Terminal Deflation; Investing in Stocks; Google Platforms Rant #38
Suthen's newsletter on the future of work, building businesses and financial independence
Happy Monday!
I’m really excited to have Austin Lieberman on this week’s podcast.
He served as a Captain on the U.S. Airforce and is one of the most transparent investors out there. We go into the basics of investing in stocks, check it out on Spotify or this direct link here.
🤒 Terminal Deflation Is Coming
The past few months will be written about for years to come - we will see documentaries, books and many more critiques of what should have been done.
Decisions that we may have heard in passing will be scrutinized. We're only starting to understand the ramifications of what some of these choices mean.
One such choice is the influx of debt that governments around the world ossued. Case in point: the central bank for the U.S. went from $4.1 to $6.5 trillion in debt by mid-April.
At the moment, they're injecting ~$1M into the financial system every second.
I first started to understand the magnitude of this situation after watching this interview by Chamath Palihapitiya (watch the first three minutes).
This post talks about the growing problem of deflation as a result of this unprecedented stimulus.
This is rather counter-intuitive because we expect to see inflation as the amount of dollars available in the market increase.
The stock market is probably the biggest indicator of this. Despite the massive drawdown in March, we have seen the market rebound to previous highs. The dollars have simply shifted between stocks that benefit from human movement (travel, restaurant, retail and etc) to stocks that benefit from people staying at home (technology companies).
While the overall stock market may have recovered and the virus being relatively contained, there are still a number of people who are unemployed. The troublesome part is that I suspect many jobs won't actually come back.
This speaks to the rise of a deflationary environment.
"Deflation depresses demand by encouraging consumers to delay their spending, especially on infrequent big-ticket purchases like cars and appliances.
In a deflationary environment, consumers expect prices to fall, so they wait on their purchases. That, in turn, creates a dangerous feedback loop: When consumers don’t buy, producers are likely to lower their prices, which confirms consumers’ expectations, so they wait longer, which drives down prices further, and so on, all while nobody buys anything. Sales dry up, so profits dry up, and businesses go under.
Deflation also makes the burden of debt heavier, as the same fixed dollar amount of a loan (the “nominal” amount) stays the same, but wages and prices fall, so the “nominal value” gets relatively bigger in “real” terms.
Deflation would increase the relative cost of every mortgage, every student loan, every credit card debt, every car loan, and every medical debt. Deflation also encourages businesses not to invest, both because borrowing to do so incurs these same costs, and because the expected future revenue from investments falls over time and thus they will never be worth the high cost.
Businesses do not sell enough to make profits, so they fire people and do not hire new ones. People lose their jobs, so they don’t have money to spend, or they fear losing their jobs, so they save for an uncertain future instead of spending now. Businesses and households spend more servicing old debts than on new consumption. Prices fall as people don’t buy things, and people don’t buy things as prices fall."
During this recovery, I'd pay close attention to the employment levels and consumer spending over the next few months. The underlying belief is that the vast majority of businesses (apart from travel) will return to normal.
I suspect that many people who lost their jobs will struggle to get it back. A lot of businesses will face uncertainty and hesitate to grow again. As a result, people will be more cautious with their spending. All of these factors create the recipe for a deflationary environment.
Deflation won't happen through a drop in our wages. We'll just see greater levels of unemployment. Most of us don't work for cash-rich businesses and will have difficulty seeking employment in a deflationary environment.
We experienced this at a smaller scale in 2008 where a smaller part of the population lost their homes and jobs. While the government supports the credit system, the aggregate economy started to rebound.
However, the people who lost their homes/jobs weren't able to recover.
I think we're in for a similar cycle where the aggregate numbers will recover at some point however the spread of wealth will be even more unequal (benefiting the top 1% vs. everyone else).
Case in point: The bulk of income gains since 2008 have accrued at the top end of the income distribution. The top 1 percent of families received 49 percent of all income growth from 2009 to 2017, while the bottom 99 percent had only recovered two-thirds of their crisis losses by the start of 2018.
The only effective way I see out of this problem is by directly giving money to the people. People need direct, universal, unconditional income support. Far from generating sudden hyperinflation, it may be the only way to avoid a deflationary spiral that rivals the Great Depression.
📈 Investing in Stocks
I'm really excited to have Austin Lieberman on the podcast today. I have been following him on Twitter for the past 6 months. He's served as a Captain in the Air Force for ~7 years and taught himself how to invest. You don't need to have a business or finance background to be a great investor.
The biggest thing that stood out to me is Austin's transparency. It's easy to talk about success in hindsight. Austin really puts himself out there and shares his ideas and picks as he makes them. He continuously shares his learnings both good and bad - which is rare to see online.
A couple of months ago, Austin and a few other investors started 7Investing, which is a great subscription service on providing guidance on potential investments. I've personally benefited from some of the picks that Austin has made and would recommend checking it out.
Getting Started
Should I invest in stocks?
How much money do you need to get started? What should my overall portfolio look like? (e.g. cash on hand vs. investments)
What do you look for in a trading platform? Are there any particular ones that you'd recommend?
Making an Investment
What's the difference between stocks and ETFs?
What are the steps you take to identify and make a new investment?
Is there a right time to buy?
An Investor's Psyche
How do you distinguish investing vs. trading? What are some things you do to avoid day trading?
When should you 'double-down' vs. exit an investment? How do you make that decision?
What's a healthy time commitment for managing a portfolio?
💡 Google Platforms Rant
This is based on an internal memo that was written by a Google engineer named Steve Yegge. Focusing on the differences between Google and Amazon (where he used to work), the memo was supposed to be shared internally, but it accidentally leaked.
While this is dated, it speaks to the cultural differences between Amazon and Google and goes into a big reason why Google may have actually underachieved relative to its potential.
On Amazon:
Amazon's recruiting process is fundamentally flawed by having teams hire for themselves, so their hiring bar is incredibly inconsistent across teams, despite various efforts they've made to level it out. And their operations are a mess; they don't really have SREs and they make engineers pretty much do everything, which leaves almost no time for coding - though again this varies by group, so it's luck of the draw. They don't give a single shit about charity or helping the needy or community contributions or anything like that. Never comes up there, except maybe to laugh about it. Their facilities are dirt-smeared cube farms without a dime spent on decor or common meeting areas. Their pay and benefits suck, although much less so lately due to local competition from Google and Facebook. But they don't have any of our perks or extras -- they just try to match the offer-letter numbers, and that's the end of it.
They prioritize launching early over everything else, including retention and engineering discipline and a bunch of other stuff that turns out to matter in the long run. So even though it's given them some competitive advantages in the marketplace, it's created enough other problems to make it something less than a slam-dunk.
However, Steve explains the two biggest decisions that changed the trajectory of Amazon.
The first one came from one of many 'big mandates' that was issued by Jeff Bezos.
All teams will henceforth expose their data and functionality through service interfaces.
Teams must communicate with each other through these interfaces. There will be no other form of interprocess communication allowed: no direct linking, no direct reads of another team's data store, no shared-memory model, no back-doors whatsoever.
The only communication allowed is via service interface calls over the network. It doesn't matter what technology they use. HTTP, Corba, Pubsub, custom protocols -- doesn't matter. Bezos doesn't care.
All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world.
No exceptions. Anyone who doesn't do this will be fired.
This sounds like a lot of technical gibberish but it essentially transformed internally into a service-oriented architecture and got the company into the mindset of building platforms (e.g. AWS or Amazon.com) vs. products.
The second one was a realization you can't always build the right thing for everyone. As a company run by a micro-manager, this is a pretty big shift in thinking. Amazon was founded on the notion of building a product that was near-perfect for everyone ("The Everything Store").
Steve defines this as accessibility. "When software -- or idea-ware for that matter -- fails to be accessible to anyone for any reason, it is the fault of the software or of the messaging of the idea." Steve argues that "accessibility is actually more important than security because dialing Accessibility to zero means you have no product at all, whereas dialing Security to zero can still get you a reasonably successful product such as the Playstation Network."
The idea of platforms and not building the 'perfect product' is fundamentally against the culture at Google, which brings us to the point of Steve's post.
A product is useless without a platform, or more precisely and accurately, a platform-less product will always be replaced by an equivalent platform-ized product.
The key to building a great platform is to 'eat your own dogfood.' Unfortunately, this is something that Google has failed to do (unlike Amazon/AWS, Microsoft or even Facebook). "You don't eat People Food and give your developers Dog Food. Doing that is simply robbing your long-term platform value for short-term successes. Platforms are all about long-term thinking."
Steve uses Google +, the social platform that Google tried to build and later killed off.
Google+ is a knee-jerk reaction, a study in short-term thinking, predicated on the incorrect notion that Facebook is successful because they built a great product. But that's not why they are successful. Facebook is successful because they built an entire constellation of products by allowing other people to do the work. So Facebook is different for everyone. Some people spend all their time on Mafia Wars. Some spend all their time on Farmville. There are hundreds or maybe thousands of different high-quality time sinks available, so there's something there for everyone.
The underlying problem goes back to Bezos' second realization.
"The problem is that we are trying to predict what people want and deliver it for them. You can't do that. Not really. Not reliably. There have been precious few people in the world, over the entire history of computing, who have been able to do it reliably. Steve Jobs was one of them. We don't have a Steve Jobs here. I'm sorry, but we don't."
Outside of Android (which was more of an acquisition), Google has not really built a platform. If they had created a platform using Google search or even Gmail, the possibilities could have been quite significant.
While Google can certainly get by without building a platform, it won't be able to evolve the way its counterparts (Amazon, Microsoft or Facebook) have.
"If you delay it, it'll be ten times as much work as just doing it correctly upfront. You can't cheat. You can't have secret back doors for internal apps to get special priority access, not for ANY reason. You need to solve the hard problems upfront."
Thanks again for reading this post. If you can just comment on what you think is interesting, what you find confusing, and what you think is boring or irrelevant, that would be really helpful.
Until next week,
Suthen