Today’s post is brought to you by DONUTS (and written by Alec Liu). Not sure what DONUTS is? Well… stay tuned, you’re in for a treat.
Sometimes in life, things can go terribly wrong despite the bestest of intentions. Maybe you twist an ankle during a ski accident. They do some surgery stuff to repair the ligaments. You’re going to be OK, but they also give you some opioid-based pain meds for the recovery process, and maybe in the beginning, it was an honest sort of habit, doctor’s orders, after all. You’ve never had a problem with drugs, and you certainly don’t plan on having one in the future.
But at some point, you crossed the Rubicon, some invisible threshold into a darker place. Maybe you were extra stressed out at work one day. You know what would feel really good, you think to yourself. Maybe we take an extra one today. Maybe we down it with a crisp, cold brewski to even out the high. You deserve it. Come on, it’s been an extra stressful day. What’s the big deal. It’ll be fun. It is fun.
At first, such moments are rare, but in time, they build up momentum. At some point, that pain pill popping habit accelerated toward an unsustainable trend. You are still a good person, a doting husband, a loving father, and a reliable high-functioning (albeit functioning high) working professional. You have a dark passenger now, but you manage, you maintain, you survive.
Yet at some point, as is typically the outcome of unsustainable trends, the house of cards comes tumbling down. At some point, invariably, there’s a wake up call. Your doctor calls your bluff. Your wife finds your stash. Your boss gets pissed you missed a meeting because you had to meet your dealer. Maybe you didn’t hurt anyone directly, but the indirect consequences of your behavior very well could have. You were caught and you know it. You’ve been bad.
You are a reasonable person and self aware enough to accept the resulting intervention. You, along with your family and friends and colleagues, are on the same page. Everyone’s goal is that you clean up and recover. Everyone has immense faith in your ability to do so. Likewise, you are ready and able to get your act together and to walk confidently in the light once again.
Still, you’ve been in a bad place. You’ve broken people’s trust. So everyone agrees that it makes sense to set some rules and some guidelines for you to follow while you build back up your reputation and people’s trust. And to jump start all of that, they send you, since they love you and respect you and also have the means to afford it, to some fancy rehab center that is quite luxurious, but also pretty strict. It’s a monastic existence. No alcohol, no sex, no sugar. But you’re allowed to smoke cigarettes. You don’t smoke, though.
And there are moments when this impending tightrope walk seems almost overwhelming, but you can also see how it could be helpful. So you agree and do your time, living the restricted life prescribed to you, knowing, however, that one day, you will be a free man again, a man that people and society trust enough to make his own decisions about how he will live his life. This seems like a reasonable expectation for you because you understand that only in such circumstances can you be most productive as a citizen of the world.
Isn’t that the question? Do we still believe in this man, having done his time? Or is this man forever broken such that we must keep him in purgatory forever, and as well, generally suffer from the loss of his productive capacity, a loss that we all have to suffer together.
We as a society, you might say that we were bad, bad in that we ultimately got hooked on the temptations offered to us by the environment. It was innocent enough at first, but at some point, it became an unsustainable habit. Some people bought houses they couldn’t afford. Some banks repackaged too many toxic assets their balance sheets couldn’t absorb. Some investors bought investments they shouldn’t have invested in. (That’s an E-trade commercial, ya?) And those who stood watch fell asleep at the wheel.
And so we all got sent to rehab.
Europe took a relatively strict approach, led by Germany, which a generation or two ago, saw firsthand the effects of brutal addiction and hyperinflation. So they were understandably cautious. The result was self-imposed austerity—though, given the structure of the EU, this was felt more at the margins in places like Greece, who, as it happens, were generally the worst offenders.
Meanwhile in China, the regime is relatively young, having had a revolution of sorts not long ago, and so they took the opposite approach and doubled down with looser policies and lots of stimulus. They could, so they did.
For the US, it wasn’t our first rodeo either, and so we took a more balanced approach. We had some stimulus, to ween ourselves off the bad stuff, but not enough to reach those euphoric highs, a metaphorical methadone. We also checked ourselves into rehab and implemented rules and restrictions to ensure that we followed the program.
The result was stuff like Dodd-Frank. For banks it meant upping the rainy day account, in case of relapse. It also meant reducing risky behavior, like trading stuff, which might prompt a relapse. For people like you and me, it meant less access to capital for buying a new house or starting a business. We had just gone off the deep end so it made sense to keep everyone on a tighter leash.
But then the question is—how long do we stay in the dog house?
Our financial collapse occurred in 2008.
Eight years later, we’re doing better. We’re doing OK. We’ve been living the monastic life for a bit and we lost a lot of weight, started running and doing yoga. We feel like we’ve learned our lesson and suffered a bunch, which further cemented those lessons into our consciousness. Now we’re sort of sitting around wondering when we get to live for real again.
And that was one of the discussions happening today during Janet Yellen’s Congressional hearing in the context of Dodd-Frank.
On one side, you have a group who believes that we can achieve a good life, despite being restricted from some of the freedoms we once had. And that the numbers sort of prove that. The economy is doing better. The jobs situation is better. Inflation looks like it’s coming back. They also believe that Dodd-Frank contributes to that stability and controlled growth by holding back the darker proclivities of our human foibles.
On the other side, and this seems to be the position of the current administration, there is the idea that we’re still operating with the handbrake on. And in an ideal world, a world of continued progress, the goal is to reduce friction where we can, rather than arbitrarily induce it into perpetuity due to past transgressions that we should have already forgiven.
For better or worse, the market seems to have already priced in the latter, which makes sense given that that’s the side currently in power. Here’s Gerard Baker, WSJ Editor-in-Chief:
Shares in America’s banks are booming again, with Goldman Sachs Group, J.P. Morgan Chase and Bank of America hitting fresh trading milestones yesterday that seemed unreachable during the crucible of the financial crisis. Investor expectations of higher interest rates, lower taxes, lighter regulation and faster economic growth under the Trump administration have added $280 billion in combined market value to the nation’s six largest banks since Nov. 8. Yesterday, shares of Goldman and J.P. Morgan hit record highs, and Bank of America traded in line with its net worth for the first time since late 2008. One reason for such investor optimism: After years of hacking away at expenses—shedding businesses, cutting staff and investing in technology that can be ramped up and down cheaply—expenses are near all-time lows across Wall Street. That means that if revenue does grow as many investors expect, the payoff could be especially big.
And remember, this isn’t about just the banks. It’s about everyone. Because the financial system is the engine for the economy, which in turn is the machine that makes the world turn. And when it turns too slow, people get hungry.
Moreover, how banks behave is, frankly, a reflection of society. It’s a reflection of how we all behave. So the question becomes. Will we ever learn to behave a little bit better?
Ones and zeros
Of course, the biggest challenge facing banks may not just be outward but inward—as its warm malleable guts are replaced by cold ones and zeros. Reports Reuters:
Programmers are now supporting those handling equity underwriting, leveraged buyouts and deals within the financial services and real estate sectors. They are also analyzing client data to offer better advice on deal targets and types of actions that might please a particular company’s investor base.
And the new people brought in building those new shiny hard guts are very much unlike the people they are joining (and also replacing with those new shiny hard guts):
There is more water-cooler chatter among young employees about using their Goldman experience to build a career outside banking, he said. Automation is not the only concern, but it does come up, he added.
“Banking used to be an area where the top undergrads and MBAs wanted jobs, but now so much of those roles are automatable,” said Tom Davenport, a professor of information technology and management at Babson College.
One concern is that technology may make some staff redundant. Another is that the strats themselves – more likely to hold engineering PhDs from the Massachusetts Institute of Technology than MBAs from Wharton – could get ahead of bankers on a career path.
In related news, here’s a fun WIRED piece on AI and the death of the middle class.
Google also has a blog post that is sort of about whether or not AI will be friends with us or will… kill us?
We buy stuff different now
Of course, all industries face the inevitable inertia of technological progress and the one everyone is talking about today is retail. And as we know, traditional retail is getting killed. Even the historically tech shy Warren Buffett apparently sees the writing on the wall:
The sale, which leaves Buffett with nearly no shares in Walmart, comes as the US’s largest traditional retailer has been rushing to catch up to Amazon and other online competitors.
As we’ve discussed in the past, the future will be ruled by companies that are technology companies first, traditional business models second:
But it’s not just about having a bunch of programmers and whatnot. Fundamentally, being a tech company is more about a framework for solving problems, whereby technical optimization comes first, then business model, versus the traditional reverse of that, which is to technically optimize an existing biz model—ie Wal-mart building a website to compete with Amazon or HBO setting up a streaming service because Netflix is eating their pie.
Because if you have a technological foundation, you can build a lot of business models on top of that. But if you only have a business model, I mean what is that, a powerpoint presentation, basically?
That’s a problem for Wal-Mart because, as a technology company first, Amazon is actively trying to solve the problem of the so-called last mile—how to get products to you at your door in as little time as possible. You can only do that if you optimize your supply chain and distribution platforms around a technological platform.
So if you are a retail operation that simply sells stuff, then look, your time is probably limited. I go to a store if I need something right now, today. Everything else, I order on Amazon. I also know my size and whatnot, so I order all my clothes online exclusively as well. There’s nothing about the whole store experience that is all that amusing. Finding stuff is annoying. Interacting with people unnecessarily, at least for me, is annoying. Paying a premium price to cover that whole operation, which I don’t need, is annoying.
The only reason why these retail corporations still have some wiggle room is because solving the problem of the last mile is really difficult, due to, I guess, diminishing marginal returns. Getting to two-day delivery was OK. But getting your stuff to you within an hour or something requires an insane amount of progress on all fronts, especially if you don’t live in a trendy metropolis, which happens to be most of us, anyway.
But hey, if you do happen to live in a trendy metropolis, specifically Seattle, you have, apparently a front row seat in terms of experiencing the future of retail:
On a busy stretch of road in this city’s Ballard neighborhood, a curious new grocery store is taking shape — and so begins another effort by Amazon to use the residents of its hometown as guinea pigs.
Workers are finishing up a driveway with a series of parking stalls, protected from the rain by a soaring steel canopy. When the store opens, customers will buy their items online, schedule a time slot to pick them up and pull into the stalls, where employees will whisk orders to their cars, according to documents filed with the city’s planning department.
Across town in the SoDo neighborhood, another Amazon drive-up grocery store is under construction. Late last year, Amazon began testing a new convenience-store concept in Seattle, Amazon Go, that uses sensors and other technology so shoppers can check out without having to visit a cashier. And in late 2015, it opened its first physical bookstore in a shopping mall in north Seattle, before expanding to more than a half-dozen other locations around the country.
But hey, this is Amazon and Jeff Bezos we’re talking about. And retail is just one thing for them. They want a lot of things. Here’s a story about how they are building stuff to track the stock market.
With banks in its sights, Paypal buys TIO.
Lucky Verizon, gets to buy Yahoo for even cheaper.
Perhaps understandably, Bitcoin is surging in Venezuela.
But it’s not just the third world, Bitcoin could also be key to the virtual one.
Umm… David Chang’s unified theory of deliciousness. (I mean, yumm….)
You know Google’s offices are real nice when employees are living in the parking lot. (And alternatively, real estate prices in the Bay Area are probably too nice.)
And look, even Thor needs “me” time:
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