30 Comments
Jan 6Liked by Dave Karpf

At the risk of proposing a Theory of Everything, I think - maybe! - part of what happened in 2023 was a continued cleavage of our culture/discourse/economy into, broadly, the materialist and post-materialist ("vibes") camps. We see this also in the confounding and uneven reception of macroeconomic data, the stickiness of glib misinformation in the face of contradictory actions and reality (see: student loan forgiveness, responsibility for). Probably the continued gutting of our information ecosystem at every level teamed with continued dissipation of faith in institutions has something to do with this!

But also, this would explain why there's a resurgent labor movement focused on and motivated by real material concerns happening at the same time as you have the return of goofy tech valuations - a widening *epistemic* divide.

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Probably related to and intertwined with the growing divide between high-trust and low-trust camps. The amount of societal change the US has eaten over the past 15 years has been massive, and it's pretty clear to me that the high-trust people have gone left and the low-trust (i.e. people who feel their institutions failed them) have gone right/Trumpian.

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I don't think it's quite that simple - there are definitely low-trust folks on the left, especially among younger people, and higher-trust people within the Trumpist camp - it's just about who they trust.

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GOOG is trading at a PE of 26; that's not insane for a company that owns a significant chunk of the online ads business, has a decent share of the cloud computing business (which will only grow as security issues continue and software gets more complicated to manage), and may even have usable self-driving car technology.

MSFT's PE is 35, but they've had better growth than Google, and (much) less of it is in the highly variable ad business. MSFT has the 2nd largest cloud business after AMZ, and they own the office productivity business.

AAPL has a PE of 29, and they own the consumer cloud the way that MSFT owns the business cloud. AND they sell hardware that's essentially impossible for mortal humans to clone.

A lot of these stocks took a hit when interest rates went up to ~5%. They're going back up because falling interest rates mean that soon you'll have to do something smarter with your cash than just buy T bills.

You discuss Crypto as if it has no value, but it is very valuable to criminals who can use it to launder money. They can also use the Etherium block chain, if I understand it correctly, to create their own coins, which they can then pump-and-dump.

The Metaverse was a huge money suck for FB; it was hopelessly bad idea. Zuckerberg pulling the plug on it just means more profit for FB. Kudos to Mark for pulling the ripcord *before* hitting the ground.

Generative AI is harder to evaluate. I don't really understand regular machine learning; I only understand back propagation for about 30 minutes after reading an explanation of it, before it fades away again, and Generative AI is more complicated than just back prop. It looks like it can generate mediocre answers to a fair number of queries, although it BS's when it doesn't know the answer, and sometimes even when it does. It sounds, more or less, like a fairly bad employee trying to hide the fact that they don't really know how their business works. Given how expensive these things are to operate, it probably makes more sense to hire the bad employee than go all-in on an AI system that can't even tell you how it made any decisions.

All in all, the only thing that looks bubblicious right now is generative AI -- deploying it to do real jobs from 9-5 would require a massive energy budget and still promises a crappy result at best.

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The fact that Bitcoin has survived at all, let alone recovered much of its lost value is evidence that financial markets have totally parted company with reality. None of the supposed use cases for crypto, and blockchain in general, have panned out, with the exception of ransomware and similar criminal transactions. And those have had a pretty bad year as the authorities finally crack down. So, it's unsurprising that tech companies with something genuine to offer (even if not a plausible basis for endless profit growth) are doing well.

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Bitcoin, Tether and to a lesser extent Etherium do well because they're use for money laundering. You write that they had a bad year, but it is the big exchanges, the ones that try to operate in the US, that had a bad year. I'm sure there are still ways to turn your ill-gotten B$ into Tether and then into USD.

Actually, I think Etherium's main claim to fame is that the block chain allows people to create their own coins, which they then pump-and-dump.

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Do you think this can carry on enough to sustain a stock of crypto valued at $1 trillion or more? I don't have a good basis for estimation, but it seems implausible to me, given that the whole thing survives mainly because authorities are willing to wink at ot.

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The thing to remember is that these crypto market caps are fiction. When people talk about SBF as having had a net worth of $15 billion, that means he had one billion FTT tokens, whose value was set when he sold 10 of them to his mom for $150. I mean, that's an exaggeration, but there's no way he could have liquidated all of his FTT tokens without knocking off a factor of 10-100 from their value. When you look at crypto, there's nothing that would prevent their price from dropping by a factor of 2 in any given week.

That's obviously not the case for real currencies tied into real economies. For example, dollars can't lose half their value in a week -- too many prices are set in dollars that can't change that fast.

So, in short, I'm not sure what these crypto stock values even mean, much less where they can go.

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author

Part of me thinks you're right, and the rebound of cryptocurrencies is just three-wash-trades-in-a-trenchcoat.

But that's the same part of me that figured during the crash that the price of bitcoin would never fall below $30k, because there were a handful of big players who would step in and prevent it.

Much of these crypto market caps are fiction, but they aren't *more* fictional in 2023/24 than they were in 2021/22.

I just dunno...

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I think there's a difference in the dynamics of the big coins, which are useful for money laundering, and that of small coins like FTT, whose volumes may not be low enough to provide cover to hide their transactions.

But I'm not enough of a math guy to model either type of coin's behavior.

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Jan 9Liked by Dave Karpf

The resilience of both big crypto and big tech stocks boils down to the same thing: they're gambling, not investing. Most of the stock market is! If you don't get a dividend, and especially if you own non-voting stock (see: Facebook), all your stock is, is a bet that a future valuation will be higher than the one you bought it at. It's not in any real sense a part of the company. Crypto is elegant because it dispenses with any pretense that it's anything but a bet.

This is also why SV/VC types hate journalism and journalists: having people focus on material things like "does this company make a product/receive revenue for their product" and the like are very bad for the valuation of the it's-just-gambling economy.

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Jan 6Liked by Dave Karpf

At least there is a semblance of relative sanity for some of these things - the Metaverse and NFTs were a lot stupider than AI and LLMs, but still everything you said it true, and a huge portion of our economy is based on it.

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Jan 7Liked by Dave Karpf

Sometimes I think about how the rise of Big Tech would have looked without the Great Recession. It's no coincidence that the period of peak societal tech optimism was the first Obama administration. The economy almost collapsed into a new Great Depression. Millions were out of work or losing their homes. Pillars of the economy like energy, finance, and real estate were disgraced. But...here was an industry that was actually talking up a positive future, where we'd all be connected and have a voice. Computer science majors were actually getting well paid jobs after graduating when most other graduates were fighting over barista positions at Starbucks. Big Tech was California, Big Tech was Star Trek, it was showing us a beautiful future when no one else was even bothering to try. That's why so many people lost their minds over Steve Jobs' death. It's why Elon Musk was as successful a self promoter as he was - he could see the world wanted Tony Stark.

Still, the thing is that in 2023, no one else is doing futurity at all. Even though money is expensive now and the low-hanging fruit that made for a few gigantic monopolies in the 2000s is gone people are still trying. I hope that soon we'll have entrepreneurs that can articulate the possibilities of a world powered by cheap renewable energy, or vaccines for AIDS and cancer, and others.

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Jan 7Liked by Dave Karpf

Heh. I first read the headline as "futility."

Very useful analysis, thanks!

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Great perspective and it got me thinking in all kinds of directions. The first more stable thought is - “isn’t this broadly what stock markets are supposed to be?” Yes over the long term the stocks will average out closer to some real value, but in any given slice of time their value is based on a complex combination of fundamentals, hope for the future and hype.

Through that framing it makes perfect sense that the largest companies of our generation will see sizeable momentary corrections as the factors vary. Especially when more and more of their fundamentals are known so hope for the future and hype would play a bigger and bigger role.

It also seems that tech companies are effectively the monopolies of this technological era and like monopolies of eras in the past, their profits and power will bloat and mutate until it reaches a point where the societal costs don’t make sense any more.

I’m often stuck as I can feel this sense of immensity that “this time is different, these companies are just too large” but that was certainly equally true for the people living during the Rail Tycoons and the Chemical Monopolies before us. The dynamics of power don’t change but the graphics get better.

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Jan 6Liked by Dave Karpf

"Futurity" ain't bad, but given the techbro culture, I would have gone with "futurismo".

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Jan 6·edited Jan 6

One way to make sense of it is to widen the "context window" and to think back and forward a hundred years. For example, a hundred years ago our industrial economic system discovered how to increase food production using nitrogen-based fertilzers. This was an essential ingredient in creating a prosperous future for billions of people on Earth. Comparing these innovations with the innovations today: While we still innovate, prosperity increasing innovations have largely stopped. Blockchain, crypto, AI, etc, all amazing technology that I love and study. But I dont see how they will help us to solve any of the big problems we are facing. Do any of these innovations create real value as opposed to only market value? I suspect that the answer is no and that this is the reason for the markets to fluctuate widely. Because, in the long run, market value has to align with real value.

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author

I like this exercise. I do a similar one with my students, thinking in 20-40 year chunks, whenever I teach The Long Boom.

1980-2020 seems pretty revolutionary at first. But not if you compare it to 1940-1980 (Nukes, the Pill, moon landing, broadcast television era). Or 1900-1940 (film, radio, mass telephony, mass production of cars). Or 1860-1900 (electrification, flight, end of slavery in the US).

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I like your idea of 40 year chunks. It is roughly the time between graduating from uni and retiring. A meaningful time span for studying innovation. If you have any links for me to follow up on, I would be grateful.

Question: I like to divide innovations in substantial ones and accelerating one. Fertilizers, antibiotics, electrification are substantial innovations. Mobile phones and LLMs are accelerating ones. Btw, I dont mean the distinction to be binary, rather on a continuum. Anyway, while I find it intuitive, I dont know whether it holds up to scrutiny. Do you know sth about this?

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All that wealth that capitalism "created" was resource extraction with a multiplier of engineering efficiency. We've harvested and eaten all the low-hanging fruit, and engineering tricks can only spread the butter so thin. The information Age is valuable because we value information and the efficiencies and amusements it offers, but like money it's valuable only because we agree it is. Technology has mostly moved from tinkering with efficiency to selling us stuff more efficiently, which brings to mind the old joke about an economy based on selling each other insurance policies. The market does align with reality in the long run, but as noted economist Yogi Berra once said, in the long run we're all dead. The other problem with The Market is that there's way too much money sloshing around at the tippy-top with nowhere to go. How many yachts and social media companies can a guy buy, anyway?

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This seems too pessimistic.

Photovoltaics could usher in an era of pretty cheap energy, and economic output is proportional to energy consumption to a first order.

We're probably just at the start of a drug innovation -- it's only in the past few decades that we have the computing power to model how drugs actually act. My guess is that the 21st century will be to biology what the 20th was to electronics.

I also doubt that innovation in computing has run its course.

I'm also skeptical that "prosperity increasing innovations" have largely stopped. United States per capita GDP is $67K in the US today. 20 years ago it was $52K (both figures are in 2017 dollars). That's a pretty big increase in real GDP per capita for a world in which no prosperity increasing innovations exist.

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I think innovations are and will continue to lead to more prosperous outcomes, but I am inclined to believe that we're never going to see a period like the 1880-1960 period Robert Gordon discusses in The Rise and Fall of American Growth. Someone born in 1880 was born into a world where almost none of the technologies that made modern urban life existed (trains being the only real exception). If they reached 80 they would live in a world with subways, buses, cars, and jet planes for transportation, vaccines, antibiotics, and enriched food for public health, radio and television for communications, skyscrapers, nuclear power, and so on. That kind of massive qualitative change in living standards may not occur again.

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In all honesty, despite how different the world looks today from that of 1960, it's really hard to argue with you -- those 80 years were amazing. My grandfather was born in 1883, and made it to 1970, so he actually saw these changes.

In addition to the things you mention, you have to add the common use of anesthetics in surgery, the very idea that you want to sterilize things during surgery (Lister 1877-93), deploying electric lights (around 1890, at least in NYC), medicines that were actually shown to be useful, vaccines beyond smallpox, indoor plumbing, and people going to the Moon, which didn't really help GDP per capita, but was undoubtedly cool.

Still, there's something cool about virtually everyone walking around with a device in their pockets that can answer pretty much any question you want to ask, transfer money to anyone on the planet, send a message for free to anyone on the planet, tell you where you are within 10' on a map, all in a fraction of a second, and which costs about 4 days of per-capita US GDP.

Also, in fairness to me, the comment I was responding to was categorical about there being *no* value to anything produced since 1960. That's definitely *not* true.

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Today on the anniversary of January 6th coup attempt, because of this platform’s irresponsible pro-nazi policy I’m unsubscribing from all Substack newsletters and telling all newsletters this same message. And advising all clients going forward about the many alternatives like Ghost Pro, etc.

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I have a spreadsheet going of Substack alternatives. I, too, will, be moving my newsletter of of Substack sometime in 2024. One vital column is "NAZIs?". Substack is checking "Y" in that box. Buttondown and Beehiiv have definitively come out as "No NAZI" platforms. Has Ghost.io made the same commitment? (They may have, I just haven't been able to find a statement to that effect).

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Good to hear you're leaving substack as well. Before this controversy over passive acceptance (unless PR gets too bad) of white supremacists, neo-nazis, and other extremists, there were prior issues about substack and hate speech and this Wired article from 2021 sums up the differences and pluses well.

https://www.wired.com/story/ghost-substack-platforms-publishers/

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Isn't there a danger in thinking of tech valuations on the basis of calendar years? Not sure that markets - or the regulatory cycle either - work like that.

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It's an oversimplification, certainly. But markets seem to anchor to quarterly earnings reports, and if we can think in quarters than I don't see why we shouldn't also think in years.

That said, I'm several fields removed from my area of expertise here. Mostly just trying to keep track of how, one year later, reality diverged from my expectations.

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