WeWork redux, Mexico's Secret Sovereign Wealth Fund
Plus the economics of not living up to your reputation, and a regulatory arbitrage unicorn, and more...
Another busy week!
First, on the economics of not living up to your reputation. Every luxury brand is tempted to go downmarket, but some trusted brands do the same thing, by being a little less trustworthy. This is a hard problem to solve, but an important one to be aware of.
I wrote a follow-up piece on WeWork. I remain in the camp that the skeptics have a point but are wildly overconfident. Now that WeWork has faced a cram-down round from SoftBank, it sounds like the skeptics were right. But were they? In a levered growth company, everything has to go right all at once, which means that when things go badly, you don’t necessarily know what went wrong.
Incidentally, one of my predictions came true: as part of its efforts to bail out WeWork, SoftBank is renting space from them and encouraging other portfolio companies to do the same.One good meta-theory of WeWork is that we’ve focused too much on the question of whether or not Masa Son is a tech visionary, and not enough on the fact that Rajeev Misra is a financial engineering visionary. Financial engineering is the art of slicing up cash flows in a way that maximizes their market value, and the intersection of private tech companies and commercial real estate is an opportunity to do that to great effect.
On the macro side, have you heard the good news about Mexico’s massive sovereign wealth fund? Excluding China, remittances are bigger than foreign direct investment, which has all sorts of side effects—it means that interest rate differentials matter less than developed-world labor markets, so countries poor countries with a large population of rich-world expats are less vulnerable to economic shocks than they used to be.
I’m always frustrated by the theory that Uber and Airbnb are just regulatory arbitrages meant to evade taxes, zoning restrictions, and labor laws. Regulatory arbitrage exists, but it’s more of a big company thing—small companies are usually founded by people who have no idea what the relevant laws are. So it’s not surprising that the biggest regulatory-arb tech unicorn is the one co-founded by a consortium of investment banks.
Beginning Tuesday October 28, I’m hosting a reading group on financial bubbles. We’ll be doing case studies on well-known and obscure financial manias, and examining the theories of how bubbles arise—everything from the efficient market theory that there’s no such thing as a bubble to Girardian Mimetics. We’ll also be talking about some of the common traits of bubbles—upfront costs and variable outcomes, bubbles as an attempt to make the world more legible, and how the physics of electrification versus line shafts changed corporate finance.
If you’re interested in learning more, shoot me an email.
Or just click here to enroll.
A few pieces I’ve read recently that I highly recommend:
Vickrey Auctions are a fun thought experiment, but in some cases they actually work! Any clever pricing system is implicitly charging people more attention rather than more dollars, so such an approach works best if you’re selling to nerds. (This is why AdWords got away with using auction mechanics. The people who understood the system subsequently became very rich nerds indeed, and kept using it.)
One of my favorite financial anomalies is Taiwan’s gigantic life insurance market, which is one of the biggest players in US corporate bonds. But how can insurers handle the risk of owning dollar-denominated assets with non-dollar liabilities? Brad Setser and the Concentrated Ambiguity blog ran the numbers, and even caught Taiwan’s central bank cooking the books. When you hear about big traders using shaky accounting, you might think of Enron, and you’d be right: like Taiwan, Enron’s energy trading arm gamed the numbers to hide how much they were making.
I don’t expect an Enron-like end to this situation, but if they don’t unwind these trades, at some point Taiwan will experience an inverse currency crisis.