems-by-dani-rodrik-2022-04?utm_source=twitter&utm_medium=organic-social&utm_campaign=page-posts-april22&utm_post-type=link&utm_format=16:9&utm_creative=link-image&utm_post-date=2022-04-11 [25]: https://www.bbc.com/future/article/20220323-the-jokes-that-have-made-people-laugh-for-thousands-of-years?utm_source=pocket&utm_medium=email&utm_campaign=pockethits&cta=1&src=ph [26]: https://www.atlasobscura.com/articles/female-brewers?utm_source=Atlas+Obscura+Daily+Newsletter&utm_campaign=266d2acadb-EMAIL_CAMPAIGN_2022_03_31&utm_medium=email&utm_term=0_f36db9c480-266d2acadb-74551534&mc_cid=266d2acadb&mc_eid=802b1ba8c4 [27]: https://lawrencekrauss.substack.com/p/the-long-goodbye?s=r [28]: https://dineshpai.substack.com/p/field-notes-edition-10-7a9?s=r [29]: https://alittlelessdumb.substack.com/p/spactacular

Yield curve meets Munger

Sat, 02 Apr 2022 00:00:00 GMT

Here's what I learned this week. One thing is that I'm going to be poor, but here are a few other things.

Charlie Munger famously said, _“There are all kinds of tricks that I just got into by accident in life. One is to invert all the time.”_ Looks like the US bond yield curves took his advice. Isn't the greatest and the lamest opening to a blog post ever 😂 One of the biggest worries in the markets right now is the fact that some US bond yield curves are inverting. Huh, what? You say? In non-PhD terms, there are bonds of various maturities from 1-month to 30-year. A yield curve is a line graph that plots the yields of these bonds across maturities. Yield curves are typically upward sloping. The shorter maturity bonds have lower yields, and the longer maturity bonds have the highest yields because of the duration risk. So a 2-year bond will typically have a lesser yield compared to a 10-year bond. But right now in the US, [the yields][1] on short-term Treasuries from 2-year to 7-year maturities are higher compared to the 10-year Treasury yield. This is weird and shouldn't happen normally. Inversions are a sign that the economy is likely to slow down and maybe enter a recession. Yield curve watchers are worried that the curve is inverting so early into a rate hike cycle. Yield curves usually take time to invert once a rate hike cycle starts. But this time around, they are inverting when the Fed has hiked rates only once so far. “Experts” are predicting 5-7 more rate hikes. The reason why people are freaking out is that inverted yield curves have predicted every recession since 1955. There's a loud debate about causality. Do inverted yield curves signal a recession or cause recessions? Like a married couple, nobody agrees on anything. ![](/blog-images/Yield-curve.png) So, a lot of people, including some Indian fund managers, have been screaming from their rooftops to their 73 followers on Twitter that a recession is coming. Is a recession coming? I had no clue. So I read some stuff about this. It turns out there are a lot of ifs and buts. The first question is, which yield curve? The popular 10-year minus 2-year curve has inverted. But a lot of people, including [Cam Harvey][2], who did some pioneering research on yield curves, prefer to look at the 10-year minus the 3-month T-bill spread. This one has been going in the opposite direction, as you can see from the image above. So, does an inverted curve predict recessions? As you can imagine, nobody agrees on anything in finance—they just bicker all the time. Some people think yield curves are omniscient, and some think they are overrated squiggly lines. Here are some perspectives. [Jim Bianco][3] thinks that the Fed doesn't have any good options, just trade-offs. He says that inflation is the biggest issue in America right now since it disproportionately hurts the poor, and the Fed has no choice but to hike rates aggressively to tame inflation. In doing so, the Fed might go too far and cause a recession. His view is that the yield curves are [signaling this reality][4]. Larry Swedroe [wrote a post summarizing][5] multiple research papers on yield curves in the US and other countries. The bottom line is that evidence for yield curves evidence is mixed. They predict recessions in some countries and don't in others. > We find no evidence that yield curve inversions can help investors avoid poor stock returns. Eugene Fama, Ken French _On a side note, Larry must have read more research papers than pretty much anybody on the planet. It's crazy how many papers he's summarized 0n [TEBI][6], [][6][Alpha Architect][7], and [Advisor Perspectives][8]._ Eric Engstrom and Steven Sharpe of the Fed [think that the evidence is “muddled” and “spurious][9].” Dare I say that they think this time is different? You could make a tiny case that two people from the Fed who think that yield curves don't offer any insight are biased. But hey, what do I know! Dare I say that they think this time is different? Here's Johannes Borgen [poking holes][10] in these arguments. [Tom Graff][11] on what the yield curves are saying and what they aren't: Cullen Roche [says that the yield curve][12] is a signal of a looming economic slowdown than a 100% recession indicator. His recent [Twitter thread][13]. Joseph Politano published a post last week with a brilliant explanation of [what an inverted yield curve tells and doesn't][14]. Hint: It doesn't signal a 100% recession! Alfonso Peccatiello (Alf) on [which yield curves to watch][15]. In reading all this, my own view is that we are probably headed for a slowdown. But are we headed for a recession? I don't really buy the yield curves predict 100% of all recessions arguments. More importantly, using yield curves to time the market or even use it to tilt toward some asset classes is akin to [timing the market based on CAPE][16] ^{1, 2}, you're gonna get your teeth knocked in.

### Inversion in Russia A different kind of inversion is playing out in Russia right now. Europe is importing more energy compared to the [pre-invasion][17] period. Bloomberg estimates that Russia will make [30% more from energy exports][18] compared to 2021. Even if you think Bloomberg's projections are nonsense, [other data points][19] n the same direction. Russia is now making more from energy experts than ever. Of course, it's almost completely shut out of the global financial system, so it can't do much with that money. Things will also change dramatically if Europe completely shuts off Russian energy. Oh, and [Vox has a really nice collecti][20]on of debates and perspectives on the various dimension of the economic fallout from the Russia-Ukraine crisis. The environment inside Russia ### A global famine? Michael Cembalest of JP Morgan had a [really interesting note][21] surveying the damage to the financial markets in the aftermath of the Russian invasion of Ukraine. This excerpt made me shudder:

Russia’s invasion of Ukraine is projected to result in one of the largest refugee crises in decades with 4-5 million people displaced¹; long-lasting water, air and ground pollution in Ukraine; and 90% of Ukraine’s population facing poverty and extreme economic hardship if the war drags on to the end of 2022².For anyone surprised that Russia is imposing this brutal misery on Ukraine, don’t be: there’s ample precedent for it. As shown below, the Holodomor famine imposed by Russia on Ukraine in the 1930’s dwarfs other famines in terms of severity and is another example of Russian subjugation of Ukraine by any means necessary³.

![](/blog-images/holodmor.jpg) I first learned about the brutality of Holodomor when I wrote [this post][17] a few weeks ago. If the previous chart made me shudder, this one is giving me nightmares. If you had asked me to take a bet on a global famine last year, I'd have sold my body parts and bet against it, but here we are. Fertilizer prices are spiking to historic highs, and there will be dramatic consequences on food supplies globally, from increasing grocery budgets to coups and revolutions. From worrying about COVID-19 induced obesity in 2021 to a global famine in 2022, what a change. [From the awesome Doomberg][23]:

We believe we are at the onset of a global famine of historic proportions. In a staggering defiance of logic, many US politicians are still attacking the lifeblood of our own energy production infrastructure, looking to score political points against “the other team,” blaming price-taking producers of global commodities for gouging, threatening producers of energy with windfall profits taxes, resisting calls to remove bureaucratic hurdles to new production, and refusing to open an introductory physics textbook to help guide them through the suite of policy choices that require true leadership to get right. They remain stuck in an endless loop of platitudes, blamestorming, corruption, and ignorance.

But there are nuances to the scary headlines about food grain shortages:

### Accidental nakedness Did you know George de Mestral came up with the [idea for Velcro][24] after he saw some spiky seeds stuck to his dog? I didn't. This is a fascinating story about the invention of Velcro. As with most inventions, Velcro had a [difficult path to adoption][25], filled with accidental moments that would've made Casablanca blush:

There were hitches: Velcro’s CEO told Martha Hamilton at The Washington Post that the product wasn’t always as sticky as one would hope. “We had petticoats falling off of gals and brassieres popping open,” he said in 1983. And although De Mestral anticipated that his product would have widespread applications, including in the fashion industry, when Velcro finally made it to market it was a flop. Carmichael writes:

Smithsonian Magazine

### Paper of the week In 2013, the legendary late David Graeber wrote what is, in my view, one of the most important articles in the history of humanity. The piece was titled “[On the Phenomenon of Bullshit Jobs: A Work Rant][26].” In it, he wrote that instead of using technology to figure out ways to work less, we've used it to create a corporate hellhole with pointless jobs like human resources and public relations. Of course, there are a lot of critiques about the theory ^{1, 2}, but from my limited experience, it's spot on. Here's how he [described BS jobs in an][27] interview:

Sean Illing: Give me some examples of bullshit jobs.

David Graeber: Corporate lawyers. Most corporate lawyers secretly believe that if there were no longer any corporate lawyers, the world would probably be a better place. The same is true of public relations consultants, telemarketers, brand managers, and countless administrative specialists who are paid to sit around, answer phones, and pretend to be useful.

> A lot of bullshit jobs are just manufactured middle-management positions with no real utility in the world, but they exist anyway in order to justify the careers of the people performing them. But if they went away tomorrow, it would make no difference at all. > And that’s how you know a job is bullshit: If we suddenly eliminated teachers or garbage collectors or construction workers or law enforcement or whatever, it would really matter. We’d notice the absence. But if bullshit jobs go away, we’re no worse off.

If there were an educational equivalent of bullshit jobs, it would have to be an MBA degree—hands down, no contest at all. Humanities also, maybe? 😬😂 Oh, and I did an MBA, so I am an authority on the subject; I have skin in the game. It's not just that MBAs are pointless; they are a net negative to society. [Here's a brilliant paper from Daron Acemoglu, Alex He, and Daniel le Maire][28]: > Wage growth has slowed down and the labor share in national income has declined in many advanced economies over the last three decades. We argue that a contributing factor has been changes in wage policies of firms associated with business education of their managers/CEOs. We explore the effect of business managers on wages and the labor share using matched employer-employee datasets from the US and Denmark. In both countries, business managers reduce the wages of their employees. For example, five years after the appointment of a business manager, wages decline by 6% and the labor share by 5 percentage points in the US, and 3% and 3 percentage points in Denmark (relative to firms operated by non-business managers). > In line with this last set of estimates, we interpret our results as reflecting the business-schoolled shift towards emphasizing shareholder values (following Milton Friedman, 1970) and attempts to reengineer corporations by making them leaner (Hammer and Champy, 1993). Unfortunately, in the current paper, this is no more than an interpretation, since we do not have any direct evidence on the micro channels through which business education changes managers’ overall approach and wage policies. If tomorrow we got rid of 99% of the MBAs, the world would be a much better and more peaceful place. What I'm saying might sound juvenile, but it honestly is a pointless degree. We've mass-produced millions of MBAs around the world like washing machines, but 99.9% of them are utterly useless. To some extent, I get the point of doing an MBA from a top college like IIM, Harvard, and Stanford, they at least have some signaling value. But getting an MBA from lesser-known colleges is as good as doing your undergraduate degree twice. It's no wonder that 93% of Indian MBA grads are [unemployable][29]. It's not just that they are useless, most of what's taught in MBAs is loosely based on neoliberal or free-market ideology—the markets are all-seeing, all-knowing, and self-correcting. Not that this is wrong, but the [problem is the lack of nuance][30]. It goes without saying that whether free markets are an unalloyed good to bad or somewhere in the middle is a contentious debate. We've been arguing for nearly a century. Some, like David Graeber think that neoliberalism is less an ideology and a more political project, and then you have the others who worship [Hayek and Friedman][31]. > The neoliberal ("free market") ideology that had dominated the world since the days of Thatcher and Reagan was really the opposite of what it claimed to be;it was really a political project dressed up as an economic one. Bullshit Jobs: A Theory But what is clear is that this ideology has caused a lot of damage. It had directly contributed to rising inequality, market concentration, declining antitrust, a falling share of labor, and increasing fragility. Of course, it's not all bad. On the other side, we have increased choices, cheaper goods, and a better quality of life. But you rarely see this nuanced version being taught. The textbooks and the professors say that free markets are perfect. The important question to ask is how did these neoliberal ideas infiltrate education? James Kwak tracks the history brilliantly in his book [_Economism_][32]. After the great depression of the 1930s, Franklin Roosevelt (FDR) and the Democrats came to power in the US. FDR, with the [New Deal][33], dramatically expanded the role of the government with social security, unemployment benefits, union-friendly policies, and stringent financial regulations. World War 2, further entrenched the centrality of the government in the economy, and big businesses had no choice but to go along. But by the 1960s, big business was sick of tired of big government, unions, and high taxes. They wanted to dismantle the system, and they co-opted the ideas of free markets and small government espoused by Hayek and Friedman. Large businesses and influential people like General Electric, General Motors, Chrysler, the Koch's and other sympathetic organizations started spending heavily to push these ideas through think tanks, books, newspaper columns, schools, and colleges. They had an army of ideologies spreading the message of the free markets across America. These organizations and people figured that the educational system was the best way to spread these ideas. They went to the extent of endowing college chairs with people sympathetic to their ideas. Over a period of time, the free market ideology, or [Econ 101 as James Kwak calls it][34] seeped all the way from schools to supreme court judges. Today, most of what's taught in MBAs and, by extension, practised by management consultants is a brilliant repackaging of neoliberal rent-seeking ideas, going back to the point that Acemoglu et al. make in the conclusion of the paper. MBAs are taught to prize efficiency above all else without considering the side effects. This line of thinking is incredibly good for companies but bad for workers. This is the same nonsense peddled by consulting companies like EY, Deloitte, and McKinsey. For this generous contribution to humanity, they make billions in revenues—they did find those synergies. But coming back to David Graeber's line of thinking, you have to admire the ingenuity of the MBAs. They've created entirely new industries, like management consulting, which are beyond pointless. The fact that these MBAs get paid for showing people PPTs with BS terms like “synergy,” “cross-pollinate,” “bleeding edge,” and “think outside the box” to say absolutely nothing is genius. It's not just my idle rant, the consultants themselves confess to it ^{1, 2} . As the joke goes:

What difference does the MBA do a student?
A: It teaches him about strategy, finance, ROI and ensures that he understands these by putting him in about 100,000$ in debt.

### What poor people say I don't yet have a particular view on crypto since I don't really understand it properly. I'd assume that the odds of me ending up poor are quite high. A few perspectives by crypto skeptics that I came across this week. Apart from the scams, grifts, hacks, and the fact that it's useless, Molly White thinks that Web3 is going really great. How great? Listen 👇 [1]: https://www.cnbc.com/bonds/ [2]: https://today.duke.edu/2019/07/its-official-yield-curve-triggered-does-recession-loom-horizon [3]: https://twitter.com/biancoresearch/status/1508477274701533190?s=20&t=xYFUVHj2aEnq0eXK21u1-Q [4]: https://twitter.com/biancoresearch/status/1508477274701533190?t=-paLv1NHE7Jv_Wx1tdwbOA&s=19 [5]: https://www.evidenceinvestor.com/should-investors-fear-a-yield-curve-inversion/ [6]: https://www.evidenceinvestor.com/?s=larry+swedroe [7]: https://alphaarchitect.com/category/other-insights/larry-swedroe/ [8]: https://www.advisorperspectives.com/search?author=Larry%20Swedroe [9]: https://www.federalreserve.gov/econres/notes/feds-notes/dont-fear-the-yield-curve-reprise-20220325.htm [10]: https://twitter.com/jeuasommenulle/status/1509134374893150213 [11]: https://twitter.com/tdgraff/status/1506214857892368386?t=X28X2sxXKbea8IE0dDjZwQ&s=19 [12]: https://www.pragcap.com/lets-get-inverted/ [13]: https://twitter.com/cullenroche/status/1508863711485718528?s=20&t=yTJyLPDbN8O1o0uyjrqi3A [14]: https://apricitas.substack.com/p/why-you-should-and-shouldnt-fear?s=r [15]: https://themacrocompass.substack.com/p/ois-yield-curve?s=r [16]: https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/ [17]: https://www.bebhuvan.com/a-little-less-dumb/making-sense-of-the-russia-ukraine-conflict/ [18]: https://www.bloomberg.com/news/articles/2022-04-01/putin-may-collect-321-billion-windfall-if-oil-gas-keep-flowing [19]: https://twitter.com/RobinBrooksIIF/status/1509593446188785672?s=20&t=EQuC3tMaBnRi3Z-_gxrnkw [20]: https://voxeu.org/debates/economic-consequences-war [21]: https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/eye-on-the-market/surveying-the-damage/ [22]: https://twitter.com/carlquintanilla/status/1509674491089195008?s=20&t=SuciMqQeu6ZDXBQu4nPCnA [23]: https://doomberg.substack.com/p/farmers-on-the-brink?s=r [24]: https://www.velcro.co.uk/blog/2018/06/how-velcro-brand-fasteners-were-invented/ [25]: https://www.smithsonianmag.com/smart-news/velcros-patent-expired-it-was-niche-product-most-people-hadnt-heard-180962701/ [26]: https://www.strike.coop/bullshit-jobs/ [27]: https://www.vox.com/2018/5/8/17308744/bullshit-jobs-book-david-graeber-occupy-wall-street-karl-marx [28]: https://www.nber.org/papers/w29874 [29]: https://qz.com/india/672387/93-of-indias-b-school-graduates-are-useless/ [30]: https://www.theatlantic.com/ideas/archive/2022/01/mba-students-against-capitalism/621117/ [31]: https://www.econlib.org/library/Topics/College/marketfailures.html [32]: https://www.amazon.in/Economism-James-Kwak/dp/1101871199 [33]: https://en.wikipedia.org/wiki/New_Deal [34]: https://www.theatlantic.com/business/archive/2017/01/economism-and-the-minimum-wage/513155/

Making sense of the Russia-Ukraine conflict

Sun, 13 Mar 2022 00:00:00 GMT

If you had the power to bring back someone from the dead, who would it be? I'm guessing a dear one, favorite actor, musician? Not me. I'd bring back that Chinese guy who cast this curse: > May you live in interesting times! Not because I like the dude. No! It's because I want the pleasure, the ecstasy of killing him. I wouldn't kill him quickly by stabbing or shooting him, either. Oh, no! I'd take my time. First, I'd push him from a second-floor building; I want him to be injured, not dead. Then, I'd blindfold him, make him run in the middle of a street, and hit him with a TVS 50. Then I'd run over his legs with a bicycle—remember, the goal is to kill him slowly. Then I'd make him watch terrible Kannada movies nonstop as he is writhing in pain. Lastly, before I kill him, I'd intermittently play Justin Beiber's Baby in repeat while he tries to sleep. Finally, I'd stab him repeatedly with a pencil and kill him. In just a few weeks, we went from dunking on Cathie Wood to World War 3. We certainly are living in interesting times, aren't we? It's 2022 and yet the great powers sometimes still choose to play Sid Meier's Civilization in real life. This time, Russia decided to invade Ukraine. This is the biggest conflict in Europe since WW2, and the fallout is getting worse by the day. Nobody knows what the outcome of the conflict will be, but given the response of the Americans and the Europeans, it's abundantly clear that the conflict will have far-reaching geopolitical and economic implications. We're already seeing historic firsts—unprecedented economic warfare, historic shifts in foreign policy positions especially by the Germans, rapidly soaring food and commodity markets among other things. While it's impossible to get a clear picture of what's happening, it's important to at least have a sense of what's unfolding in Ukraine, given that this crisis will indelibly alter our world for the years to come. It also isn't about whether Putin is bad or if the Americans are good. Such binary and moralistic thinking doesn't help. It's just having a sense of what's happening, we can jump to moralistic conclusions later. I've been trying to make sense of this tragedy and thought I'd share whatever I read, watched, and listened to over the past few weeks. What ostensibly seemed like a cakewalk for the Russians has quickly become a nightmare for them. This is an existential crisis for both the Ukrainians who have mounted a heroic resistance against a far superior aggressor against all odds and the Russians. For Ukraine, it's a fight for Independence, and for Putin, it's a fight to save face enough to continue posting macho topless pictures. In response, the West has unleashed economic warfare on an unprecedented scale, and no, I'm using the term __lightly. Russia had been building up its foreign exchange reserves to withstand economic shocks. They grew the reserves from ~$380 billion to ~$630 billion. The reserves were in foreign currencies like the Euro, Sterling, Dollar, Yuan, Chinese bonds, and nearly 2300 tons of gold. The Americans and the Europeans not only cut off select Russian banks from the SWIFT, the backbone of global banking but also seized the Russian central bank reserves in their jurisdictions. Cutting off Russia from SWIFT itself at one point was considered the “nuclear option”, but the West went one step further. The Americans had frozen access to dollar reserves of smaller basket cases like Iran, Afghanistan, Venezuela, and North Korea but never a large economy like Russia. ### Crumbling fortress The fact that Russia had built a reserve chest of ~$630 is one probable reason why Putin was emboldened to invade Ukraine. Since the western sanctions in 2014 over the annexation of Crimea, Russia had painstakingly built up its reserves, dubbed “fortress Russia.” In 2014, it had to draw those reserves to [defend the Ruble][1]. From 2018 to 19, Russia also got rid of pretty much all its [US treasury holdings][2] and started deploying the money in the FX swaps market.

- ![](/blog-images/Russian-foreign-reserves-compsition-and-location-1.png) - ![](/blog-images/Russian-reserves.jpg) - ![](/blog-images/Russia-FX-swaps.png) - ![](/blog-images/Russia-reserves.webp)

These FX swaps to the tune of $200 and Russian private sector deposits to the tune of about $100 in foreign banks are most likely now frozen. These calculations are from [Zoltan Pozsar's recent note][2]:

Other than the roughly $200 billion in FX swaps, the Bank of Russia and the private sector have claims on foreign banks in the form of deposits in the amount of about $50 billion each – most likely a mix of euro- and U.S. dollar denominated deposits, which is how we arrived at the $300 billion total above.

Consider for example if funds get frozen through sanctions – an event that would turn a surplus agent into a deficit agent, which in turn would lead to missed payments, much like the onset of Covid-19 led to missed payments and turned surplus agents into deficit agents. Some version of such flows are something the market should discount. Alternatively, consider the notion that… …if you owe the bank $1 million, that’s your problem, but if you owe the bank $1 billion, that’s the bank’s problem.

Global Money Dispatch, Zoltan Pozsar In one fell swoop, the Russian central bank lost access to 40-50% of its reserves and became poorer by ~300 billion. The economic damage has been devastating. The Russian stock exchange is shut and was down 35% YTD at the last close. But you can get a sense of what would have happened if the exchange was open if you see the prices of some of the London-listed Russian stocks and US and European listed Russian ETFs. Gazprom, Sberbank, Lukoil, etc are down 90% while the Invesco Russian ETF is down 87%.

- ![](/blog-images/RUssia-markets.png) - ![](/blog-images/Russia-interest-rates.png) - ![](/blog-images/Russia-CDS.png)

The Russian 10-year bond yield shot up from about 9% to 19.8% and Russian credit default swaps (CDS) shot through the roof. The central bank hiked the interest rate from 8.5% to 20% given that it doesn't have the reserves to defend the Ruble. It also imposed capital controls—withdrawals above $10,000 have to be in Rubles, which are quickly becoming worthless. In about a week, Russia went from a relatively important part of the global economy to a basket case. ### Fallout Russia is the world's [11th][3] largest economy. It's a small economy, but a crucial cog for the global economy in certain sectors like food and energy. ![](/blog-images/Top-20-economies-of-world-gdp.png) #### Russian imports and exports [OEC has a brilliant visualisation][4] of Russian exports.

- ![](/blog-images/Exports-2019-Click-to-Select-a-Product.png) - ![](/blog-images/Imports.png)

> Top exports: Oil (59.1%), Iron and steel (4.86%), precious metals, gems and jewelry (4.38%), cereals (2.38%), wood products and charcoal (2.2%), aluminum (1.6%). > Top imports: Cars (4.63%), medicaments (4.28%), vehicle parts (3.45%), broadcast equipment (2.83%), planes and parts (2.02%), computers (1.29%). OEC So far, the Russian energy sector and the banks like Sberbank and Gazprom bank which process energy payments have been exempt from the economic sanctions. That's because Europe is beholden to Russian energy—nearly half of European oil, gas, and coal imports are from Russia.

- ![](/blog-images/Eu-energy-consumption.png) - ![](/blog-images/Russia-Europe-Energy-1.jpg) - ![](/blog-images/Moscow-Oil-1.jpg) - ![](/blog-images/Russia-Europe-1.png) - ![](/blog-images/EU-RUssia-1.png) - ![](/blog-images/Russia-Oil-1.png) - ![](/blog-images/Russoa-Oil-1.png)

If Russia cuts off oil and gas to Europe, people will quite literally freeze to death. Oil and gas prices would shoot up even more than they already have, and they have shot up substantially already. ![](/blog-images/Power-futures.png) And the irony is that Russia is having a bonanza as energy prices shoot up due to the war. Given the energy flows have been carved out of the sanctions, Russia is making about $650-750 million a day. Though the situation is dramatically changing every day, it's very hard to imagine the Europeans banning Russian energy imports. Energy is one of the biggest components of household budgets. The reason why politicians worry about rising energy costs compared to generalized inflation is that energy consumption is front and center in everyday life—every time people switch on the heating or refuel a car or a bike, they pay and get angry because of high prices. People don't care if it's a supply issue or a war, they always blame the people in power for rising energy costs. In the last few weeks, the Europeans have said a lot about reducing the [energy dependence][5] on the Russians. The situation has become so dire that [US officials met][6] Venezuelan President Nicolás Maduro a couple of weeks ago to work out an oil deal. The other problem is that the global oil & gas CAPEX is hitting record lows. ![](/blog-images/Energy-spending.png) #### Commodities While energy prices are getting all the headlines, Russia and Ukraine are [large exporters of other commodities][8] like coal, nickel, steel, aluminum, and other metals and derivatives. Along with oil prices, coal, and nickel prices have shot up dramatically. ![](/blog-images/Metal-futures-1.png) The historic volatility in the commodity markets is causing all sorts of headaches. On March 8th, there was an epic short squeeze in nickel futures on the [London Metal Exchange (LME)][9]. The price of nickel shot up 250% from ~$20,000 to $100,000 and LME in a weird move decided to cancel $3.9 billion worth of trades. The heightened volatility is causing a drop in volumes and widening spreads in [key commodities][10] like crude and aluminum. 1. It's important to note that coal still accounts for over 35% of global energy production. 2. Nickel is a crucial component in battery manufacturing, and Russia manufactures 28% of nickel globally. 3. There are other lesser-known but insanely crucial linkages. Ukraine produces 70% of neon gas, a crucial component in semiconductor manufacturing. 4. Russia exports 16% and 24% of global platinum and palladium. They are key components in electronics manufacturing. Ukraine is also a key part of the automotive supply chain, especially wiring systems, thanks to its cheap labor. The conflict has already forced BMW, Volkswagen among others to stop production. These are some of the most obvious ripple effects. There are bound to be a lot of unintended consequences and second-order effects from the Russia-Ukraine conflict—effects that will have a tremendous impact on global value chains. #### Food Last but not the least, the conflict will have an outsized impact on food production and food prices. 1. Russia and Ukraine are the largest and the fifth-largest wheat producers in the world. They account for 23% of the world trade in barley, 27% in wheat, and 14% in maize. 2. Russia and Ukraine account for 53% of the world’s sunflower oil trade.

- ![](/blog-images/Ukraine-Exports.png) - ![](/blog-images/Ukraine-Imports.png)

The problem isn't that Russia and Ukraine are large exporters of grain, the problem is who they export to. The biggest buyers of Russian and Ukrainian wheat and other grains are poor developing countries in Africa and the Middle East. These countries are already heavily indebted, and COVID-19 made it even worse. ![](/blog-images/Russian-and-Ukranian-wheat-export.webp) Ukraine has already [banned the export][11] of wheat, oats, and other staples.![](/blog-images/Agri-futurrs.png) Emerging markets will [take a disproportionate hit][12] if food prices spike. ![](/blog-images/Food-inflation-EM.jpg) For the privileged few of us living in India or the west, it's hard to imagine food being so important, but they can cause revolutions and topple regimes.

Protests over affordable food access are a regular feature of political economy. There was a wave of such demonstrations in 2007-2008, even before the Arab Spring began in late 2010. More generally, social movements responding to food shocks have played a powerful role in shaping modern history. Sharply rising prices were a major driver of the French Revolution. The 1848 revolutions followed several years of European drought that pushed food prices upward, and food protests not only kick-started the 1917 Russian Revolution from which the Soviet Union was born but also, in a historical irony, contributed to the USSR’s demise. More recently, food crises hastened the 1998 removal of Suharto in Indonesia.

Food Price Spikes and Social Unrest: The Dark Side of the Fed’s Crisis-Fighting Food shortages will hit the most vulnerable of countries like Yemen the hardest. The crisis is already pushing countries to start hoarding. ![](/blog-images/Hungry-people.png) > Since the Russian invasion, Indonesia has set new limits on palm oil exports to control prices. Hungary banned all grain exports last week; Serbia on Wednesday said it would ban exports of wheat, corn, flour and cooking oil. On Thursday, Egypt — a country 80 percent reliant on Russian and Ukrainian wheat — imposed controls on grain exports as the price of subsidized bread has already started to creep up. Flour rationing in Lebanon, grain hoarding in Hungary: How the Ukraine war is lurching the globe toward a new food crisis The other worry is fertilizers. Russia is the largest exporter of fertilizers. Belarus, the other major exporter, has also been sanctioned. Belarus is essentially a puppet of Russia, and the country has become a staging ground for Russian military operations in Ukraine. The US, India, China, Brazil, and France are the largest importers of fertilizers and also key exporters of food items. In broad terms, Russia accounts for almost 13% of global trade for key fertilizer intermediates (ammonia, phosphate rock, sulphur) and for almost 16% of global trade in the key finished fertilizers IHS Markit ![](/blog-images/Russia-fertilizer.png) Fertilizer prices had already been spiking even before the invasion, but things just got a whole lot worse. With Russia temporarily suspending fertilizer exports, farmers around the world are in for a rough time. Fertilizers account for anywhere between 15% to [35%][15] of farm input costs. Rising fertilizer prices could lead to lesser use of fertilizers, lower yields, and perversely, higher food prices. The hungriest, will get even hungrier. The impact of the conflict will inevitably feed into inflation, compounding the problem caused by strained supply chains around the world. This conflict is probably the final nail in the coffin of the _inflation is transitory_ narrative. Transitory inflation is dead, long live transitory inflation. ### Will the sanctions work? It's important not to overstate what sanctions can do. While sanctions will certainly kneecap the Russian economy, they will adjust to a new normal after a while, j[ust like Iran did][16]: ![](/blog-images/Iran-sanctions.png) > Even if Russia must accept lower prices for its oil as the markets begin to shun its crude, economists expect Moscow to be able to run a similar siege economy, using hard currency from oil and gas sales to buy imports from countries and companies willing to supply the country. Running a siege economy: Russia prepares to endure pain of sanctions Here's how Julia Friedlander, a former Treasury Department official who helped design the 2014 Russian sanctions program, explained it on the Hidden Forces podcast:

A lot of what we do, implicitly do, is essentially outsource the success of our foreign policy through sanctions to the private sector because they're the ones on the front lines who actually have to say, okay, we're a bank, we're going to do everything we can to make sure that we're complying with this. Not only banks, with major compliance shops, but every mom-and-pop shop in America. Every mom-and-pop shop in Europe is technically obligated by law to implement these things.

Now you can imagine that for some who are used to this, many colleagues from the treasury department go and run major sanction shops for large banks, and they're therefore extremely helpful, but sanctions could have a single point of failure because you're talking about all kinds of financial intermediaries that are also involved in this.

And so sewing all of it up, I think we often in the public misunderstand that sanctions are leaky because they're imperfect as a tool. They're imperfect because we ask those who are not, who are obliged by law, but not by policy, to uphold them. Our private sector are not like soldiers in a war, and so that's what I think that it's often sort of a little bit misunderstood here.

Interesting times? Bloody yes! 😐 ### Good reads **[Pausing at the precipice][17]** | I really loved this piece by Tanner Greer. He argues the West's desire to _“do the right thing”_ without pausing to carefully consider the consequences of their actions will end up hurting the people of Ukraine. He quotes from Michael Mazarr’s book that documents the utter ineptitude of the Bush administration that led to the Iraq war. The quotes paint a rather disturbing picture of how the Bush administration was driven more by the need to do the right thing than by WMDs or oil, as is commonly assumed. There was a stunning lack of thought about the consequences that US actions would have. Tanner writes that the same lack of consideration about the second-order effects of the Iraq invasion is evident in the way the West has rushed to impose crippling economic sanctions against Russia. This piece is all the more important given the charged environment we are in. Anybody with anti-War or anti-Western views is labeled as a “Putin apologist” or a “commie.” But that should be a sign to seek opposing views. The central point of the post about the need to consider the unintended consequences of actions is sage wisdom. [**Was it inevitable? A short history of Russia’s war on Ukrain**e |][18] This is a brilliant piece by Keith Gessen tracing the long ark of Ukrainian history from the collapse of the Soviet Union to the current invasion. The thing that stands out is just how unlucky Ukraine is. From living in the shadow of a great power to wrestling with the fractured identities of its people that simultaneously look east to Russia and west to Europe, it almost feels like Ukraine is destined to keep failing. But from the rise of Cossacks to the Soviet occupation, if there's one thing that defines the Ukrainians, it's their unyielding will to be free. [**What If Russia Loses?**][19] | Will Putin win? Liana Fix and Michael Kimmage write that there's no victory for Putin in Ukraine. His options are to commit the Russian army to an occupation, annex large parts of Ukraine and install a puppet regime while dealing with an insurgency, or model Ukraine into an autocratic regime like Belarus. He also runs the risk of Russian public opinion souring and has to deal with an economy that's reduced to rubble. So, Putin really doesn't have a way out. **[The Return of Containment][20]** | Now that Ukraine or large parts of it are most likely to be occupied by Russia, what should the West do? Ivo Daalder writes that the only real way to deal with the Russians is now to bring back the containment playbook similar to the one used in the 1940s against the Soviet Republic, but with the modern complexities in mind—namely the Russia-China friendship. He says that to contain Russia, Americans, Europeans, and NATO must spend heavily on military and beef up the presence in Eastern Europe. The West must also work with allies across the world to ensure tight enforcement of the sanctions and squeeze. The Europeans also must do whatever it takes to end their energy dependence on Russia. By doing so, they can inflict an even greater economic cost on the Russians.

Why Strangling Russia’s Economy Could Backfire | Maxim Mironov writes that the crippling economic sanctions risk turning Russia into “something like a larger, more unstable, and more dangerous North Korea.” Sanctions will impose a heavy cost on ordinary Russians and will lead to severe shortages of everything from basic goods to critical industrial components. The maximum economic pressure campaign could backfire and Russians will end up resenting the West, further cementing Putin's rule. Instead of sweeping sanctions, they should squeeze the oligarchs and other Russian officials.

[**The Bleeding Victor (Part One)**][21] | The common narrative is that except for oil, the West will suffer less compared to the economic damage they've inflicted Russia, but Pippa Malmgren argues otherwise. She writes that Putin might be losing the battle of public perception, but is inflicting extraordinary damage on the West and the global economy at large. Russia is among the world's largest producers of oil, palladium, nickel, wheat, and fertilizers. The prices of all these commodities have risen dramatically and are leading to runaway inflation and destabilizing financial markets. The economies of European countries like Germany and Italy have sizable exposure to Russia, and the West's response all but guarantees a debt contagion She also thinks that given the fact that Russia and Russian puppet Belarus are the largest producers of fertilizers, Putin is set to unleash a global famine that will disproportionately hurt the poorest African and Middle East countries. #### **Who's to blame for the current crisis?** **[Why John Mearsheimer Blames the US for the Crisis in Ukraine][22]** | On the one extreme, you have scholars and historians like John Mearsheimer. He thinks the West is squarely to blame and traces the origin of the conflict back to 2008 when NATO expressed support to Ukraine and Georgia's NATO aspirations. This, he says, was a clear red line for Russia. If the United States can't allow Chinese friendly Canada and Mexico, why would Putin be ok with a NATO friendly Ukraine housing missiles pointed at Moscow? He argues that when you are neighbors with great power, you mustn't antagonize them and that the destiny of smaller countries is always determined by great powers. [**"Fuck it!" Russia's Final Break With the West**][23] | Niccolo Soldo shares John Mearsheimer's view. He thinks that Ukraine is a pawn in America's game to cut off Europe from Russia and isolate it. The bonus is that the Americans can cash in by exporting gas and weapons to the Europeans. He says that the Americans couldn't care less if Ukraine is occupied by Russia. They'd be happy to see the Russians get stuck in an Afghanistan-like insurgency. [**Putin YES!, Putin NO!, US Empire 100 Years Ago, Orban and the Challenge of the War in Ukraine, Led Zeppelin and How They Came To Be**][24]. The most interesting point from this piece is the cognitive dissonance of Americans. Most Americans think that they're a republic, while the rest of the world considers America as an empire. The fact that the Americans consider themselves as a republic probably is a way of giving themselves mental cover to meddle in the affairs of countries across the world, foment dissent, and overthrow governments. [**The Crackpot Realism of America, Russia, and Ukraine**][25]. Ross Barkan writes on the same lines as the pieces above. [**The American Pundits Who Can’t Resist “Westsplaining” Ukraine**][26] | On the other extreme, you have people like Jan Smoleński and Jan Dutkiewicz argue that just blaming the US and NATO is an extremely misguided and reductive view of the realities of Eastern Europe. To say that NATO is to blame is to deny the agency of these countries. They write that Eastern European countries like Hungary, Poland, Czechoslovakia were subject to brutal Soviet occupation. In the case of Ukraine, it's even worse. Joseph Stalin unleashed a deliberate famine that killed anywhere between 3-12 million people. Several European countries deliberately sought NATO membership because they wanted security against Russia and a taste of the prosperity of the West. [**The Weakness of the Despot**][27] | Historian Stephen Kotkin disagrees with Mearsheimer and the others and says that the West and NATO aren't to blame. He goes to the other extreme and says that the fact that NATO expanded puts the West in a much better place to deal with Putin. He says that Russia has always been a _“weak great power”_ and its ambition to be recognized as a great power on the global stage has never matched the ground realities. He says the reason why Putin has maintained his grip on power for so long is that he knows the power of a good story. A brilliant point he makes is that censorship isn't just about suppressing information, but also about spreading stories that Russian enemies like NATO and IMF want to destroy it. As long as money (oil) gushes out of the ground, Putin can buy the cooperation of people in power and doesn't have to bother about the ordinary people. [**How Sanctions on Russia Will Alter Global Payments Flows**][28] | The other major debate has been over cutting off Russian banks from the SWIFT messaging system. But is Russia completely cut off, and does it have no alternatives? No, the total Russian banking system isn't completely cut off. The sanctions specifically excluded certain Russian banks that process energy payments for Europe's energy purchases from Russia. Robert Green writes that as long as some Russian Banks are still connected to SWIFT, Russia can manage to soften the blow. The reason why the west has been reluctant to completely cut off the Russian banking system from SWIFT is because of Europe's Russian energy dependence and worries that Russia would run straight into China's warm embrace. Also, Russian banks would no doubt be connected to China's Cross-Border Interbank Payment System (CIPS) and can use Renminbi payments. **[The West Has Declared Financial War on Russia. Is It Prepared for the Consequences?][29]** | This is a really interesting piece on the realities of using sanctions to discipline nation-states and effect change. Julia Friedlander captures the dichotomy between the expectations of policymakers and the realities of using sanctions really well. While policymakers want immediate results from sanctions, that has rarely happened. From bringing down the apartheid, the Soviet Union, and forcing Iran back to the negotiating table, sanctions take years and decades to work. She writes that whether sanctions can force Putin to change will determine the effectiveness of sanctions in the future. If Putin is still able to maneuver despite the economic costs, the use of sanctions in the future will probably reduce. [**Adam Tooze**][30] | I have a feeling there might 5 Adam Tooze's. I don't know of anybody else who can write so prolifically. Adam Tooze is one of the smartest historians of our generation and is also the author of must-read books like [_Crashed_][31] and [_Shutdown_][32]. Adam has been writing prolifically about this evolving tragedy. If I start linking individual pieces, this post will be full of his links. So, I've linked his newsletter instead. ### Good listens There are countless talking heads saying all sorts of things and making all sorts of predictions. I've been listening to a few to get some sense of this conflict and Samo Burja is without a doubt one of the more insightful commentators I came across. A few interesting points from the conversation: 1. This isn't a disaster for the Russian military yet 2. China is more than able, but might not yet be willing, to take advantage of the economic destruction unleashed by the west in Russia. 3. More and more countries will turn to China in the future. 4. War is messy. If you had smartphones in 2003 during the US invasion of Iraq, you might have concluded that the US was losing because they were best with all sorts of problems. 5. Based on the US military doctrine, the Russian invasion might seem like a disaster given the heavy losses, the stalled forces, and equipment malfunction etc. But you have to judge the situation by Russian standards. The Russian military is willing to take heavy losses, that's how they operate. 6. The Russians hoped for better, but that isn't to say that the Russian military has failed. It's hard for people to consider the fact that Russia is perfectly competent. 7. The fact that Russia dared to invade a country shows that the West has grown weak, and US hegemony is over. 8. India and other countries haven't joined the sanctions. So, this isn't a global opposition to Russia but rather a significant power block, i.e., the west. 9. Russia is trying to build an imperialist empire based on economic and security concerns. Russia can't afford to let Ukraine join NATO because that would mean offensive weapons in Ukraine that can hit Russia in a few minutes. There's no reason to believe western promises that they won't station such weapons close to Russia. 10. NATO is not benevolent. Both NATO and Russia are engaged in imperialist expansion based on irresolvable security concerns. 11. This situation was inevitable. It's not that this particular war was inevitable, but some sort of clarification of the situation of Ukraine was inevitable. It could've been either a Russian-backed coup to restore a pro-Russian govt or NATO admitting Ukraine and quickly moving troops. 12. I don't think Russia is messing up this invasion badly. 13. The West doesn't have diplomats of the same caliber as Henry Kissinger that could've navigated and maybe avoided this situation. Zelensky was shit at diplomacy, but excellent at PR after the war started. 14. Did NATO provoke Russia into this conflict? NATO hasn't done anything to avoid conflict. 15. The Western leaders still think Russia is weak and ready to implode. These are the same people who bungled Afghanistan and Iraq. The Western leaders are more deluded than Putin. 16. Putin isn't growing insane. He's isolated because he's scared of being targeted by a bioweapon based on his genome. He's he's avoiding people because of that. 17. It's very difficult to avoid media bias. In a charged environment like this, you won't care about war crimes of your side because you support your country. 18. Russia might occupy 70% of Ukraine, leaving a rump of a state in western Ukraine. They'll create puppet states like Luhansk and Donetsk. 19. The Russian information environment is disconnected from reality, but it's the same in the West. 20. The conventional wisdom is ignoring Russian willingness to take casualties. 21. This war is not worth it for Russia, but that depends on whether the West is in decline. If the West is still strong, this war is a huge disaster for Russia. But if the West is in decline, this would be the beginning of a bank run on the Western security umbrella and the western financial system. 22. There will be fallout from Russia being cut off from the global economy. If Russia shuts off gas to Europe, it would mean long term deindustrialization of Europe and impoverishment of Germany, Britain and France. 23. The notion of enlightened self-interest—the economic costs of any military adventures would be costly, is dead. The desire for war has always been disconnected from economic realities. Pre-WW1 was the peak of globalization, yet people went to war that destroyed Europe. 24. The global economic and financial system will never be the same now that the West has shown that it is possible to disconnect an entire economy from the global economy. 25. Countries will start developing their own alternatives to Facebook, Twitter etc. There is no reason for countries like India to trust the west. 26. India and China are the new rising powers and Russia, no matter what happens in this war, was already in decline. 27. If we really want countries like Ukraine to have western values, the West should help them develop their own independent security and foreign policy and not retrofit them into the western value system. 28. Russian standards of living will decline severely, but they can withstand it, like Iraq and North Korea. Sanctions don't immediately topple regimes. 29. Russia will increasingly depend on China. It's not in China's interest to see Russia fail. 30. The result of this conflict would be high energy prices and deindustrialization of Europe. The US will do well and China will come out stronger. 31. Chinese and Russian interests are different. China might just do the bare minimum to help China. A Russia in a position of the maximum dependence on China is what the Chinese want. 32. A military conflagration over Taiwan is inevitable. #### The history of Ukraine and what it means to be a Ukrainian In the run-up to the invasion, Putin published a [blog post][33] saying that Ukraine wasn't a real nation and that it was always a part of Russia. This flawed view of history is at the heart of the conflict, Putin has used to justify the invasion. You gotta admire the creativity of dictators and autocrats when it comes to creating alternate realities. I did some reading and listening over the past couple of weeks to get a sense of the history of Ukraine and Russia. It doesn't take much to quickly realize that Putin's version of history is nonsense. It's important to understand that the history of Ukraine is heavily contested and subject to vigorous debate—nobody agrees on anything. There are a lot of competing historical narratives about the origins of Ukraine. This history is also heavily colored by ethnic, religious, and nationalist considerations—propaganda even. History after all is a narrative constructed in between the gaps of facts and evidence. But anyway, the ancient roots of Ukraine and Russia are fascinating, to say the least. Here's a truncated version of Ukraine's 1000-year history. Serhii Plokhy, in his book _[The Gates Of Europe][34]_, traces the history of Ukraine all the way back to Herodotus, the father of history. Herodotus had written about the Scythians who inhabited parts of modern-day Ukraine in the fifth century. Around the 6th century, the Slavs started settling around these regions along the Dnieper River. The origins of Ukraine, Russia, and Belarus can be traced all the way back to this time period. Around the late 7th, 8th and 9th centuries, the first wave of Vikings started raiding and conquering parts of Europe including Britain, Ireland, and Scotland. Around this time, Vikings called the "Rus" started traveling down the major river routes like the Volga and Dnieper rivers from Sweden, Denmark, and Finland started settling in lands belonging to modern-day Russia and Ukraine. People often take the term "Rus" to mean Russia, but that isn't the case. Its meaning has evolved over centuries, and the usage of the word has never been constant. One version of the history is Vikings demanded tribute from northern Slavs and Finns. They paid the Vikings initially, but later fought the Vikings and drove them out. But after a battle, the Slavs had internal discord and invited the Vikings back to rule over them. Three brothers Rurik (Ryurik), Sineus, and Trevor obliged and settled in Novgorod, Byeloozero, and Izborst. But this version of history is contested. In 882 Oleg (Helgi) or the Rurik dynasty conquered Kyiv and this land came to be known as "Kievan Rus." Later, the Rurikids attacked Byzantine and got trade concessions in return. Constantinople was the biggest market at the time. Around the 980-990s, Volodymyr (Vladimir) married Anna, the sister of Byzantine Emperor Basil II, and agreed to convert to Christianity. This is an important part of history and marks the spread of Christianity among the Vikings, who had already been assimilated by the Slavs. One important aspect is that Kievan Rus wasn't a unified nation, the concept of a single national identity didn't exist yet. These were loose principalities ruled by different rulers and proliferated around the region. Around 1240, the Mongols invaded Kievan Rus and sacked it and the region was carved up. As Kyiv disintegrated, Galicia–Volhynia emerged as the next power center, which included parts of modern Ukraine. As the Galician–Volhynian line ended, the Polish conquered Galicia and Volhynia fell to the Grand Duchy of Lithuania, including Kyiv. By the 14th century, Ukraine was divided between these emergent powers. In 1569, Poland and Lithuania signed The Union of Lublin and formed the Polish-Lithuanian Commonwealth. As part of the agreement, most of modern-day Ukraine was incorporated into Poland, the remaining part with the Duchy of Lithuania eventually became Belarus. In the 15th century, a group of people called the Cossacks started settling in South Ukraine. Cossacks were originally nomads, but they included people from different nationalities. They were peasants, serfs escaping serfdom, fisherman, slaves, people escaping debts, and so on. The term Cossack means _free men_. They were brave warriors and over a period of time they fought and served Muscovy (Russia) and Poland, and became a dominant force on the Ukrainian Steppe. In 1649, the Cossacks rebelled against the Polish Commonwealth by allying with the Crimean Tatars, whom they were harassing and stealing from until then. The polish suffered several defeats at the hands of the Cossack-Tatar alliance, and an independent Cossack state was established, known as The _Cossack Hetmanate_. Ukrainians trace their nationality to this period. Later, the Tatars would betray the Cossacks, and to keep their dream of nationhood alive, the Cossacks pledged their allegiance to the Tsar of Russia, but even that alliance didn't survive and rebellions ensued. In 1764, Catherine the Great abolished the Hetmanate and integrated the Cossacks into the Russian Empire. Throughout the 1800s, the dream of an independent Ukraine remained a dream. In the 1860s and 70, the Russian Empire banned the publication of all Ukrainian publications to further suppress Ukrainian nationalism. With the fall of the Russian monarch in 1918, Ukraine declared its independence. As the Austro-Hungarian Empire fell, the Western Ukrainian People’s Republic consisting of Galicia also declared independence. But both these regions weren't united and by 1920, they lost to the Poles and Bolsheviks. This time the region was divided between the Russians, Poles, Czechs, and Romanians. In the 1930s, Stalin unleashed the forced collectivization of farms. The idea was to replaced peasants and individual farmers with centrally controlled farms to increase yield. This deliberately unleashed a famine that killed over 4 million people, and it came to be known as _Holodomor_. In 1941 Hitler invaded the Soviet Union and the Soviet army was utterly humiliated. Nearly 3.5 million Red Army soldiers became prisoners of the Germans. Ukraine became a graveyard under the Germans as millions of Jews were killed on a scale never seen before. The Soviets retook Ukraine in 1941, and Ukrainians had to endure another 50 years of Soviet rule. Finally, after much struggle, Ukraine declared its independence in 1991 which also meant the end of the Soviet Union. Thought the idea of the modern Ukraine nation emerged in the 19th century, the Ukrainian identity has always existed since medieval times in some form or the other. One of the meanings of the word Ukraine is _borderlands_ and throughout its history, Ukraine has always been a border for great empires. But like the first line of Ukraine's national anthem alludes to, “_Ukraine is not yet dead_,” Ukrainians never gave up on their dream of an independent Ukraine, free to chart their own destiny. These podcast episodes are amazing if you want to get a sense of the history of Ukraine. I also learned a tremendous amount from listening to the talks of Ukrainian historians like [Serhii Plohky][35], [Timothy Snyder][36], [Olenka Pevny][37], and [Christian Raffensperger][38]. I highly recommend listening to them If you're interested, in getting a better sense of the role Ukraine has played in shaping the history of modern Europe. [1]: https://www.reuters.com/markets/europe/russia-counts-reserves-shield-against-sanctions-finmin-2022-02-16/ [2]: https://plus2.credit-suisse.com/content/dam/credit-suisse-research/SearchPDF?DocumentID=1188597&DocumentType=NR%20Publication&documentClick=true&AuthRequired=true&tagFormat=PDF [3]: https://www.visualcapitalist.com/visualizing-the-94-trillion-world-economy-in-one-chart/ [4]: https://oec.world/en/profile/country/rus?depthSelector1=HS2Depth&depthSelector2=HS4Depth [5]: https://www.politico.eu/article/eu-agree-end-russia-energy-dependence-no-date/ [6]: https://www.washingtonpost.com/world/2022/03/06/venezuela-american-officials-visit/ [7]: https://privatebank.jpmorgan.com/gl/en/insights/investing/eotm/russia-ukraine-update-energy-implications [8]: https://www.atlanticcouncil.org/blogs/econographics/beyond-oil-natural-gas-and-wheat-the-commodity-shock-of-russia-ukraine-crisis/ [9]: https://www.bloomberg.com/news/articles/2022-03-16/nickel-drops-by-exchange-limit-as-trading-resumes-on-the-lme [10]: https://www.bloomberg.com/news/articles/2022-03-18/the-world-s-biggest-commodities-markets-are-starting-to-seize-up [11]: https://abcnews.go.com/International/wireStory/ukraine-bans-exports-wheat-oats-food-staples-83337319 [12]: https://www.bloombergquint.com/onweb/rising-food-prices-pose-a-threat-to-emerging-market-currencies [13]: https://data.unicef.org/resources/sofi-2021/ [14]: https://ihsmarkit.com/research-analysis/russia-ukraine-impact-of-escalating-tensions-grains-fertilizers.html [15]: https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=103194 [16]: https://www.ft.com/content/47121812-621a-404a-b60f-e2a7f62c5236 [17]: https://scholars-stage.org/pausing-at-the-precipice [18]: https://www.theguardian.com/world/2022/mar/11/was-it-inevitable-a-short-history-of-russias-war-on-ukraine [19]: https://www.foreignaffairs.com/articles/ukraine/2022-02-18/what-if-russia-wins#author-info [20]: https://www.foreignaffairs.com/articles/ukraine/2022-03-01/return-containment?utm_medium=promo_email&utm_source=special_send&utm_campaign=election_&utm_content=20220304&utm_term=all-special-send#author-info [21]: https://drpippa.substack.com/p/the-bleeding-victor-part-one?s=r [22]: https://www.newyorker.com/news/q-and-a/why-john-mearsheimer-blames-the-us-for-the-crisis-in-ukraine [23]: https://niccolo.substack.com/p/fuck-it-russias-final-break-with?s=r [24]: https://niccolo.substack.com/p/saturday-commentary-and-review-76?s=r [25]: https://rossbarkan.substack.com/p/the-crackpot-realism-of-america-russia?utm_source=pocket_mylist&s=r [26]: https://newrepublic.com/article/165603/carlson-russia-ukraine-imperialism-nato?utm_source=pocket_mylist [27]: https://www.newyorker.com/news/q-and-a/stephen-kotkin-putin-russia-ukraine-stalin [28]: https://carnegieendowment.org/2022/03/04/how-sanctions-on-russia-will-alter-global-payments-flows-pub-86575 [29]: https://www.politico.com/news/magazine/2022/03/08/west-gamble-financial-war-russia-00015156 [30]: https://adamtooze.substack.com [31]: https://www.amazon.in/Crashed-Decade-Financial-Crises-Changed/dp/0670024937/ref=sr_1_3?crid=AC2LRW1M8LU2&keywords=crashed+book&qid=1647585901&sprefix=crashed+book%2Caps%2C232&sr=8-3 [32]: https://www.amazon.in/gp/product/B08973VVZ5/ref=dbs_a_def_rwt_bibl_vppi_i0 [33]: https://www.vox.com/policy-and-politics/2022/2/23/22945781/russia-ukraine-putin-speech-transcript-february-22 [34]: https://www.amazon.in/Gates-Europe-History-Ukraine/dp/1541675649 [35]: https://www.youtube.com/results?search_query=serhii+plokhy+ukraine+history [36]: https://www.youtube.com/results?search_query=timothy+snyder+ukraine+history [37]: https://www.mmll.cam.ac.uk/ozp20 [38]: https://www.youtube.com/results?search_query=christian+raffensperger

Go curate yourself!

Sun, 06 Mar 2022 00:00:00 GMT

I have an embarrassing and pretentious-sounding confession. One of the reasons why I created this blog is because I really enjoy collecting links—the internet calls it "curation" nowadays. Boy, does it sound douchey just to use the term. I don't know why but I've always loved sharing interesting things with friends and colleagues. But over the years, an abundance of good things on the internet quickly went from a boon to a bane. There's too much to read, watch and listen to but too little time. The side effect was FOMO. We kept collecting and saving more and more things that we'd never go back and read or watch. This problem of overload kept coming up whenever I was talking to friends, colleagues or in some cases went talking to startups that approached Rainmatter. One of the reasons for my fascination with curation is because some of my favorite blogs and newsletters on the interweb like _Marginal Revolution_ by Tyler Cowen and _Kottke_ by Jason Kottke, The _Marginalian_ by Maria Popova, _Techmeme_, and _Klement on Investing_ by Joachim Klement are curated—I love reading them. The common theme among all these blogs is that all these people share things because they enjoy it and they don't pander to the whims and fancies of audiences or algorithms. These writers are among the minority on the internet not yet infected by the disease of "engagement." These blogs still have some of that magic of old-school blogging. The tragedy of our age just sharing interesting things without worrying about engagement or pandering to algorithms seems heretic. Anyways, this problem of _too much_ was stuck in my head and I figured, I'd put all the interesting things I came across in one place. That was how this blog was born and I've done a piss-poor job of doing what I wanted to so far. Then I figured, why not learn about "curation" and as I was browsing by Michael Bhaskararound I came across [this Google talk][1] by this person named Michael Bhaskar. It was really good. Turns out he had written a book on curation _[Curation: The power of selection in a world of excess][2]_. I finished reading it last week and I thoroughly enjoyed it. Given just how huge the problem of abundance today is, I have a feeling that this book will become important and better with time—like wine. By now talking and writing about information overload and the sheer excess of everything on the internet is a tired cliché but doesn't make it any less true. We live in an age of excess—everything from amazing blogs, books, podcasts, newsletters, cheap Vietnamese clothing to terrible Kannada movies _(The guy falls in love with the girl, father says no, stalker boyfriend beats hero, hero beats up the stalker, hero smiles, father cries, girl marries, flash-front, 2 kids)_. We have too much of every goddamn thing and it's a pain in the hindquarters. We generate 2.5 quintillion bytes or 2,500,000,000,000 megabytes of data every day—this factoid in the first chapter sets the stage for the rest of the book. The author presents a sweeping panorama of how we went from a world of scarcity to a world of abundance—everything from clothing to information. How did humanity go from the problem of too little to too much? Bhaskar goes back to back to the 1700s to trace the origins of what he calls the _long boom_ to innovators like Richard Arkwright, Emil Rathenaul, and Werner von Siemens. Arkwright invented the spinning frame and the carding engine and is called the _father_ of the _Industrial Revolution_ and the modern factory system. Thanks, to his inventions the cost of a short went from $3500 (Yes, I was shocked too and yes, it's [true][3]) to a few dollars today! Werner von Siemens invented the telegraph and the dynamo among other things and revolutionized communications and power generation supercharging industrial production. The short descriptions of these famous men are fascinating given that I know next to nothing about the industrial revolution except for the fact that I knew the industrial revolution happened thanks to my relentless mugging of social studies textbooks in school. The two industrial revolutions starting from the late 1700s to the early 1900s pushed humanity from an age of scarcity to abundance. **This chart by Luke Muehlhauser illustrates the profound impact of the industrial revolution.** ![](/blog-images/Industrial-revolution-Luke-Muehlhauser.png) ### The big bang The economy is an expression of its technologies W. Brian Arthur The technological advancements of the industrial revolution, two world wars set the stage for globalization but It didn't happen immediately. Around the 1970s thanks to advancements in shipping and containerization, the world started to become a smaller place. Global trade started to take off but the biggest event that changed things was _China's accessio_n into the World Trade Organization (WTO) in 2001 and global trade increased dramatically and everything became cheap. ![](/blog-images/globalization-over-5-centuries-km.png) The result was that we all became hoarders. Who are some of the greatest philosophers you can think of? You might probably be thinking old Greek and Roman guys like Plato, Artistotle and other brand ambassadors for arthritis medication. But if you ask me, George Carlin is one of the greatest philosophers of our time. There was nobody who observed all the dumb things we do better than him. Just watch these two videos: Thanks to the industrial revolution and the wartime technological advancements we quickly went from not having the things we needed to filling our houses with things we don't need and paying for it with money we don't have—buy now, pay never! What Charles Dickens wrote over a century ago is a perfect summary of today: > It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair. Charles Dickens, A Tale of Two Cities Globalization enabled unchecked consumerism and our homes became glorified storage containers. Too much of everything. > Novelty and excess become the norm and no longer excite us. Moreover, all this wealth increases pressure to keep up with the Joneses. Your Ford, impressive enough last year, loses its lustre now your neighbour owns a Mercedes. Curation: The power of selection in a world of excess—Michael Bhaskar Here are [some numbers][4] from _Life at Home_ in the Twenty-first _Century_ study by UCLA. Bhaskar quotes the study in the book too:

In the smallest home in their study, a house of 980 sq ft, there were, in the two bedrooms and living room alone, 2,260 items. And, because of the rules the anthropologists were using to count, that was only the things they could see when they stood still. They didn't count any of the stuff that was tucked into drawers or squeezed into cupboards.

The other homes were just as packed. On average, each family had 39 pairs of shoes, 90 DVDs or videos, 139 toys, 212 CDs and 438 books and magazines. Nine out of 10 had so many things that they kept household stuff in the garage. Three quarters of them had so much stuff in there, there was no room left for cars.

BBC Globalization enabled unchecked consumerism and our homes became glorified storage containers. Too much of everything. Now, we're all mindless shoppers constantly buying things. You could probably spin that and say you're contributing to India's GDP but, your family might not like the explanation. **For Earth to the metaverse, we're all hoarders** It's not just too much physical stuff, there's too much digital stuff too. Just some stats: - About 1 million books are published every year. - Over 500 hours of video are uploaded to YouTube every minute. - 500 million tweets a day - 5-10 million blogposts are published every day - 80-100 million photos and vidoes are uploaded on Instagram every day. - Spotify has over 86 million songs and 3.6 million podcast episodes. If you check [Internetstats][5], there's a non-trivial chance of you losing your mind. This is what people mean when they say there's information overload. So, everybody agrees that we have information overload? In the immortal words of every bickering couple "well, not quite." The way I see it, there are three viewpoints. The dominant view, of course, is that there's too much information and people are losing their minds. ‘We live in an age of electricity, of railways, of gas, and of velocity in thought and action. In the course of one brief month more impressions are conveyed to our brains than reached those of our ancestors in the course of years, and our mentalising machines are called upon for a greater amount of fabric than was required of our grandfathers in the course of a lifetime.’ Curation: The power of selection in a world of excess—Michael Bhaskar People like Daniel Levitin (neuroscientist) fall into this camp:

Americans took in five times as much information every year every day during this year and we did in 1987. Five times as much information every single day we take in the equivalent of a 175 newspapers read cover to cover. In our leisure time alone we processed 35 gigabytes of information, that's the equivalent of 5 high-definition DVDs in a day in our leisure time we created a world that has 300 exabytes of information.

If you were to write each bit of information on a little 3 by 5 card like this, just your share your individual share of that information, if you were to take those index cards and stack them they would reach from here to the moon and back and then to the moon again. 750 thousand miles is your share of the information created in the world.

The Organized Mind: Using Neuroscience to Navigate the Age of Information Overload Then there are people like Clay Shirky and Tyler Cowen who think, it's a problem of filtering rather than overload. Clay Shirky:

I think this is and it goes back to the printing press right. Gutenberg and the invention of movable type injected for the first time into life outside universes information abundance right. By the 1500s the cost of producing a book had gotten so cheap and the volume of books being produced have gotten so large that an average literate citizen could have access to more books than they could read in a lifetime. So information overload is actually aproblem of fairly ancient provenance. Thinking about information overloadisn't actually describing the problem, and thinking about filter failure is.

It's Not Information Overload. It's Filter Failure, Clay Shirky Tyler Cowen on information overload:

Google lengthens our attention spans in yet another way, namely by allowing greater specialization of knowledge. We don't have to spend as much time looking up various facts and we can focus on particular areas of interest, if only because general knowledge is so readily available. It's never been easier to wrap yourself up in a long-term intellectual project, yet without losing touch with the world around you.

As for information overload, it is you who chooses how much "stuff" you want to experience and how many small bits you want to put together. If you wish, you can keep information at bay as much as you need to and use Google or text a friend when you need to know something. That's not usually how it works—many of us are cramming.

The Age of the Infovore: Succeeding in the Information Economy Kindle Edition by Tyler Cowen I used to be in the _information overload_ camp but over time, I've slowly shifted to the _filter failure_ camp. The more stuff—both physical and digital—we have to deal with, the better our filters have to be. But as Bhaskar emphasizes multiple times in the book, it's a good problem. Compared to a world of scarcity, a world of abundance is a much better place to be in. ### Choice overload MFs ### We're natural curators For all the talk of the human brain being a supercomputer, the conscious brain is basically like a floppy disk. It's our [unconscious brain][6] that ends up doing most of the heavy lifting. Here's an excerpt from the book: > Information overload is commonly accepted. The question is not whether it exists (given that our conscious brain can process something like sixty bits at a time and the amount of information now available is such that each American consumed the equivalent of 175 newspapers per day in 2011. So, even though our conscious brains are constantly bombarded with information, they process only a tiny bit of it. Put another way, whether you know it or not, our brains are naturally filtering or "curating" everything. Cue the eye roll! The way I think about it, curation is much less an activity than a worldview. To me, this was the biggest takeaway from the book. > In the context of excess, curation isn’t just a buzzword. It makes sense of the world. Curation: The power of selection in a world of excess—Michael Bhaskar We are naturally wired to cull, sift, filter, arrange and curate everything from what we think, read, eat, smell to what we sense. In that sense, curation is just the conscious application of what our brains were evolutionarily hardwired to do. This leads to the debate over the use of the term curation and internet pissing contests over its appropriation. The term comes from the Latin word __[cūrāre][7]__, which means to look after or take care of. The term was originally used in the art and museum worlds but not that everybody is a curator, the art people are horrified. ![](/blog-images/curation-google-trends.png) But as Bhaskar writes in the book, what we call curation was already happening for ages and we just labeled those activities as curation. The term has always had an elitist undertone. Most often than not, you can sense the unbearable pretentiousness, pompousness snobbishness, and douchebaggery when people use the term callously. There's a good chunk of the book dedicated to the fight over the usage of the term. But today, every jackass is a curator, and thanks to the relentless abuse, it kinda feels like the term is becoming a bit meaningless. Some people like [Choire Sicha][9], for example, really don't like the overuse of the term to label trivial and banal actions as curation:

As a former actual curator, of like, actual art and whatnot, I think I’m fairly well positioned to say that you folks with your blog and your Tumblr and your whatever are not actually engaged in a practice of curation. Call it what you like: aggregating? Blogging? Choosing? Copyright infringing sometimes? But it’s not actually curation, or anything like it. Your faux TED talk is not going well for you if you are making some point about “curation” replacing “creation” because, well, for starters, “curation” is choosing among things that are created?

You Are Not a Curator, You Are Actually Just a Filthy Blogger—The Awl But, as Bhaskar and Maria Popova say, the curated genie is out of the bottle: > Like any appropriated buzzword, the term “curation” has become nearly vacant of meaning. But, until we come up with a better one, it remains the semantic placeholder that best captures the central paradigm of Twitter as a conduit of discovery and direction for what is meaningful, interesting and relevant in the world. Maria Popova: In a new world of informational abundance, content curation is a new kind of authorship — Neiman Lab ### What the hell does curation mean anyway? Here's how Micheal Bhaskar defines it: Curation: using acts of selection and arrangement (but also refining, reducing, displaying, simplifying, presenting and explaining) to add value ### Curation everywhere One of the central arguments of the book is that making more things and adding more were solutions to most problems—but they may not be anymore. > First because for the last two hundred or so years we have engineered society and businesses to keep growing; to keep adding more. Second because we are now reaching overload, when incremental additions cause more harm than good. Lastly it is important as we have an idea, whether in business, the arts or our general lives, that creativity is always a net positive. Perhaps it is. If, however, problems arise from creating more, aren’t there grounds to question that assumption? > This is the underbelly of the creativity myth. The ‘growth complex’, perhaps. Just as creativity doesn’t have to be about quasi-divine newness, so growth can work differently. Growth can come from adding value, not adding more. Paradoxically, as the century wears on, we will realise that creating less, indeed, actively cutting down, leads to more prosperity. This is true. The default answer to pretty much every societal problem or business problem has been to add more—build more things, add more features. This is partly because it was easier to do more than less. The other thing is that we're hardwired to think in additive terms to solve problems. [Lediy Klotz][10], professor at the University of Virginia in a series of studies found that people instinctively overlook subtractive solutions to solve problems: > The paltry rate of subtraction in our organizational-improvement study was no fluke. We observed similarly low rates of subtraction across multiple tasks. To improve a redundant piece of writing, few participants produced an edit with fewer words. To improve a jam-packed travel itinerary, few removed events to allow them to savor the ones that remained. To improve a Lego structure, almost no one took pieces away. Whether people were changing ideas, situations, or objects, the dominant tendency was to do so by adding. When Subtraction Adds Value But there's also the fact that thinking from the lens of doing less to do more is unnatural and contrarian. I think people would rather fail by doing more than less because they'll have something to show. Maybe it's a form of signalling, even? Because the virtues of _working hard_ and _doing something_, even for the heck of it are deeply ingrained in our cultures. Doing less, one the other hand is the same as being lazy. Then there's career risk. Take fund management for example. The turnover rate of mutual funds across the much of the world has been going up. Take a look at this chart, this is for US funds, but it's the same [in India][11] as well. A turnover rate of 100% means that the fund manager is changing the portfolio every year. ![](/blog-images/MF-turnover.png) Of course, there are certain strategies like momentum that naturally have higher churn and some strategies that have higher churn to reduce risk maybe a good thing even. But not every fund is a momentum fund. In fact, there are more funds that have a value orientation (at least, that's what they say) than other styles and value typically has very low churn. Most active mutual funds, don't beat their benchmarks. Most investing requires the manager to hold on to stocks for a long time, but that's also a sureshot way to bleed assets and get fired. Active managers doing Nothing? Unpossible! So they have two choices: 1. Hug the index and deliver predictable returns while spinning nice stories. 2. Be seen as doing something. Trading just for the heck of it without any logic because in India, funds don't pay taxes on churn. If you're gonna take career risk, might as well go all-in. The same applies to managers and CEOs as well. It's better to be throw shit against a wall and see what sticks than be deliberate about what you do. This becomes even tougher when you have VC money because you then have external pressure to deliver performance. Companies often end up doing too many things and stretching themselves thin to appease investors than do more by doing less. Running a business with a curation mindset requires being contrarian. This requires people to jettison some deeply ingrained values and beliefs. If there's one bet I'd never take, it's to bet against human inertia. It's because of the human tendency to prefer doing nothing over something, that we'll always prefer doing more, even if we know it's futile. Doing more with less is also at the heart of the _"_[Degrowth][13]" movement. The degrowthers like Jason Hickel [argue][14] that the only way to save our planet is to move away from an economic paradigm that prioritizes economic growth, production and consumption. That sound awfully like a more curated world. A world where people are more deliberate about the tradeoffs between growth and planetary wellbeing. But of course, degrowth has a lot of critics like [Matt Klein][15] and [Branko Milanovic][16]—not unlike critics of MMT. #### Investing as curation? There's a nice section on Michael Moritz, the legendary partner at Sequoia who led investments in Google and PayPa on the parallels between investing and curation:

Moritz adjusted his companies to the reality as he saw it. He realised that you shouldn’t just select the right start-up, you then needed to continuously mould, adjust, rearrange it for reality, for constant change. You didn’t just invest in Google, you worked with the company to help it become Google.

Moritz resembles a curator as much as an old-style investor. The skills involved substantially overlap. In a complex scenario he found a new way of doing business that reacted to change. It’s a skill replicated by the best investors like Warren Buffett. Moritz claims it’s hard to find new VCs. It’s an exceptional skill set of selecting and arranging that is not easily replicable.Moritz adjusted his companies to the reality as he saw it. He realised that you shouldn’t just select the right start-up, you then needed to continuously mould, adjust, rearrange it for reality, for constant change. You didn’t just invest in Google, you worked with the company to help it become Google.

Curation: The power of selection in a world of excess—Michael Bhaskar ### Is curation a cure for all ills? If you read the book, you might get a feeling that curation is a solution to mos problem, eventhough the author takes great pains to say that it isn't—it's one tool in our toolkit. Curation isn't just human, it could be algorthmic too. There are brillaint examples of algorithmic cuaration and human curation in the book. Here's a quote from the book that was stuck in my head. It's of Brian Armstrong, the co-founder of canopy.co speaking to Bhaskar: > We’ve only seen the very beginning of machine-driven curation – it’s still super-early in the game. People have been hand-picking things for thousands of years in their homes and shops, so human curation has a huge head start. Even though it’s becoming more and more pervasive, algorithmic curation is not yet a solved problem. Algorithmic curation will definitely get better, but it won’t ever have discerning taste or a unique point of view. Brian Armstrong, Canopy | Curation: The power of selection in a world of excess—Michael Bhaskar Curation really does help make sense of this world of excess. But we need to be equally wary of the side effects. Algorithmic curation on it's own doesn't work. In fact, except for Amazon to an extent it sucks. There's an interesting example contrasting Apple App Store which has human curators behind the scenes and Android Apple Store which is algorithmically curated. The bottom line is that Android Store sucks. But the way I think about it, there are some side effects too, especially on the internet. I'm still a little hesitant to call myself a "curator" when the job of an actual curator involves touching the Monalisa. But like the author says in the book, the term is now a victim of mainstream appropriation and we have to make our peace with it. Human brain natural curation Deepstash, Morozov, crypto syllabus, DJ Taptu A guy asking your interest Awl Pocket and it's curation page. Instatpaper email My idea about a newsletter curated to your tastes Curation and Trust Context-stripping – everything isn't curation Collecting, filtering, sifting Tastemakers -Seth godin Curation is a business model Present in the middle ages just had enough information equivalent to a newspaper compared to today where we get on 75 years papers We're all curators – signalling Good curation – value. Bad Big tech curation – Amazon, Spotify, Netflix apple curation-slcoal.media outrage Now that I have read the book I see curation everywhere in fact my next book which I unknowingly pic as soon as I finished reading curation on my Kindle and this is a physical book was 50 economics classics by Tom butler Bowden. The book is a distillation of 50 of the biggest economic ideas from a variety of authors ranging from liyakat Ahmed friedman drucker polony samuelson schumpeter to Amartya Sen and Max Weber. Somebody who's very interested in the dismal science of of economics and the snake study and astrology of micro masturbation I probably wouldn't have studied all the ideas that having distilled of the famous economist in the book but he has done a brilliant job of summarising some of the biggest economic ideas that are enough to give an additive science to my world view of how I see the markets and economics given that either work in the financial services industry. I have a feeling that this book of this book will become more popular as time goes on One of the risksis that in a world started for context, any activity that is stripping, culling, summarising, will be seen a net negative. Context stripping maybe be rebranded as curation. Brevity isn't always good. Sometimes you need a muddled mess because somethings sometimes are just that –mudess messes. Curator economy will probably be like the creator economy and the Gig Economy before that. 80/20 Attribution, credit, payments Moreover — [1]: https://www.youtube.com/watch?v=nJ5WHZARhvY [2]: https://www.amazon.in/Curation-Michael-Bhaskar/dp/0349408696/ref=sr_1_3?crid=2QZH9P5XWY1RK&keywords=curation&qid=1646231952&sprefix=curation%2Caps%2C219&sr=8-3 [3]: https://boingboing.net/2015/01/25/when-shirts-cost-3500.html [4]: https://www.bbc.com/news/magazine-30849473 [5]: https://www.internetlivestats.com [6]: https://www.apa.org/science/about/psa/2009/10/sci-brief [7]: https://en.wiktionary.org/wiki/curare [8]: https://trends.google.com/trends/explore?date=all&q=curate,curation,curator,curated [9]: https://twitter.com/Choire?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor [10]: https://www.leidyklotz.com/other-work [11]: https://www.valueresearchonline.com/stories/45978/why-are-funds-having-high-portfolio-turnover/ [12]: https://awealthofcommonsense.com/2013/10/costs-matter/ [13]: https://www.degrowth.info/en/degrowth [14]: https://www.vox.com/future-perfect/22408556/save-planet-shrink-economy-degrowth [15]: https://theovershoot.co/p/pro-growth-isnt-anti-environment?s=r [16]: http://glineq.blogspot.com/2017/11/the-illusion-of-degrowth-in-poor-and.html

Niall Ferguson on money and cryptocurrencies

Sat, 26 Feb 2022 00:00:00 GMT

Niall Ferguson is one of the smartest and the most provocative financial historians of our time. His controversial reading of history has earned him a reputation as an enfant terrible among historians. He's also a prolific author with 16 books on subjects ranging from the history of money, Rothschilds, war, Kissinger, and pandemics. His name most often comes up in the context of cancel culture, wokism and is often labeled as a conservative. But this whole notion of assigning labels not only doesn't do justice to the man's intellect, but is also stupid. As he often says, people with “anti-liberal” views are labelled as conservatives. I didn't know a whole lot about him. Whatever I knew was mostly from the articles and reviews of his books. Last year he had appeared on the [Lex Fridman Podcast][1], and I heard the episode last week—it was absolutely fascinating. A few minutes into the conversation on money and it immediately became clear why he's considered one of the best historians of our time. His vast grasp of economic and financial history and his ability to marshal it in defense of his contrarian and revisionist arguments is impressive, to say the least. The first part of the conversation is about the controversial [University of Austin][2]. It's a new university by a bunch of controversial, “conservative,” and “anti-woke” figureheads like Bari Weiss, Steven Pinker (he quit), Heather Heying, and Joe Lonsdale among others. They want to offer courses that are either banned or aren't offered by the “liberal” education system. He talks about the rampant censorship, wokeness, and stifling of free speech at universities. He makes a passionate case for old-school university values, academic freedom, and not having to live in constant fear of saying the wrong thing and getting cancelled. Enter The University of Austin—a safe space for people who want anti-cancel culture, and anti-woke perspectives. I wasn't too interested in this part of the conversation because I haven't kept close track of the rising wokeness, cancel culture, and the culture wars. I don't really look forward to taking a dip in those putrid waters. What I was interested in were his perspectives on crypto, money, and DeFi. Crypto at this point is like living right next to relatives you absolutely despise. You have to grit your teeth and still smile at them every morning. So, I've been trying to learn about crypto in the hopes that I don't become a victim of poverty. Cryptocurrencies might just be a decade old, but history is littered with [private][3] and [alternative currencies][4]. Having a historical perspective is quite useful in understanding this moment when many people want to tear down the fiat money system and replace it with dog coins, ass coins, and cat coins. The Chinese guys are real pricks. They've been messing with us throughout history. It's not just them eating bats, causing a global pandemic, and almost wiping humanity sci-fi movie style. Remember that old guy who cast the _“may you live in interesting times”_ curse? What an asshole! There were a lot of interesting takeaways from the podcast, so I made some notes. I've added snippets from the conversation transcript and related links in italics. ### On money {#on-money.wp-block-heading} The origins of money can be traced back 5000 years to ancient Mesopotamia. Clay tablets were used to record transactions between debtors and creditors. _You can check out images of these Cuneiform tablets on [The Metropolitan Museum's website][5]._![](/blog-images/Cuneiform-tablets.jpg) Trust is what makes money work. Anything can be money as long as it can be used to record a relationship between a debtor and a creditor. Ultimately, money is a manifestation of trust. Money crystallizes the relationship between debtors and creditors. > The whole thing depends on our collective trust to work. I had to explain this to Stephen Colbert when he said “um, so Neil could I be money?” and I said, yes. You know we could settle a debt with a human being that was quite common in much of history, but it's not the most convenient form of money, it has to be convenient. The shortage of coinage after the Black Death in the 1300s led to the birth of bills of exchange. They were the first peer-to-peer network-based payments system that wasn't based on money, as defined as coins and notes—they were just IOUs. Bills of exchange were DeFi (Decentralized finance) before DeFi, and they supercharged global trade. One of the highlights of the conversation was about monetary stability. He made a fascinating point about how the current stability of the global monetary—barring the occasional crises, of course, system—is an aberration. It’s an interesting notion, given that we’re living through a moment in history where we’ve probably never seen monetary policy experiments on such a scale. If you take a sweeping look over hundreds of years, history is littered with failed monetary systems and currencies. Over the past 500 years, multiple currencies and coinage systems have been decimated because of wars and inflation. Several currencies in Europe, including the Russian, German, Polish, Serbian and Austrian failed in the 1900s during World War 1.![](/blog-images/Weimar.jpg) _On a related note,_ _Ray Dalio made a similar point_ _in a recent post about how most currencies throughout history have failed:_

Of the roughly 750 currencies that have existed since 1700, only about 20 percent remain, and all of them have been devalued. If you went back to 1850, as an example, the world’s major currencies wouldn’t look anything like the ones today. While the dollar, pound, and Swiss franc existed in 1850, the most important currencies of that era have died. In what is now Germany, you would have used the gulden or the thaler. There was no yen, so in Japan you might have used the koban or the ryo instead. In Italy you would have used one or more of six currencies. You would have used different currencies in Spain, China, and most other countries as well. Some were completely wiped out (in most cases they were in countries that had hyperinflation and/or lost wars and had large war debts) and replaced by entirely new currencies. Some were merged into currencies that replaced them (e.g., the individual European currencies were merged into the euro). And some remain in existence but were devalued, like the British pound and the US dollar.

The other fascinating point he makes is that financial innovation is the result of a series of rolling crises. > We had to invent the bond market in the 18th century to cope with the problem of public debt which up until that point had been a recurrent source of instability, and then we invented equity finance because bonds were not enough, so I would prefer to think of the financial history as a series of crises really that are resolved by innovations and in the most recent episode very exciting episode of financial history something called Bitcoin. ### On Crypto {#on-crypto.wp-block-heading} Satoshi didn't create Bitcoin over fears of a breakdown of the fiat-based financial system. Bitcoin was a response to the need for internet native money. The crypto financial revolution is way past that point where it can be killed. It has sufficient adoption and momentum behind it to survive existential threats like the Chinese mining ban. It's tough to figure out the damage that regulators will cause with crypto regulation. They might not be able to kill crypto, but they can kneecap it with regressive regulations. Central Bank Digital Currency (CBDC) is a dangerous idea that makes Chinese-style surveillance possible. CBDCs are a way for vested interests to stop the march of crypto. Bitcoin won't replace fiat currencies. Bitcoin is an option on digital gold. > No, I think what bitcoin is this was a phrase that I got from my friend Matt McLennan (First Eagle) is an option on digital gold. So it's the gold of the system, but currently, it behaves like an option that's why it's quite volatile because we don't really know if this brave new world of crypto is gonna work but if it does work then bitcoin is the gold because of the finite supply. Holding some crypto given the post-pandemic debt binge, the low bond yields and a looming tech bubble isn't a bad idea. The IRS won't care about crypto as long as you pay taxes. Crypto is a portable store of wealth, especially in failed and dangerous countries like Venezuela and Zimbabwe. Being 100% in crypto if there's a World War 3 is a terrible idea because it will also be a cyberwar. Diversification is always a good idea. Smart contracts can eliminate a lot of simple and some seemingly complex financial transactions like mortgages and insurance. The reason mortgages and insurance have 1000s of pages of terms and conditions is because of regulatory “ass covering.” Small and poor households are at the mercy of big banks. Crypto and other fintech solutions can be a solution. > A lot of financial transactions have the potential at least to be simplified automated, turned into smart contracts that that's probably where the future goes. I can't see an obvious reason why my range of different financial needs, let's think about insurance, for example, will continue to be met with instruments that in some ways are 100 years old. So I think we're still in an early stage of a financial revolution that will greatly streamline how we take care of all those financial needs that we have uh mortgages and insurance leave leap to mind you know most households are penalized for being financially poorly educated and confronted with oligopolistic financial services providers. Money remittance is punitively costly, and tech can solve that. The financial system that the west builds can't be similar to China, that's based on surveillance and data plundering. Modelling payments, and CBDCs on the Chinese model is a terrible idea. Those were some of the highlights about money from the conversation. The rest of the conversation is about history, pandemics, politics, and philosophy. One reason why he evokes such strong reactions among people is because of his counterfactual treatment of history—looking at history from a _what if_ lens. One counterfactual he talks about in this conversation is that if Britain had stayed out of World War 1 and Germany had won, it would've just been a European war and Hitler would've just been a failed artist. You need some heavy brass balls to make that argument. Similarly, his other controversial counterfactual, which isn’t in this conversation, is that the British Empire was actually a force for good. Just thinking about the fact makes me squirm, but he’s written a book on it. Here’s his explanation from his conversation with [Tyler Cowen][6]: > Well, my heretical position — and it’s been my view for at least 20 years — is that the benefits of the British Empire outweighed the costs. If one does a cost-benefit analysis of British imperialism, one comes to the conclusion — if one is in any way rigorous about it — that it was a remarkably benign empire compared with other available empires. > And the counterfactual is crucial here because those people on the left who make a living out of comparing the empire to the Third Reich are just not being rigorous. They’re committing category errors, and more importantly, they’re not positing realistic counterfactuals.

### Assorted stuff {#assorted-stuff.wp-block-heading} After listening to the podcast, I was smitten by the man 😂 I've added The Ascent of Money, [Doom, and][7] The House of Rothschild ([Part 1][8], [Part 2][9]) to my Marathahalli traffic jam long book wish list. These are fascinating rabbit holes to go down. Here are some related things I read. [After Crypto’s Cold Winter, Expect Springtime for Web 3.0][10] [50 Years After Going Off Gold, the Dollar Must Go for Crypto][11] [1]: https://lexfridman.com/niall-ferguson/ [2]: https://www.vanityfair.com/news/2021/11/bari-weisss-university-hitting-speed-bumps [3]: https://www.econlib.org/library/Enc/CompetingMoneySupplies.html [4]: https://www.cato.org/blog/fable-cats [5]: https://www.metmuseum.org/art/collection/search/321753 [6]: https://conversationswithtyler.com/episodes/niall-ferguson/ [7]: https://www.amazon.in/gp/product/B08FX6YHFV/ref=dbs_a_def_rwt_bibl_vppi_i3 [8]: https://www.amazon.in/House-Rothschild-Moneys-Prophets-1798-1848/dp/0140240845/ref=sr_1_19?qid=1645627388&refinements=p_27%3ANiall+Ferguson&s=books&sr=1-19 [9]: https://www.amazon.in/House-Rothschild-Worlds-Banker-1849-1999/dp/0140286624/ref=sr_1_20?qid=1645627388&refinements=p_27%3ANiall+Ferguson&s=books&sr=1-20 [10]: https://www.bloomberg.com/opinion/articles/2022-02-06/niall-ferguson-crypto-s-cold-winter-will-give-way-to-a-red-hot-future [11]: https://www.bloomberg.com/opinion/articles/2021-08-15/niall-ferguson-nixon-the-gold-standard-and-a-bitcoin-bonanza

There’s too much of everything

Wed, 19 Jan 2022 00:00:00 GMT

The amount of new content created every day on the internet is astounding. It goes without saying that a lot of it’s nonsense, but there’s plenty of good stuff. It probably takes a few months to consume what you liked and saved just today. It’s either that or I’m bloody lazy 😅 This has become such a problem that “_curation”_ has become the new buzzword and a business model unto itself. At the risk of sounding like a snobby douche, I’m fascinated by this “problem” of overload. I was reading _[Curation: The power of selection in a world of excess][1]_ by Michael Bhaskar, and here are a few quotes that kinda stuck with me: > *We solved the problem of insufficiency, only to find it was replaced by abundance. As a result we’ll have to curate far more effectively. In order to prosper we’ll start to appreciate the value of less, of simplicity in a complex world.* > > *In the context of excess, curation isn’t just a buzzword. It makes sense of the world.* > *‘We live in an age of electricity, of railways, of gas, and of velocity in thought and action. In the course of one brief month more impressions are conveyed to our brains than reached those of our ancestors in the course of years, and our mentalising machines are called upon for a greater amount of fabric than was required of our grandfathers in the course of a lifetime.’* > > *Each person alive now has 320 times as much information available to them as in the whole Library of Alexandria which would have so concerned Seneca. If James Crichton Browne worried about information overload in 1860, it’s difficult to sense what he would make of it today.* It’s true. We live in an age of abundance, and we’re losing our minds. You know something is a problem and an opportunity when VCs start paying attention to it and writing glossy takes. The VCs have been trying to pump up this notion of curators as creators. Here’s [Gaby Goldberg of Bessemer][2]: > Curators are the new creators, and as consumers, we’re going to be willing to pay someone with good taste to help us sort through the ever-growing mass of information at our fingertips. I kinda agree. Also, now that the VCs are paying attention, the idea of “curation” will probably to shit very quickly. Pretty much like the notion of the “sharing economy”, which was nice of saying we’re exploiting cheap labour, but those are arguments for another day. I think this notion of curation will increasingly become popular and mainstream as the internet becomes an ever-larger firehose of content. There’s an incredible opportunity for people with a knack for reducing choice by culling things, and I think there’s a huge audience willing to pay. But I also think that we’ll pretty quickly reach the stage of curating the curators. I don’t know, maybe I’m wrong. In any case, I’m utterly fascinated by the problem of abundance of information. I think It’s a fun problem, one we keep talking about at work as well. Consuming information on the internet has become an adventure in itself. > *“Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to."
"I don't much care where –"
"Then it doesn't matter which way you go.”
― Lewis Carroll, Alice in Wonderland* This blog was originally a place for me to keep track of how this notion of curation shapes up, and to share interesting things I come across. Will start trying harder to force myself to share and write about interesting things in the adventure I’ve chosen—mostly finance, markets, astrology (economics), and some assorted stuff. That’s it. I got no other sales pitches are anything. Doing this because it’s bloody fun! 😀 [1]: https://www.amazon.in/Curation-power-selection-world-excess-ebook/dp/B018R3FIXU [2]: https://gabygoldberg.medium.com/curators-are-the-new-creators-the-business-model-of-good-taste-5852727d4b54#:~:text=Curators%20are%20the%20new%20creators,%20and%20as%20consumers,%20we',of%20information%20at%20our%20fingertips.

What a time to be in the markets

Tue, 10 Aug 2021 00:00:00 GMT

Today was a bad day for smallcaps. The Nifty Smallcap 250 index was down by 2.59%. No, this isn't a post about "smallcaps are risky". Although, I don't who reads this thing, but I'll say it – smallcaps are super risky. DSP Smallcap Fund was down 65% at the depths of the 2008 bear market. ![](/blog-images/DSP-smallcap.png) But anyway, what was funny about today was that, for the first time I've been on Twitter, I saw the #smallcap trending. I've seen #Nifty trend multiple times in the past couple of years.

![](/blog-images/smallcap-2.jpg)

This was quite surprising given that the smallcap index is down just about 5%+ over the last week. ![](/blog-images/small-index.png) To put that into perspective, the Nifty Smallcap 250 index is up nearly 170% since its March lows. Even considering the fact that indices hide some of the sharper falls in individual smallcap names, this was funny. This is quite interesting if you think about it. This year, the GameStop and the AMC sagas highlighted the power of social media in accelerating the trends in the US. We haven't had similar social media power manias around stocks in India, except for the displays of euphoria whenever ITC crosses Rs 200. Just like the rapid financialization of everything from art to sneakers and Pokemon cards in the US, we are seeing the beginnings in India. It's still a small market with just about a couple of crore unique investors. Most of the money is still stuck in FDs. But financialization is picking up pace for sure. But in the last couple of years, I get the sense that social media and messaging platforms like Telegram and WhatsApp have been having a measurable influence on stocks, mostly garbage penny stocks. But with #smallcaps trending today is any indication, I think, things will be more fun in the days ahead in bigger stocks. In all likelihood, social media platforms may substantially accentuate trends both on the upside and on the downside. There's plenty of research [1, 2] that shows the impact of social media chatter on volatility, turnover and shorting. Most of this is in the US, but with hypersocialization, I have a feeling we'll see some fun incidents in the Indian markets soon. This also raises the question of what should the regulators do, just like we saw in the case of the SEC at the height of the GameStop mania, but this is a tricky issue, to say the least. But assuming we see the amplification of trends due to social media, a good time to be a trend follower or a momentum investor/trader?

Miser and miserable

Thu, 01 Jul 2021 00:00:00 GMT

On balance, the personal finance bloggers and the gurus have done a lot to educate people. But sometimes, it feels like they undo a lot of that work with ridiculous nonsense that they preach. If you listen to some of these people, you'll learn that you're ruining your retirement just by drinking a cup of coffee every day. Instead of spending on coffee, you should apparently be investing that money and letting it compound at 15%. And then there are the miseryporn people. These people have somehow deluded themselves into thinking that misery in the present is the price you pay for pleasure in the future. By now, I've realized that trying to psychoanalyse these people is like trying to understand what _Keeping Up with the Kardashians_ is about. Came across this blogpost today that debunks this nonsene: > When we get into things like houses, cars and kids we start to get into territory involving deep-seated emotions around values and status. Much of the consumer debt industry in America is built on a deep reluctance to sacrifice status to save money. If anything, the culture encourages the opposite. > This is not an argument for hairshirt frugality. If you want to live a high status lifestyle, you either need to make a whole lot of money or take on a whole lot of debt. > Treat yourself on the coffee. Save your energy for the tough. stuff. Let people live. Let them drink coffee, wear decent clothes, use soap. There are far bigger things in things in life that affect people's finance than all these trivial things.

Never better or getting worse?

Wed, 30 Jun 2021 00:00:00 GMT

If you listen to Steven Pinker, he'll tell you the world has never been a better place:

Some graphs track increases in good things: income, longevity, sustenance, safety, literacy, democracy, civil rights, leisure and happiness. Others show declines in bad things: poverty, infant mortality, famine, state-sponsored torture, capital punishment, war, homicides, lynchings and racist attitudes. Together, the graphs demonstrate that we are wealthier, healthier, freer, more peaceful, smarter and nicer than we have ever been. Not by a little, but by a lot.

But if you open Zerohedge for just 20 seconds, you'll not only find that the markets apparently will go to zero, even humanity. The battle between the optimists and the pessimists is a bit like the argument between cigar butt value investors and moving average quants. It'll never end. But, if you were to believe the liberal dishrag that is The Economist, certain parts of the world are getting worse by some measures:![](/blog-images/Peace-index.png) The number of people being displaced are at an all-time high: > People from just five countries account for about half of those displaced abroad (see chart). The biggest share have left Syria, where the civil war which began in 2011 has settled into a bloody stalemate. Almost 5m Venezuelans have escaped an economic crisis and political repression in their home country. Afghans subject to terrorism and insurgency, and South Sudanese caught in the middle of fighting have also fled their homes. In Myanmar, more than 1m people have escaped civil war and the genocide of the Rohingyas. ![](/blog-images/Refugees.png) The other problem with such profound issues is the tyranny of the aggregates. > The death of one man is a tragedy. The death of millions is a statistic. Josef Stalin.

I don't mean to be insensitive, but such debates also show the power of framing and the power of narratives. The same set of facts can be spun to show things in an extremely positive or negative light. And of course, like research shows, negativity will always have positivity for breakfast. But, If you veer more toward the negative side, then you'll run the risk of being painted as a Cassandra. Like with Perma bears like Marc Faber, John Hussman, and Peter Schiff. They've been pointing to some perfectly logical data points to support their position, but they've been spectacularly wrong for decades. On the other hand, the Perma bulls have used the posturing of the Perma bears to spin their bullish narratives. And two people can have wildly different views on being optimistic or pessimistic by looking at the exact same things. And two people can have polar opposite views on being optimistic vs being pessimistic. Here's Morgan Housel: > Hearing that the world is going to hell is more interesting than forecasting that things will gradually get better over time, even if the latter is accurate for most people most of the time. Pessimism can be hard to distinguish from critical thinking and is often taken more seriously than optimism, which can be hard to distinguish from salesmanship and aloofness. Morgan Housel And here's Adam Grant: I suppose what I'm trying to say is that we're all slaves to narratives. Being dispassionate and objective about something is pretty much almost impossible. And we're always operating with just a slice of information and context, and we over extrapolate those things to suit our priors. And our conscious brain has just 512KB of memory. It's nowhere near suited to large amounts of facts and forming opinions. Availability bias is strong among all of us, and we're mostly acting based on salient information. Of course, the easiest thing is to say that people should consider all the facts and make judgements, but that's silly if you think about it. By the time it reaches us, most of what we know is usually lost in translation and slowly stripped of context. This is why, in things like investing, unless you've reached a zen state of mind, investing based on beliefs and feelings can be dangerous. It might work for a few, but not for everyone. Of late, everyone touts systems and automation as a solution to these human foibles. But they aren't a silver bullet either. Systems and automated processes reflect the biases of the maker. Having said that, a set of robust processes rooted in evidence are almost always better than the human gut. Which begs the question, how do you form opinions in real life? I'm no Munger fanboy, but it does remind me of a quote of his:

I never allow myself to have an opinion on anything that. I don't know the other side's argument better than they do.

Charlie Munger This was a lot of meandering and going to many places without getting anywhere 😃 But hopefully, as I write more, I'll be able to get to places a lot quicker than this piece. Apologies if you've read this piece and wanted to delete the internet.

Stop Zuckerberg!

Tue, 29 Jun 2021 00:00:00 GMT

This week's edition of the _Nonzero newsletter_ was quite interesting. It chronicles all the shenanigans of Mark Zuckerberg since he was at Harvard. The post paints Zuck almost as a modern-day Darth Vader. Of course, you might agree or disagree depending on your vantage point, and I don't want to get into passing moral judgements on Zuck's character. But here's an interesting passage that kinda gives a sense of what I'm talking about:

And after the ConnectU folks lobbied the Harvard Crimson to write a story about their claim that Zuckerberg had stolen their idea, Zuckerberg used private Facebook login data to hack email accounts so he could see what the two Crimson journalists working on the story were saying about it. He once texted a Harvard friend about how much power Facebook gave him: “if you ever need info about anyone at harvard just ask. i have over 4000 emails, pictures, addresses… people just submitted it. i don’t know why. they ‘trust me.’ dumb fucks.”

I could go on, but you get the idea: If we could design a moral gyroscope to guide the man who runs the most powerful conglomeration of social networks in the world (Facebook and Instagram, not to mention WhatsApp), it probably wouldn’t be an exact replica of Zuckerberg’s moral gyroscope.

More importantly, the post references a new study by Steve Rathje, Jay J. Van Bavel, and Sander van der Linden on the role of social media platforms in political polarization. A few interesting findings:

1. An analysis of Twitter accounts found that people are increasingly categorizing themselves by their political identities in their Twitter bios over time, providing a public signal of their social identity (27). Additionally, since sharing behavior is public, it can reflect self-conscious identity presentation

2. Messages that fulfill group-based identity motives may receive more engagement online. As an anecdotal example, executives at the website Buzzfeed, which specializes in creating viral content, reportedly noticed that identity-related content contributed to virality and began creating articles appealing to specific group identities

3. First, we looked at the effect of emotional language on message diffusion. Controlling for all other factors, each additional negative affect word was associated with a 5 to 8% increase in shares and retweets, except in the conservative media Facebook dataset, where it decreased shares by around 2%. Positive affect language was consistently associated with a decrease in shares and retweet rates by about 2 to 11% across datasets.

4. Across datasets, each political out-group word increased the odds of a retweet or share by about 67%

5. The average percent increase in shares of political out-group language was about 4.8 times as large as that of negative affect language and about 6.7 times as large as that of moral-emotional language.

This thread by Steve Rathje has a more exhaustive summary. These results broadly confirm other studies. Negativity and adversarial posturing generate the most amount of engagement on Facebook and Twitter. In that sense, we could say that social media platforms have an incentive to perpetually fuel outrage among users by algorithmically feeding us content that conforms to the user's priors. And the end result is that people are slowly transforming into rage-filled monkeys engaging in pointless partisan arguments on social media. This ties back to the previous post I wrote about the incoming regulatory assault on big tech and social media platforms. As we slowly begin to grapple with the enormous real-life consequences of these platforms, we're bound to see regulatory actions, both good and the ugly. No matter what, this won't be pretty.

'Work from home: good, bad, or ugly?'

Mon, 28 Jun 2021 00:00:00 GMT

There was a lot of chatter about work from home last week. A lot of these were the same old debates about whether work from home is good or bad. Is work from home increasing productivity or hurting it? It started with Marc Andreessen's Q&A with Noah Smith

It’s hard to overstate the positive shock that remote work works. Remote work isn’t perfect, there are problems, but virtually every CEO I’ve talked to over the last year marvels at how well it works. And remote work worked under the extreme duress of a pandemic, with all of the human impact of lockdowns and children unable to go to school and people being unable to see their friends and extended families. It will work even better out of COVID. Companies of all shapes, sizes, and descriptions are retooling their assumptions on geographic footprint, where jobs are located, where employees are located, how offices are configured, and if there should be offices at all.

Marc Andreessen And then another with the recently cancelled Antonio García Martínez in which he said: > Any company that was running a physical plant had to shut down that plant, but any company running on knowledge work, and all of the companies that have any knowledge-work component, kept working. Car companies had to stop making cars, but they were able to keep designing cars. The Hollywood studios could no longer film on set, but they could continue to do post production and animation. Basically there is not a single case I know of a company whose knowledge work operations were disrupted by this. The entire financial system kept working, the stock exchanges have worked, the banks worked, the Internet kept working, all these things just kept working. Marc Andreessen Then Dustin Moskowitz, the co-founder of the work management tool published a thread on why hybrid work arrangements won't work And today, The Ken published a piece on how work from home is leading to increasing working hours, decreased productivity, attrition and workplace disillusionment. > A study on professionals at a large Asian IT services company, conducted in May 2021 by the US-based Becker Friedman Institute for Economics, supports this. The total hours worked increased by roughly 30%, including a rise of 18% in working after normal business hours. Average output, however, did not change significantly. Consequently, productivity fell by about 20%. Charlie Bilello had a couple of polls on the same subject, the results of which confirm that the shift towards remote work isn't a passing phenomenon and is here to stay. Which begs the question? Is work from home good or bad? Will it increase productivity or decrease productivity? I'll take the cowardly path to answer this. I don't think there are binary answers here. Taking a reductive approach to thinking about this problem will lead to wrong conclusions and, by extension, misguided prescriptions. For some industries, remote work is a boon, and for some, not so much. Moreover, in jobs that can be quantified, measuring productivity is easy, but not all jobs, particularly those in the knowledge work domain, can be measured. We're still just a year into this experiment, and the data that is being analysed can be quite noisy. The bigger problem in all these debates is the binary phrasing of whether remote work is good or bad. There's no right answer, and it's context-dependent. You could reasonably make an argument that it is a net positive and a net negative too. For every Ken article that shows remote work is hurting productivity, I can cite a paper that shows the opposite. Here's a concluding remark from this paper by Jose Maria Barrero, Nicholas Bloom & Steven J. Davis: > We also estimate that higher levels of WFH will boost productivity by about 4.6 percent. Over half of this productivity gain reflects the savings in commuting time afforded by WFH. These true productivity gains will go largely unrecorded in conventional productivity statistics, because they do not encompass the effects of reduced commuting time. Indeed, when we mimic the conventional approach, we estimate a comparatively paltry 1.0 percent productivity boost from higher WFH levels in the post-pandemic economy. While it's tempting to jump to conclusions, I think we're still very early in this experiment. Steven Sinofsky, in this brilliant piece, [said it best][1]: > At the broadest level the next years will be about experiments, but I don’t like that word because it feels very lightweight and ephemeral. There was time when something like “buy a PC for a marketing executive” was the kind of experiment I’m talking about. I don’t literally mean an A/B test, but rather an alternate model of working — something new that is tried with all of the effort and zeal that any existing process would have been applied. The only thing experimental about it is that many different companies will be trying many different approaches all at once. Over time as people move between companies, and as companies rise and fall, a new set of norms and practices will be established. These will never be as prescriptive as some would like them to be — business and management are social sciences and for every solution there is an abundance of context that makes all the difference. Then there's the question of the economic impact. Again, I think this needs more research, but there was some preliminary research by Kristian Behrens, Sergey Kichko, Jacques-François Thisse, which gives you some sense: > First, we find that the long-run effects of telecommuting are all described by bell-shaped curves: Telecommuting first increases skilled and unskilled workers' productivity and GDP up to some threshold. Beyond that level, a higher share of home-workers reduces the strength of the knowledge and information spillovers which, therefore, do not produce desirable effects. Too much WFH may thus be detrimental to long-run innovation and growth due to limitations of information and communication technologies as well as foregone agglomeration economies in the form of face-to-face contact and knowledge spillovers. > We find that GDP rises slowly and monotonically with the WFH share in the short-run; it is bell-shaped in the long-run. Hence, the short-run benefits may send inappropriate signals about the long-run effects of WFH when all markets have adjusted. > Lastly, Figure 3 shows that telecommuting will exacerbate economic inequality by making skilled workers better off than unskilled workers. This will be a fascinating debate to watch out for. As more companies and more data comes out, we'll have a better picture of the impact of remote work at large. [1]: https://medium.learningbyshipping.com/creating-the-future-of-work-449c66707e35

Trillion dollar problems

Fri, 25 Jun 2021 00:00:00 GMT

Microsoft hit $2 trillion in marketcap a few days ago. There was a time when a trillion meant something, but it doesn't seem so anymore. Microsoft and Apple now are worth over $2 trillion. It's a silly comparison, but for context, the market cap of all listed companies on NSE is a little over $3 trillion. ![](/blog-images/Big-tech.png) The growth of big tech companies has been phenomenal. Here's a look at the historical sector composition of the S&P 500. The way they've replaced the old economy and staid old names is remarkable. ![](/blog-images/SP-500.png) Not just the indices, these big tech companies now dominate our lives. From the phones we use to the entertainment we consume, the big tech companies, particularly the FANMAG companies (Facebook, Amazon, Netflix, Microsoft, Apple, and Google are dominant. This dominance of big tech companies has raised a lot of concerns worldwide. On the one hand, people want tighter regulation of these companies, and on the other hand, there people calling for an outright breaking up of these companies. Heading in the next decade, this regulation of these big tech companies will be front and centre. We're already seeing the first wave of regulations, from the billion-dollar fines and the continued investigations in the European Union to the latest big tech reform and antitrust bills in the United States. But regulating these big companies and platforms isn't as easy as just breaking them up. The debate about regulating technology companies and platforms has become about scoring political points and posturing. Nuance has been a casualty in these discussions. There are no black and white solutions. These companies and platforms are neither 100% evil nor 100% innocent. For example, in April 2012, leaked documents showed that Google used data from this ad exchanges to give its own ad buying [an upper hand][1] over competitors. The EU has fined Google billions for abusing its dominance and stifling competition. But millions of people worldwide [benefit from Google's free services][2] like Gmail, Maps, YouTube, etc. The same goes for most tech companies and platforms. Most regulatory proposals are simple solutions for complicated problems based on [rules and understanding from a bygone era][3]. There will be real-life consequences to any regulatory actions and some nasty trade-offs. But regulations are coming, and that's for sure. And these regulations will have a real-life impact on you and me. Be it on the products we use or the tech-focused funds we invest in our portfolios. However you slice it, big tech regulation is one of the defining issues of our times. Watching how regulators and governments tackle the issue will be fascinating to watch. **Further reading** Matt Stoller Benedict Evans Stratechery BIS The Conversation

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[1]: https://www.adexchanger.com/platforms/what-pubs-and-ad-tech-really-think-of-googles-project-bernanke/ [2]: https://marginalrevolution.com/marginalrevolution/2019/04/should-we-break-up-the-big-tech-companies.html [3]: https://www.ben-evans.com/benedictevans/2020/8/10/would-breaking-up-big-tech-work

Hello, world!

Thu, 24 Jun 2021 00:00:00 GMT

Yay! I am now another pretentious idiot on the internet with a blog. The reason why I started this blog is I love writing and learning about things, but I am too lazy. Sometime back, I came across this whole notion of "learning in public" and it seemed like a perfect antidote to my laziness. Like most things on the internet, this has probably become another one of the douchey, pretentious bullshit trends. But strip away the nonsense, and the logic remains true. The commitment of learning and writing in public is a brilliant hack. One of the best ways to learn is to write about the things you learn, hence this blog. I've also been in awe of people like Jason Kottke and Tyler Cowen, among others, who consume copious amounts of information and distil them on their blogs almost every day. That's just insane. This blog is also a lame attempt to imitate them. I've mostly been interested in finance and new media broadly, but I wanna expand my interests. So, this blog is also a hack for me to go down more rabbit holes and write about them here. If I've wasted your time, you're welcome.