A Non-Zero Interest Rate World

The Fed, billionaires, and empathy

some thoughts on markets and empathy and pricing mechanisms

Ah, what a week.

SBF arrested. CPI came in soft. Fed hiked by 50 bps. Twitter is melting.

There are two threads that I think tie together well in the broader discussion around the Fed and what’s happening on a microscale on Twitter dot com.¹

• Inflation doesn’t impact stocks - how the Fed reacts to inflation impacts stocks

• Tech libertarianism relies on free market ideology - but a handful of billionaires end up being the entire free market

What’s interesting about these two things - the market really listening to the Fed (usually) and sometimes to the economic data (bad news is good news sort of thing), and the tech world bemoaning journalism while elevating themselves as the executor of free market - is that they both have a a weird twist of irony.

Free Markets

There is extensive literature on what “free markets” actually mean, with no real conclusive answer. Many have pointed out that there is really no such thing as free markets; that truly free markets actually require more government oversight, not less; that they require enforceable property rights and the government to absorb all social costs.

Free markets are good! And they are very important to the tech world. There is an idea in some corners of the tech world that only tech people can be executors of Goodness (we saw this with SBF) and that anything that stops tech people from doing what they want is Very Bad. This is a big theme on Twitter with top VCs and billionaires getting pretty upset with media. Max Fisher has a great thread on it:

People really need to understand how mainstream it has become in some tech VC circles to argue that journalism itself is dangerous as an idea and should be abolished, and that it will be up to the tech world to carry this out… If you remember the Clubhouse sagas of 2020, you saw how openly this is now discussed among some of the Valley's most powerful. "Why does the press have a right to investigate private companies? Let the market decide."

Thomas Zimmer summarized it well on the more individual level:

Convinced the world works best if people like [Elon] get to do whatever they want, unhampered by regulations or criticism – because their personal interest is supposedly identical with the interest of humanity itself.

In “Safe Space”, the Verge explores this intersection of Silicon Valley and VC victimhood more, with a focus on workers gaining in power, writing:

Now that the tech industry has grown to be a major cultural force, workers are wondering why they aren’t treated better… As a result, tech reporting has focused less on founders and CEOs and more on the hundreds of thousands of workers who power their businesses.

Tom Whyman takes it a step further in his piece examining how capitalism (and the billionaires that subscribe to it) has become a sort of religion, drawing from Adorno’s Minima Moralia -

The single man who hoped for immortality absolutely and for himself alone, would in such limitation only inflate to preposterous dimensions the principle of self-preservation.

That sums up what we’ve seen. Self-preservation through waging false war. Spiraling into the concept of free markets, while simultaneously making them gated. There’s also been a rise of anti-intellectualism, with hostility towards creation and art, and discourse over if reading books is actually good. Basically, there are threads of history woven into the present that are concerning.

The Silicon Valley billionaires are waging a war against “wokeness” because that enables them to keep the tech world elevated and maintain a certain status quo. The Fed is inadvertently threatening the fluffy world of nonzero interest rates that enabled a lot of excess, and the political landscape is evolving. All trapped animals beat against the cage.

The Fed’s Market

Everyone has one ear on the Fed, waiting to hear whatever sweet whispers Jerome Powell will have for number go up this time. And the Fed has made it very clear that they want to keep the market in line - and the market is starting to rebel against them.

• The market thinks rate cuts are likely relatively soon, whereas the Fed is like “well hm, no, we plan to keep hiking”

• The market also thinks that the peak rate, where rates hang out for a bit and the Fed pauses is lower than what the Fed thinks. The Fed is planning to rip to 5%+, and the market is somberly shaking its head saying “this won’t happen”

The reason that the market is no longer hanging on the Fed’s every word is because

• We have started to see softer prints in inflation (like the CPI this week)

• We have seen inflation expectations ticking down

• Supply chains have eased according to US services and manufacturing PMI

• We have seen somewhat of a loosening in the labor market in quits

But the Fed seems to have blinders on for some of this, and based on their Summary of Economic Projections - it surely seems like they think that a recession is going to happen. Lower GDP, higher unemployment, higher rates, and higher inflation into 2023 - bad! But structurally, a lot of things have changed in the economy that the Fed is trying to manage.

• The labor market is radically different, and that’s center stage for the Fed.

• The Boston Fed found that men are dropping out of the labor force because they are upset about their social status

• We’ve lost a lot of people from COVID, something we haven’t even made time to grieve. Things are weird.

And now the Fed is really focused on the labor market via “core services ex-housing inflation” - let’s call this “Things We Have To Spend Money on To Stay Alive” which is an inflation category (that is more than half of core PCE) and measures things like healthcare, education, hospitality spend. And it’s slowing! Like it's not going up! A lot of the pressure in this category is healthcare spend, and that should be slowing soon.

• But what is really worrying the Fed here is this intersection “Things We Have To Spend Money on To Stay Alive” and the labor market - because wages are a huge component of the cost of these services, and the Fed seems increasingly concerned about wage-price spiral woes.²

So the Fed is like “heck no buddies, we gotta keep ripping even though there are some signs of inflation speeding up towards slowing down” - and that’s the worry. That the Fed rips so hard because the labor market and worries over wage growth that the labor market really does collapse within itself - and then, we have problems that the Fed’s toolkit simply isn’t big enough to fix.

SBF Arrested

I didn’t include this in the core thesis of the piece because it is disappointing in a visceral sort of way. How greed shakes out, how something that should have been good turns so bad. Cathie Wood sort of falls into this category too (obviously not to the same degree) - these big promises (I think the colloquial term is charlatan) that just end up evaporating people’s money.

SBF was charged with a litany of things - “Wire Fraud, Wire Fraud Conspiracy, Securities Fraud, Securities Fraud Conspiracy and Money Laundering” (the list goes on) and honestly, if you have a group chat *named* Wirefraud, you should likely expect to be charged with these things!!!!

I’ve written a lot about him - but the main things are:

1. Don’t steal people’s money

2. The altruism wasn’t effective

Final Thoughts

A lot of the above lies at the intersection of accountability and responsibility.

I think a lot about empathy and relating to other people and how important it is that we spend time understanding each other. Platforms like Twitter (and even mechanisms like the stock market) enable monetized opinions. Scream the loudest, and someone will pay attention. Use the market as a way to express your thoughts.

But there’s a quote attributed to Bill Bullard that says:

“Opinion is really the lowest form of human knowledge. It requires no accountability, no understanding. The highest form of knowledge… is empathy, for it requires us to suspend our egos and live in another’s world. It requires profound purpose larger than the self kind of understanding.”

Within markets, we rely on the forces of supply and demand, on the actions of businesses and individuals to move things forward, and prices occur where those two forces intersect.

Empathy is a function of understanding the emotions of others. Markets don’t really price this. It requires looking beyond individual forces of supply and demand - but self-interest often overwhelms this process because that is what is rewarded. And this is one of those things that is “alas that is life, alas human nature, alas alas alas.”

From Vincent Van Gogh -

“Many people seem to think it foolish, even superstitious, to believe that the world could still change for the better. And it is true that in winter it is sometimes so bitingly cold that one is tempted to say, ‘What do I care if there is a summer; its warmth is no help to me now.’ Yes, evil often seems to surpass good. But then, in spite of us, and without our permission, there comes at last an end to the bitter frosts. One morning the wind turns, and there is a thaw. And so I must still have hope.”

Thanks for reading.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1. For context, Elon has sort of taken the hammer to the platform, banning and then unbanning journalists, and has continued to wage some sort of war against “wokeness”

2. Even though John Williams of NY Fed sees no worries of wage price spiral, which is great