Longreads + Open Thread
Markets; BuzzFeed; Risk; Mortgages; Retail; LBJ; Diff Jobs
Canice Prendergast: How Food Banks Use Markets to Feed the Poor. This paper is a case study in which a group of food banks changed the way they allocate across the US, by switching from a queuing/rationing-based system to a market-based system with an internal currency. One problem markets are great at solving is allocating heterogeneous goods to parties with heterogeneous preferences. And this can be useful even when not everyone involved is a dedicated profit-maximizer.
Via worldoptimization, a popular pseudonymous Tumblr account.
Mia Sato writes in The Verge about BuzzFeed's struggles to remain relevant. An unfortunate truth about the content business is that the more it scales, the more it gets commoditized. And once it's commoditized, it can get squeezed between a cost structure the content company doesn't control and a distribution system that's operated by another business with its own interests. If scaling entails lower quality, any sufficiently high-growth media business is indistinguishable from spam.
For previous BuzzFeed coverage, see this Diff post.
In light of the debates FTX has sparked about risk tolerance, this post by Brad DeLong from a few years ago is worth reading. DeLong starts with the observation that stocks outperform bonds over the long term, and that leverage enhances returns. Does that mean we should be fully levered at all times? No: with monthly rebalancing, a 4x levered investor is permanently wiped out in 1929. But what about a little less leverage? At 3x, an investor is actually worse off than at 2x leverage, even though they don't get fully wiped out—because during the Great Depression, that investor loses 99.9% of their money, and even subsequent high returns aren't enough to make it back.
Eglė Jakučionytė and Swapnil Singh have a paper on the decline of co-borrowing for mortgages. Co-borrowing leads to 60% lower defaults on average. Some of this is a selection effect, where the co-signer has access to credit quality signals that don't show up in FICO scores and thus doesn't feel that they're taking much of a risk. And some of it is because people dislike defaulting on debt to an extent that is economically irrational but admirable.
Via Marginal Revolution
Josh Eidelson at Bloomberg has a piece on the evolution of the Apple Store from a great retail job to a merely okay one. Markets are brutally efficient. Apple retail jobs were better jobs when the company wasn't as profitable, and faced the real risk of extinction. Now they're safer and more attainable roles, in part because brand affinity and employee morale are potential energy that can be converted into free cash flow. It's a lot more satisfying to work at a company when it's still mostly investing in these intangibles, and that period can go on for a long time. But eventually, it will probably be run by someone who is trying to get a measurable financial return on that investment.
The Path to Power and Means of Ascent. Robert Caro is a great biographer of Nietzschean heroes despite not being especially Nietzschean himself. His subjects are willful, pragmatic, amoral, and tireless. Caro himself is at least tireless (every time the book cites LBJ telling his assistants "If you do everything, you'll win," it reminds me that Caro spent time living not just in Washington, D.C. but in rural Texas in order to write the books).
There are many scenes in these books that feel a bit like parts of Trader, in which someone extremely committed to optimizing every detail and not missing a single opportunity constantly works the phones and takes judicious but often extreme risks. There are some archetypes that show up across many different careers. LBJ also mastered technology early, whether it was making full use of one-to-one communications (sending telegrams ahead of letters so people would know what to expect and know who to thank for it), broadcast (planting newspaper stories, running aggressive direct mail, doing radio ads—and owning a radio station), or transportation (in the 1948 Senate campaign, LBJ’s big attraction was that he traveled by helicopter).
One fun thing about these books is that they're often a dialogue, between what LBJ was saying at the time and what Caro's sources have admitted after the fact. In one sense, these books had flawless timing: many of the people involved were still alive when Caro was writing, but were old enough that they either didn't mind burning bridges that had long since fallen into disrepair, or had forgotten what was supposed to stay secret.
These books are an extraordinary monument to diving into a topic and giving it more effort than it seems to deserve. And it's worth speculating on how many LBJ-level figures exist today, perhaps in domains outside of politics, and how many Caro-level biographers there are who could do them justice.
Drop in any links or comments of interest to Diff readers.
There are lots of companies currently in a position where they've spent more money building their business than the business can realistically generate. Are there any outstanding examples of capital discipline over the last few years?
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Throughout this whole saga, I have come to realize that, like many things, capital is also Lindy. Things which come quickly sometimes go quickly as well, often because they have not had the time to build up more compliance, risk controls, partnerships and system integrations. When you become a big, pondering, aging organization, it gets a bit harder to rip you out (so much so that sometimes you even get implicit bailout guarantees). You become Lindy.
This is absolutely true. The leverage link above is a nice, simple illustration of this: rapid success can be a symptom of overbetting, and eventually lead to a blowup. And Some companies and individuals are fractally risk-seeking: not just making high-variance choices, but being bad at keeping track of them and blowing up that way, too.
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