“Progress is precisely that which rules and regulations did not foresee.” –Ludwig von Mises
MEDIA
How to end the port crisis (w/ Yaron Brook) - Silicon Valley Examined 19
In this episode of Silicon Valley Examined, Robert Hendershott, Don Watkins, and special guest Yaron Brook discuss the port crisis. What caused it? And how can Ingenuism help us figure out a solution? They also delve into the value of a global supply chain and the importance of standardization in progress.
INSIGHT
How the stock market fuels exploration
Robert Hendershott and Don Watkins
When we think about how finance aids innovation, the most clear-cut examples come from venture capital and other forms of funding startups, like angel investing. But what about the public stock market? What role if any does it play in promoting innovation?
It’s not obvious. Sure, firms raise money in the public market but far more distribute money (Apple paid dividends of over $14 billion in 2020). Most trading occurs between investors; the company is not involved.
Yet, the stock market supports Ingenuism and Ingenuism is rewarded in the stock market.
To see why, consider the parable of the Bottled Imp, a short story by Robert Louis Stevenson. The Imp (in the bottle) grants wishes. But there’s a catch (there’s always a catch): if you die in possession of the bottle, you suffer in Hell for all eternity and you can only rid yourself of the bottle by selling it to a willing buyer, who fully understands the transaction, for less than you paid for it.
Buy the Imp for $100, lots of wishes granted, sell it for $99, and you are home free.
In the story a prior owner of the Imp runs into hard times and is at risk of losing everything including his beloved wife. He tracks down the bottle but is shocked to learn that it last sold for six cents. He can buy it for five cents but that seems crazy: who will buy it for four cents, knowing that it will be virtually impossible to sell for three cents as nobody would subsequently buy it for two cents?
But our protagonist can’t imagine losing everything, so he buys the Imp. Wishes granted, he and his family are thriving again. But after the initial period of joy his dark future of suffering in Hell for all eternity settles on him, driving him to depression and drink. His loving wife pleads with him to tell her what’s wrong and eventually he cracks and admits his error.
Determined to save her husband, the wife convinces a friend to buy the bottle from him for four cents, promising to purchase it herself for three cents. This happens and the husband is joyously relieved. But now his wife falls into depression and despair, and when the husband figures out why he commits to a similar deal to save her. A disreputable rouge of a sailor agrees to buy the bottle from the wife for two cents with the husband promising to buy it for one cent and bear the cost of his earlier folly.
In the end, however, the couple lives happily ever after. Once the scallywag begins enjoying the Imp granting his wishes, he refuses to part with the bottle. After all, he is quite sure he is going to Hell anyway…
The point is that the value of something today is linked to its value tomorrow and to make good decisions now, you must think forward into the future. But the future doesn’t behave as predictably as the Imp.
For example: What will the MetaVerse look like? When will it become ubiquitous? What business models and firms will thrive by creating and supporting it? Facebook’s name change aside, none of these questions have clear answers.
The stock market is a mechanism to effectively connect the present to an unknowable future. Millions of investors and billions of dollars trade based on their opinions about which companies will thrive, survive, struggle, or disappear. These opinions are often wildly varied, and the market allows them to coalesce into a single price that reflects them all.
The stock market moves rapidly to balance opinion, bulls (the price is too low and will go up) versus bears (the price is too high and will go down). A market price being too high means that although there may be many, many investors who think the price is ridiculously low, they are in the minority and the price falls enough to swing some bears to bulls and balance opinion. When Apple announces unexpectedly great (poor) iPhone sales, bears become bulls (bulls become bears) at the current stock price, which rises (falls) until balance returns.
Why does this matter?
Well, consider this example. In July 2020 Tesla became the most valuable automaker on the planet (and has since quintupled in value to eclipse the market value of all other major automakers). Tesla’s stock price rose, not because the company was selling the most cars or earning the largest profit. No, Tesla was envisioned as the dominate future automaker as electric vehicles and autonomous driving become increasingly important.
Will this future come to pass? Is Tesla a bubble? It is impossible to know, but what we do know is that many investors think Tesla is worth a trillion dollars (or more) and at the same time many investors think Tesla is overvalued. Given this, it makes sense to think Tesla has a good chance to be a dominant player in the transportation market—and that investors are very willing to fund this evolution.
The EV optimism epitomized by Tesla has spawned an investment boom in both competitors and related technologies. EV company Rivian, for example, just went public at a valuation of around $77 billion, raising $12 billion cash in the process. Now it has traded up to a valuation north of $100 billion, higher than Ford or GM.
These valuations fuel exploration in the EV space by channeling resources to the industries, technologies, and companies that have the best shot at building the future. Without access to capital, exploration in capital intensive industries like auto can stall.
Meanwhile, investment in less promising alternative technologies like hydrogen vehicles lags. The leading hydrogen fuel cell companies, such as Bloom Energy Corporation and FuelCell Energy, Inc. have market caps of only a few billion dollars.
Is this the best way to allocate resources between auto technologies in 2021? Given the balance of opinion on Tesla’s prospects, we have to say yes. The stock market will let us know if that changes.
The stock market gives us a veiled glimpse of the likely future, giving ongoing feedback that helps entrepreneurs focus their ingenuity on the most promising business opportunities—even before novel ideas begin bearing fruit.
By effectively connecting our present decisions with an uncertain future, the stock market plays a key role in allocating resources, both human and financial, to maximize progress.
QUICK TAKES
Kids need more screen time
Not exactly, but entrepreneur Keith Schacht makes the case that there is a huge opportunity to make the internet far more valuable for children.
Whereas today screen time consists of little more than a way to watch shows and play games, Schacht thinks “there’s room for a new audio-visual web browser for kids: one where they can independently look things up online and satisfy their own curiosity.”
He goes on to outline a vision for unique for kid-friendly apps. Not adult apps made kid friendly, like Netflix Kids or YouTube Kids, but new tools designed especially for children.
What new uses will excite children? I believe we’ll soon see a kids-first money app, possibly centered around allowances and gift cards. Imagine extending ecommerce to children, maybe by allowing them to send birthday and holiday gift lists to friends and relatives. Ultimately, a browser for kids is not solely about giving children access to information—it’s also about unlocking a new wave of child-first applications.
After all, kids are not just miniature adults, they’re a unique demographic all their own. What online experiences make sense for children, these digital natives? In what new ways could an internet device be a platform for imaginative play? With nearly a billion children now online worldwide, tech companies are beginning to recognize children as an important audience with unique needs.
I love this vision. The current view basically says that either you keep children away from the web or you let them mindlessly waste away on it. Schacht’s vision for using the web to unlock children’s curiosity about the world and help them discover and nurture their passions is so much more appealing.
A web for thee but not for me
My Twitter thread has been filling up with mentions of Web3. I had no idea what that meant, so in case you don’t either, here’s a rundown from Slate.
Web3 refers to a potential new iteration of the internet that runs on public blockchains, the record-keeping technology best known for facilitating cryptocurrency transactions. The appeal of Web3 is that it is decentralized, so that instead of users accessing the internet through services mediated by the likes of Google, Apple, or Facebook, it’s the individuals themselves who own and control pieces of the internet. Web3 does not require “permission,” meaning that central authorities don’t dictate who uses what services, nor is there a need for “trust,” referring to the idea that an intermediary does not need to facilitate virtual transactions between two or more parties. Web3 theoretically protects user privacy better as well, because it’s these authorities and intermediaries that are doing most of the data collection.
I still don’t have a good sense of what this will look like in practice, but it is a good reminder that the web is still in its infancy. Another reason why I’m less than sympathetic about cries we’re going to be eternally at the mercy of the Facebook/Twitter/Google/TikTok/Snapchat, um, monopoly.
Only Silicon Valley can prevent forest fires
As someone who lived in Southern California for over a decade, I know how dangerous and damaging wildfires can be. And I also know how bad a job California has done at forest management.
So thankfully, a number of startups are getting into the wildfire fighting game.
In recent years, tech startups have entered the [wildfire response] fray . . . claiming that emerging tech like AI, machine learning, drones, and sensors can help firefighters do more with less, or with the same.
These startups—like Pano, which offers hardware and software solutions solely for firefighters, or Edgybees, a geospatial intelligence firm whose tool can help with wildfire response—have raised tens of millions of dollars to date. Many are still in the early stages, running pilots with various fire departments in the American West in an attempt to both gain footholds and refine their models for the wider community.
I’m sure there’s a “watch your burn rate” joke in there somewhere, but I’m too lazy to find it. So I’ll just say: I really hope these companies can make an impact.
The FDA blows smoke
It’s good to know that when it’s not busy preventing us from stopping a deadly pandemic, the FDA has time to make it harder for people to find safer alternatives to tobacco.
Jonathan Adler explains how the FDA just got hammered by the U.S. Court of Appeals for the Fifth Circuit for essentially forcing vaping businesses to pay the price for its poorly thought through attempt to regulate the industry. Here’s the background.
In 2016 the Food & Drug Administration "deemed" electronic cigarettes, vaping pens, and other electronic Nicotine delivery systems ("ENDS") to be "tobacco products" under the Family Smoking Prevention and Tobacco Control Act. As a consequence, all ENDS manufacturers were required to submit premarket tobacco applications (PMTAs) in order to continue selling their wares. Under the Tobacco Act, the FDA is only to approve a PMTA if it concludes approval is "appropriate for the protection of public health," taking into account "the risks and benefits to the population as a whole." Without a PMTA, a deemed tobacco product cannot be sold.
PMTAs are supposed to be submitted before a new tobacco product is sold, but this was impossible since the FDA's rule applied to products already on the market. Accordingly, the FDA announced that ENDS manufacturers would have two years to prepare and submit the lengthy and detailed materials necessary for their applications before they would face the prospect of FDA enforcement. The FDA soon realized that the material and information necessary for PMTAs would be substantial, particularly because a separate PMTA is required for each product, defined quite capaciously (i.e. each package size, each flavor, each nicotine level, each delivery system, etc.). So the FDA tried to extend the enforcement deadline until 2022, but anti-tobacco groups sued, and they settled on a 2020 deadline.
The FDA ultimately received applications for over 4.8 million ENDS products from 230 companies. Needless to say, this is a bit more than the agency anticipated, and it has been working to process the applications, denying most of them. Because a PMTA denial is a death sentence, some disappointed ENDS producers have filed suit, challenging the denials and seeking judicial orders blocking FDA enforcement in the meantime.
The details of the case are stunning. The FDA told the vaping companies they wouldn’t have to perform long-term studies to meet standards for approval, which would’ve been impossible given the timeline. Then it denied their applications in large part because, you guessed it…no long-term studies!
The vaping industry did something amazing. It actually managed to develop a smoking alternative that smokers liked. Now, in the name of protecting our health, it appears that the FDA is doing everything in its power (and outside its power) to destroy the industry.
I’m sure cigarette companies are popping champagne.
Until next time,
Don Watkins
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