Changes
That's just the way it is
Things will never be the same
Tupac — “Changes”
That's just the way it is
Some things will never changeBruce Hornsby — “The Way It Is”
I.
Tupac’s classic hip hop song “Changes” (you know, the one with the piano) samples Bruce Hornsby and The Range’s “The Way It Is” almost note for note. It’s one of those samples you hear and are struck by how obvious but simultaneously well-executed it is. Cleverly, it’s not just the music that is sampled; Tupac is riffing on the same subjects as the original (welfare, racism), but the chorus has been altered: instead of “some things will never change”, we hear the opposite — “things will never be the same”.1 Well, which is it?
I’ve wondered about this question lately — are we, like we experienced with COVID, undergoing just a short-term, temporary shock? Sure, badness abounds (a war in Ukraine, US-China tensions at an all time high, tech layoffs, persistent inflation), but the economy is strong, and we’ll soon return to the status quo of Pax Americana feat. Big Tech circa the last decade. Or are things actually different this time, as we collectively confront a new decade of uncertainty ahead of us? If you’ve read some of my previous pieces, you can guess where I stand, but among my peers, I’m not sure how widely my view is shared (or even talked about).
I was recently in Los Angeles visiting my brother-in-law, who works in TV/film. My cousin, who also works in TV as a writer’s assistant came by for lunch, and there ensued a bit of inside baseball discussion about the state of the industry. She was working on a show (now on indefinite pause due to the writers’ strike) that was angling to be Yet Another New Show For a Major Streaming Service, and lamented the political games necessary to get a show green-lit, among other small injustices one imagines an aspiring writer going through. When I got home, I stumbled across this Vulture piece on the broken economics of the TV streaming model, and sent it to her. It was a great read on the phenomenon of “Peak TV”, or the reason your “to watch” queue is interminably long.
She responded that it was a good piece on all the money being wasted funding prestige projects no one was asking for… which it undoubtedly was, but the bigger question was: Why were we wasting the money in the first place? Where was it even coming from?
The answer, from an industry exec, gives us a clue:
“The unspoken thing was that this [the spending blitz on new shows for streaming] will all be accretive to valuation: ‘I may not be running a profitable business, but boy, is it going to add stock value!’
Well, it worked:
II.
I sometimes read the fatFIRE subreddit, which is focused on the FIRE movement (Financial Independence, Retire Early), but doing it “fat”, aka not on a shoestring budget. It consists of people who would like to retire early, but are unwilling to move to Iowa to do so. It’s retiring early and continuing to live in NYC or San Francisco, while having a vacation home closeby; having your cake and eating it too. It includes everyone from entrepreneurs who have sold their companies for nine figures and stopped working, to the crypto nouveau riche, to you guessed it, (mostly Bay Area) tech workers. The subreddit is a mixture of genuinely useful information, thinly disguised bragging or LARPing, and aspiring hopefuls looking for advice on winning lottery tickets. One user recently wondered how all these tech employees in the SF Bay Area had amassed significant net worths by their late 30s working “regular tech/SW [software] jobs”. Were they missing something obvious? How was it possible? The top replies all pointed at the same thing: rising stock prices.
We — my cohort of friends who entered the tech workforce around 2007 +/- a few years — all thought we were smart, talented, whatever. While we weren’t stupid, the real driver of wealth for all of us was luck: specifically being lucky enough to start our careers in the best possible industry at the start of one of the greatest bull markets in history, nitro-boosted by low interest rates and cheap money.2
Here is the reality — the same economic forces that brought us Uber and Lyft, and artificially cheap subsidized rides to gain market share also brought us: Peak TV and unprofitable prestige projects, too much money chasing too few startups driving up valuations everywhere, spiraling housing costs exacerbated by a construction shortage, a roaring stock market, an even frothier crypto market, the SPAC craze, and ultimately the inflation we are dealing with today.
If the impact of this glut of money was limited to shitcos like Theranos or Juicero, it might not be so big a deal, but excess capital distorts even the good companies — it’s as if a bunch of new animals were born in a low-gravity environment and never needed to develop the bone density or strength to handle life on Earth.
So is this all a blip? Should we prepare ourselves to awaken from this malaise, ready to return to the comforting world of 2018? I’m not so sure. Viewing the 2010s as the natural state of things seems backwards. We are not experiencing an anomaly now; we already did for the last decade, but since it’s all we’ve ever known for our working lives, we simply aren’t aware. And we can’t snap our fingers and go back to the way things were unless the Fed turns the money printer back on and drives rates lower, which they can’t do because of (partly to largely self-inflicted) inflation. This isn’t to say stock prices can’t go higher. They certainly can. But prices aside, we should recognize that the world of today is different from a decade ago, and this will affect anybody relying on cheap money anywhere, including tech. (Also, uh, this is not financial advice and there’s no reason you should be listening to me for financial advice anyway.)
There is a famous Warren Buffet quote on unwinding market excesses: “Only when the tide goes out do you learn who has been swimming naked.” Actually it’s worse; some of these companies can’t swim at all. We’ve been living in artificial low gravity for so long we’ve come to think of it as normal, but gravity is returning, and for many of us our muscles are weak and we are far heavier than we think.
Things will never be the same, but then they were never meant to be that way in the first place.
Thank you to Camilo Moreno-Salamanca for their feedback on this piece.
In reality, the full lyrics for Changes are more ambiguous. The opening verse starts:
I see no changes, wake up in the morning and I ask myself
Is life worth livin'? Should I blast myself?
I'm tired of bein' poor and, even worse, I'm black
…which certainly sounds less positive than the chorus. And the final line of the song actually reverts back to Hornby’s original “some things will never change”. So it seems like even Tupac was torn between optimism for change and resignation at the status quo.
Also the Vatican put “Changes” on their MySpace playlist in 2009, and while I know that the Vatican and the Pope are on Twitter, that somehow seems impossibly quaint. MySpace!
The link between low interest rates and higher stock prices is discussed in the excellent book The Price of Time by Edward Chancellor. First, when rates are low, we’re willing to engage in more speculative bets because the 1) the cost of borrowing is lower, and 2) the hurdle rate for any prospective investment is lowered. Why risk investing in a new tech company that might turn a profit for years — let alone exist — if you can stash your money in government bonds paying 5%? The net effect is money flowing into more speculative assets seeking returns, driving up stock prices.
But there’s another reason: since most of their profits lie in the distant future, the valuation of technology companies (also known as ‘growth companies’) is inflated when the discount rate falls. During manias, speculators are said to engage in ‘hyperbolic discounting’.
Second, companies actually use cheap debt to finance share buybacks, further driving up share prices (which disproportionately benefit executives):
This problem was encountered at first hand by Richard Fisher, President of the Dallas Federal Reserve, and one of the few ‘hawks’ on the Fed’s Open Markets Committee. Fisher told colleagues in 2012 that Texas Instruments, one of the largest firms in his district, had issued debt securities at the lowest rates in history but not a single job had been created. Instead, all the money was spent on share buybacks.
And:
Even the most profitable companies, such as Apple, attracted their attentions. When Apple repurchased its shares, the iPhone-maker chose to borrow rather than spend the billions of dollars of cash on its balance sheet.
There is much more in the book around the problem of artificially low (or even negative) rates the world has been gorging on since the turn of the century. I highlighted some 120 passages from the book; if you are even remotely curious about the topic I highly recommend it.