Longreads + Open Thread

Longreads

• This 1989 Atlantic piece on Japan by James Fallows is worth rereading occasionally to see what economic threats to the US look like at their peak. Fallows didn't know that he was writing about a country whose political salience and perceived economic impact on the US would soon decline—has any major US politician in the last twenty years professed concern about Japanese competition? One claim from the article is that the US tried to use principled arguments about free trade, while Japan's trade negotiators were more interested in costs and benefits than abstractions. This is the common perception when countries are losing their position; running very principled policy is so expensive and inconvenient that only superpowers can afford it, and even they can't afford it for very long.
• Tyler Cowen interviews Marc Andreessen. A great riff in this interview is Andreessen's point that general-purpose technologies are easier to criticize than other technologies because the more general they are, the more likely they are to lead to bad behavior. "We figured it out, we gave people cars. In history, we gave people automobiles, and what’s one of the first things that happened was there was a nationwide rash of bank robberies."
• Ben Tarnoff in The Guardian on eBay as the original platform business. This piece goes in many directions, from Marx's criteria for the varieties of labor exploitation to the history of American malls. One useful question is: why did it take so long for another successful platform business to arise? It may be that eBay benefited from the Beanie Baby bubble and the one-time repricing of most of the country's dusty, forgotten antiques, and that these two forces provided enough potential energy to kickstart a platform's network effects before the Internet as a network was big enough to support other platforms.
• D.E. Shaw has a fascinating paper on stocks' sensitivity to interest rates. Especially worth checking out; the chart on page four showing sensitivity by industry. Contrary to my expectations, tech was not especially tied to interest rates in the 2010s, but was very closely connected to them from 2020 onward. One possibility is that tech stocks were slowly accumulating duration risk, as investors gradually discounted out cash flows further and further in the future, but that this only became salient for day-to-day decisions when rates moved up.
• Pondering Petajoule on why clean energy needs financial engineering. The core difficulty in the energy industry is that the popular investments generate fairly modest returns in the current regulatory environment, whereas the ones that make you a pariah also offer lots of free cash flow. Financial engineering is one way to bridge this gap, by converting the expectation of different returns in the future to different economic incentives today.

Books

• Princes of the Yen: A well-researched and fairly conspiratorial book arguing that Japan's recession in the 90s was deliberately engineered by their central bank. One useful takeaway from this book is that it's very hard to understand complex bureaucracies from the outside, and the "outside" can even be defined as people who are inside an organization but don't understand which parts of it are powerful. In Japan's case, the central bank essentially established lending quotas for banks, which allowed them to determine the total availability of credit in the economy regardless of what interest rates and fiscal policy did. The book makes a strong case that this practice continued well after the government claims to have stopped, and that this contributed heavily to the boom as well as the bust.
• The World for Sale: A great look at the world of commodities trading. Commodities trading houses end up being an interface between countries that demand inputs for manufacturing and the sometimes unstable and dangerous places where those inputs are cheaply available in large quantities. The development of the business is a good example of path dependence; some commodities traders were well-prepared for events like the oil shocks of the 1970s or the rise of Russian energy exports, and prospered accordingly. The book also makes it clear that there's a blurry line between commodities trading as a logistics business—connecting buyers and sellers and taking a commission—and the commodities business as an avenue for wild speculation.

Open Thread

• Drop in any links or comments of interest to Diff readers.
• One source of competitive advantage for companies is recruiting. In private equity, the recruiting process has kept moving earlier and earlier, for example, and tech companies (and quant firms) like to sponsor high school-level math and science competitions to get in front of talent early. Which companies (or other organizations) have done an unusually good job of systematically recruiting the best people ahead of competitors?

Reader Feedback

A reader responded to this piece on why discounted cash flow guesswork is worth doing ($) with links to two papers that dive deeper into how to think about valuation. At one level, theorizing about the real meaning of various financial models doesn't help much with improving those models—in practice it may be easier to use the same model as everyone else and focus on guessing the inputs correctly, at least in the short term. But understanding where value comes from is useful both as a sanity check on bad assumptions and as a reminder that financial theory needs to connect to the real world.

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