“Systems grow terribly out of control when people don’t stop them when they’re going mildly out of control.”
-Jordan B. Person.
My thinking tends to be better when I ask myself simple and broad questions that take decades to play out. If I can answer these questions correctly, I can stay focused on the coherence of the narrative while people, trends, technology, and beliefs all dance around destiny. So, I ask myself a very simple question. Does America deserve the prosperity it has seen over the last half century to continue?
My style of dissecting principles and ideas applicable to investing centers around my own desire to view the investment world through an original and comprehensible window, hoping to gain a new perspective on a thoroughly examined field. This has forced me to look far outside what is deemed pertinent to investing, hoping to gain insight outside the borders of common investment investigation. Investors seem to have a steadfast recency bias regarding America as the golden goose, driving investible prosperity forward. Unfortunately, America, as with much of the west, has fallen asleep in the shade, under trees planted by men who disciplined themselves into prosperity, only to awaken to an unkept farm unsure if they want to be farmers.
Notice I am not asking if America will continue to be prosperous, I’m asking if it deserves to be. A timeless Munger quote is, “The safest way to get what you want is to deserve what you want.” I have yet to find a single hairline crack in one letter of that quote. One of the hardest parts of investing, and living, is watching fraudulent action and trends become popular during your time. Not taking action is always questioned. The man with no job does not get paid. The man doing his job poorly, even illegally, still gets paid. But in markets, the dormant and observant investor gets paid while the active fraud eventually gets slaughtered. As mentioned in the last essay, we have a devout commitment to committing proactive errors. Bad trends and situation can outlive a rational man trapped inside them. Let’s take look at some quiet trends I’ve noticed that I believe are going to get very loud.
This isn’t anything new….
Humans are not built for interactions at a large scale. In Malcolm Gladwell’s Outliers, he outlines businesses that saw great success and tries to explain the reasons behind their success over their competition. One of the businesses outlined was a clothing company that built parking lots with only 200 spaces adjacent to the factory. When an employee complained there was nowhere to park, the company built a new factory, with a new lot. They understood the importance of creating an environment that comported to what humans naturally are, and scaled their factories to be manageable and familiar to those working there. Their employees were all friends outside of work, social circles naturally sprung up, and almost everyone knew each other. Take a guess whether this company had a hard time finding, and keeping, high-quality employees.
We are scaling ourselves out of our own lives. Our modern way of being productive has brought forth unmanageable and undesired daily routines with intangible results. This has not only impacted mental health but has also caused a certain disdain for the business world with younger generations. We should be improving upon what makes us human, what drives us, and what causes us to showcase the best of ourselves. Instead, we are seeing those with the most to offer being funneled into a handful of high paying firms that generate very little for society in the long-term. The wealth being created is real, but in many ways, not deserved or sustainable without a very high level of bureaucracy and legacy protocols maintaining their control. Like the Treasury buying from the Feds, modern solutions to modern problems are compounding the original problem. Like water off a duck's back, scale has a miraculous way of pushing responsibility off those in-charge.
I am trying to focus on the cause of the fragility we are now seeing with an interconnected world. It started with a global search for margin, and has left us with where we are now. It’s easy to look at COVID and the failures of global trade. Its much harder to understand how we got here.
“With my family, I’m a communist. With my close friends, I’m a socialist. At the state level of politics, I’m a Democrat. At higher levels, I’m a Republican, and at the federal levels, I’m a Libertarian.”
Scale informs you of the world’s problems all at once. Yet, you have no familiarity or responsibility to those affected. So in a way, we are programming ourselves to be numb to the difficulties of our fellow man. Paying attention only gives way to psychological stress and wasted time. What this boils down to is a lack of responsibility to our fellow man, a pledged allegiance to our bubble, and institutions that push agreed upon narratives. Our ability to care and act has evaporated under the beating sun of scale. If you owned a bank in a town of 200 people, and things mildly went south, not only would you feel the consequences yourself, you would have every friend and neighbor telling you about it. When the Fed prints trillions, taxing the middle class in the double digits, scale allows them to walk past their victims on their way to their prestigious job. They have no responsibility. Everyone knows it’s more than mildly wrong, but neither them nor their children will likely feel the consequences of their decisions as scale, as well as their wealth and status, protects them. People are currently getting what they can, when they can. And that is going to be an awfully hard story to tell their grandchildren.
The below chart shows what the federal government's interest expense would be with each rate hike of 1%. If rates go to 3%, we will be spending more to finance our debt than on all of Social Security. What led to this? A total lack of skin in the game. No responsibility and no morals. We might be able to pull the strings for a while, but with this type of financial gluttony, we deserve to lose a lot of prosperity. I worry about the legacy finical system and its continued growth in proportion to real economic output. I am almost certain it will be completely obsolete in fifty years, and I believe the advancement of technology and centralized control will make it harder, not easier, for a more robust and decentralized alternative to arise.
A few quotes from the above article:
“By contrast, since 2005, the importance of meaningfulness in driving job selection has grown steadily. “Meaning is the new money, an HBR article argued in 2011. Why, then, haven’t more organizations taken concrete actions to focus their cultures on the creation of meaning?”
In a survey of attendees, he found that nearly 80% of the respondents would rather have a boss who cared about them finding meaning and success in work than receive a 20% pay increase. To put this figure in perspective, consider that Americans spend about 21% of their incomes on housing. Given that people are willing to spend more on meaningful work than on putting a roof over their heads, the 21st century list of essentials might be due for an update: “food, clothing, shelter — and meaningful work.”
“Employees who experience strong workplace social support find greater meaning at work. Employees who reported the highest levels of workplace social support also scored 47% higher on measures of workplace meaning than did employees who ranked their workplaces as having a culture of poor social support. The sense of collective, shared purpose that emerges in the strongest company cultures adds an even greater boost to workplace meaning. For employees who experience both social support and a sense of shared purpose, average turnover risk reduces by 24%, and the likelihood of getting a raise jumps by 30%, compared to employees who experience social support, but without an accompanying sense of shared purpose.”
- As you can imagine, these numbers have skyrocketed with people working from home.
We are mainstreaming routines and actions that are contrary to what humans derive happiness and meaning from. How can we have prosperity when a large portion of the workforce is unhappy with their daily routine? The common route of getting educated and employed, specially at the higher levels of white collar compensation, are leaving people empty, frustrated, and searching for an alternative. This won’t lead to just a lower number of people participating in the workforce, it will shift productivity in the direction people value. There is going to be a big shift in productivity as we are already seeing people use COVID to grant them the courage, or the excuse, to move away from their old life. Companies are still trying to hire like crazy, and people still want to find their own way outside a well paying bureaucracy. Denying what we naturally are denies us of the happiness we derive from life itself. Work from home, along with a lot of corporate and academic structures, go against the fabric of what makes us human. This leads me to believe we are at the top of an established productivity cycle. Humans will carry on, but in a way that puts themselves before the rigors, or the boredom, of the modern economy. Businesses that lean into this will attract top talent, as well as conscientious customers. The most powerful and ubiquitous companies in the world these days are global. Birthed by America, they no longer need America’s infrastructure or “educated” employees to complete the tasks at hand. They can hand select from all over the globe, and if America shows signs of weakness or increased regulation, moving headquarters would be as big an affair as a teenager popping a zit.
Recognize these quiet and fragile trend and focus on robust and moral productivity. The intangible qualities of businesses are going to matter more than ever. Find people and businesses that are going in the opposite direction, empowering people to have autonomy and pride in their output. Look for companies that can scale, without scale itself demoralizing those who keep the lights on. People these days are searching for alternatives, and with that will come opportunity to those who can supply it. Finally, with responsibly and morality fading (two of the most important ingredients for implementing capitalism) look for people building trust at a local level with each other and their customers.
Obviously, we have a bit of a currency crisis as well. The problem with current inflation is not that it exists, but that there this is no solution to fix it. If the government raises rates in any meaningful way, the government will default. I don’t know what the perfect hedge here is, but I would be long the tangible and short the paper.
To summarize, we have put our nature behind our wants. We have scaled it in a way that alienates us from each other, as well as the fruits of our labor. This detachment and scale has created a lack of responsibility and skin in the game, causing a lot of undeserved and fragile prosperity. The next 40 years is going to be a lot harder, with many opposing forces at play. Not only will the economic tailwind not be blowing as hard, but our growing pains will continue to present themselves as we look for better solutions. The best products are worthless without the best employees. Good micro will persist through bad macro, but people have to believe it’s possible.
When was the last time you heard someone mention “The American Dream” in a non-sarcastic light? Are young Americans excited to join the team? Proud to be an American. Or, is everyone quietly looking for the exit? Our social fabric, along with institutional trust, must be restored. Having an extreme minority excel is enough for a portfolio, but not a nation. So I ask myself, how can we have prosperity when prosperity comes after responsibly, purpose, pride, and happiness?