Plain English with Derek Thompson - Market Meltdown: Why Tech and Crypto Are Crashing - and What Happens Next

Episode Date: May 11, 2022

The stock market is absolutely gross right now. Everything is down, except (as loyal listeners know) the CATAN portfolio. Crypto has cratered, growth stocks have been ravaged, and hedge funds are imploding. Why is this happening? Is this Dot-Com Bubble 2.0? And what does it mean for the future of the U.S. economy, investing, and tech? Investor, entrepreneur, and podcaster Jason Calacanis joins the show. He gives us a brief history of the 21st century tech industry, explains why this is like and unlike the summer of 2000, makes some bold predictions about crypto and the economy, and tells us how he's advising young chief executives. If you have questions, observations, or ideas for future episodes, email us at [e-mail]. Host: Derek Thompson Guest: Jason Calacanis Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

Yo, Rob Harvilla from 60 Songs That Explain the 90s here to inform you that we are back with 30 more songs because the 90s were super long and had a ton of rad music. Please join us every Wednesday for more 60 songs that explain the 90s only on Spotify. Today is an emergency episode of sorts. We're moving Friday's episode up because the stock market is vomiting all over itself and I thought some of you might be interested in understanding why. So if we wind back the tape to last fall when markets were near their peak, there was this moment in history, this very specific moment that probably should have told all of us that we're living in a simulation and the simulations architects are laughing and laughing as they get ready to pull out the rug from under our feet. So October 28, October 28, 2021, crypto.com, a trading platform for cryptocurrencies,

comes out with an advertisement featuring Matt Damon, walking through some CGI room. He waves his hands at Columbus. He waves another arm at the Wright brothers. He talks about bravery and grit. He walks to a CGI window and Mars is there, of course. And he turns from the camera and says, fortune favors the brave. Now, the price of Bitcoin peaked about one week later, and it has since crashed more than 50%. Matt Damon, bless his heart, love his movies.

Matt Damon was the top. He said Fortune favors the brave. basically milliseconds later, the bottom fell out of crypto. But it's not just crypto. This year, the NASDAQ is off 30%. Growth stocks and pandemic darlings, Peloton, Zoom have crashed more than twice that amount. Hedge funds that backed those growth stocks, ARC, Tiger Global, have seen some of the fastest collapses of any hedge fund in history. And it's starting to give people summer of 2000 vibes. Dot com era vibes.

That summer, of course, was the beginning of the end of the dot-com bubble when many companies that basically just slapped dot com on their names instantly got rich without any sort of business model, they collapsed. In the same way, I suppose, that many companies in the last few years put the words blockchain or token in their company description and then immediately got rich. And that brings me to today's guest, who's Jason Calicanis. Jason is an early internet entrepreneur. He's a veteran of the dot-com bubble.

an angel investor in companies like Uber and a prolific podcaster as well. One lesson of today's show is that one of the hardest things to do when either the market is soaring or when the knife is falling is to maintain perspective. A lot of the companies that are failing right now are bad companies. A lot of the companies failing right now are grifts wrapped in brain-dead religious fervor and reality is catching up to them. But a lot of the companies that are getting killed right now are good companies.

Great companies, the Amazon's and Googles of the next generation. For years, a lot of startup founders have basically been fundraisers. And now we get to see who's really a CEO. And if you're an investor, well, look, this is not an investment show, and I am not an investment advisor, but it is a matter of straightforward math, just straightforward math, that fortunes are collected at the top, but they're made at the bottom. The bottom is near.

It's time to pay attention. I'm Derek Thompson. This is plain English. Jason, welcome to the podcast. Thanks for having me. I'm very excited to be here. So the market is absolutely disgusting right now. Tech stocks have been destroyed this year. Crypto has been demolished.

Growth stocks are down 70% if they're lucky. What is happening at the moment? Do you think we're witnessing the popping of Tech Bubble 2.0.0.0.5. now. Yeah, it's a great question. There's a lot going on concurrently. So this is unlike anything I've seen. We had the 2008 Great Recession that was based on one thing, real estate, and a bunch of people getting mortgages who probably shouldn't have gotten mortgages and defaulting. And people doing really complex derivatives around those people who should never have been, you know, given mortgages. Then you had the dot-com bust, which I guess is most analogous, since it's the same cohort of companies, same style of companies.

That was very different as well, because at that time, you had tens of millions of internet users. Most of them weren't on broadband. People were still afraid to put their credit cards online, and the business models were not established. And so it was a very different world. The number of customers you could reach was typically millions to tens of millions. Now it's billions. Like really, real addressable market. You know, you go on to the App Store, you can reach billions of people.

You go on to both app stores, you know, it's 3 billion people. And so what we're seeing right now is we had a very vibrant market, and then the pandemic happened. What happened when the pandemic happened? Everybody looked at tech stocks and said, my God, it's so easy to make money with tech stocks. They only go up. In fact, Dave Portnoy had a reoccurring joke when he was trading stocks every day from Barstool. He would just say, stocks only go up. And that was kind of like we all laughed.

Like, no, they don't. They go to zero. Like, literally, I've seen many socks go to zero. And people forget that. And that's an important thing for people to remember. So, Jason, you were there for the dot-com bubble in 2000. And you're obviously here now for whatever this is going to be called. The COVID bubble, dot com 2.0, Web3 bubble, the name will come.

Can you do a brief history of the 21st century in tech for us? Like, how did we get from the dot-com bubble to the pandemic bubble? So how do we get here? We had very few companies going public, and so for the last 20 years, we talked about how few companies were going public. And the argument I heard as a private market investor, I've invested in 300 companies privately. Before that, I was a journalist and an entrepreneur. So I've been on both sides of the table, entrepreneur and investor. That going public kind of sucked.

And the markets were challenging to you, and you had to disclose everything. So all of a sudden, we have all these unicorns, we have all this incredible innovation going on, and the business models become incredibly juicy and SaaS as a business model, selling software to businesses, reoccurring revenue. That starts to churn things like Salesforce and Slack are just printing money. And then you have consumer products like Instagram. All of a sudden you have 15 users and they have 15 employees and they got 100 million users. You're like, wow, this is such incredible. incredible efficiency. So we have this industry set up where it's like these companies are not going public and they're money printing machines and you can't lose. And that's when you start to get nervous. Overfunding happens. And founders say, you know, every time I've raised money, C, series A, series B, it's gotten easier. And I don't need to have discipline. I don't need to worry about the bottom line because everybody's rewarding the top line. And obviously Uber was a big beneficiary of this. They just kept raising more and more billions of dollars. And it was like, well,

what can Uber do? Let's go to another hundred cities. Let's do food. Let's do vetoes, flying cars. Let's be super ambitious. If the money is coming in cheap, our company's worth 20 billion and we can give away 5% of the company and get a billion dollars, we'll figure out how to make that worth more than 5%. So that's kind of all the setup. And then, of course, the public markets started getting excited. Retail investors join the party again. Always an interesting sign. And this time, the retail investors are much younger. And they're very sophisticated and they're very risk-taking. And they have this app called Robin Hood, which I was a seed investor in as well. And it makes it super easy. They take all the friction out to trade. Remember, the friction to trade was $25.

So you had to get on the phone and tell a broker what your order was. Like literally when I started trading stocks in the 90s, you had to call up, say, I want to buy 100 shares of this. market, they say, great, charge you your 25 bucks to put your order in. Now you can buy like a fraction of a share of Apple, trade it 10 times a day and pay nothing. So anyway, that's all the setup. And people lost their discipline on the investing side. People lost their discipline running the companies. And then the public markets said as they got overheated during the pandemic, whenever it's home, there's no sports to bet on. And people have stimulus checks. And people stop spending money. People forget that last one. Because the stimulus checks were a couple

grand. But if you're not going to Coachella, now you've got another couple of grand. If you're not going on vacation, if you're not going out to eat, all this adds up. A couple of hundred bucks here, a couple of thousand dollars there. You start buying NFTs. You start buying stocks. What stocks do you buy? I don't know. Reddit said AMC and GameStop or funny stocks to buy. Let's do that. The rise of meme stocks. All this starts happening and people getting disconnected from the fundamental reality of business, which is you serve a customer with a product or service, you charge them a price or you monetize them in some way, and then there's a profit at the end of the day. All of that went out the window. This is a full-blown contagion. The great news is there's,

you know, a lot of companies that are not sustainable, but most of the companies actually have real businesses. And even some of the ones that are most punished, if you look at some of the most punished companies, Peloton comes to mind, people love their Pelotons. They got three million subscribers. Like, to have three million subscribers during the dot-com era would be extraordinary. So even the ones that are absolutely decimated have pretty loved products. You talk to anybody with the Peloton. They're like, you can take this from me, you know, pride from my dead hands when I have a heart attack on it. Like, they're not giving it up.

And so this is a big swing probably too far for the overheated markets. But, you know, this is when fortunes are created. I always tell people fortunes are created in down markets. They're collected in up markets. And here we go. The cycle starts again, which is great for me as an early stage investor. That's a great line. Let me do a little bit of summarizing and then kick the question back to you.

So I think you told a really, really interesting history and important here. history about how software created this incredibly important business model where people could have extraordinary scale with very few employees. That's wonderful for profits. That grows. It becomes more sophisticated. It enters more markets. You have this low interest rate environment where money is cheap. It's easy to push money into companies and they can achieve scale. But we probably got over our skis in a lot of different ways. The same way that in the early 2000s, there were companies going public that had no business models. Today, there are companies that were essentially going public or raising money based on a narrative, not based on unit economics, based on the ability to make

money off of individual subscribers. And so that seems like, so, whereas that seems like an interesting difference between 2000 and 2022, the difference between business models not being there versus unit economics, not being there. That's correct. But in, you know, in 2000, you did have some companies who went public with the idea that they would figure out a business later. So they were like incubators going public, which, you know, which is really weird. And you did start to have things like truth social, where they didn't have any products,

and their deck was like, Phil was spelling errors. Trump's Twitter essentially, right? So you did have people like going public just based on whatever, I guess they call it momentum or something. I'm pretty old school. You know, there's a product and there's customers, and there's a team that builds it.

And so when I make my investments, I just look at those three things. Who's the team? Who's the customers? What's the product that connects them together? or how much you charge for it. And you get that flywheel thing going, things go well. And what's really brilliant, you know, as a kid from Brooklyn who has no business being like one of the top seed investors in history, to be honest, I didn't go to MIT. I went to Fordham at night while I was a waiter

and a bus boy. And one of the things I was struck with was it's a really milestone-based system, at least when I got out here. And you would get some friends and family or a seed investor to give you 100K, 50K. You'd build a prototype. You might get one customer. Then you might get a venture capitalist or a seed fund to give you 500K or a million. Then you get to 10 customers, 25 customers, six or seven employees. You get two or three of the management team members. And now you can raise the three or four million. And so it goes. Milestone-based. And something very strange happened in the last three or four years. I'd have people I invested in. And I would be like one of those first two or three milestones out of the first four. And then they say, guess what? I'm raising

money, I just raised $10 million, you know, at a $50 million valuation for, you know, 20% of the company or 15% of the company. I'd say, really? We don't have product market fit yet. Like, we're skipping like five steps. And they're like, well, should we take it or not? I'm like, yeah, take it. But realize, like, in order really be worth $50 million, we will be graded on 10 to 20 times

our sales. So you're going to need $5, $10 million in a hot market with a great company for that to be reality. or 20 times your earnings, 30 times your earnings. So just be ready to throw off $2 million in profits to be worth 50. And that may be a long road. It may be a two or three, four, five year road depending on the product or service. And so when I saw that, that was like a really red flag for me.

And when did you start to skipping steps? When did the red flags come pouring into the picture? Well, they first started the red flags, I would say a couple of years before the pandemic where the valuation discipline went out the window. So people would say, well, this company graduating from Wycombinator wants a $15 or $20 million valuation that used to be $5 to $10 for the entry price. So it probably doesn't matter because if it becomes a unicorn, doesn't matter. And I would say, well, I invested at Uber at $5 million and Com at $5 million and Tentity at $5 million.

Those are all unicorns. And you're asking for $5 million more than those three combined. So you're for Uber's? I don't think so. They had more. com.com, the meditation app, had more accomplished than you. do. So that's when I was like, this is getting weird, but I sort of sustained a disbelief because I said, well, listen, if I'm buying 10% of the company, the outcomes are bigger. Google, Apple,

Facebook. You can see it, the Uber, these outcomes are much bigger. The idea that a company would be worth 10 billion or 20 billion was just crazy years ago. So the outcomes are bigger because of the global market. You can address millions of, billions of customers globally with your products and services today, and that didn't exist 20 years ago either. The idea that you could fluidly launch an app in, you know, 100 markets, or you can launch Uber in a thousand cities, that playbook didn't exist until Google really, you know, went on their march, launching Gmail in every country. And smartphones proliferated.

And so everyone had the platform through which you got these apps. It's interesting. One theme of the story that you're telling is that there was contagion on the way up and contagion on the way down, right? Absolutely. It's by momentum on the way up. Exactly. Which is interesting.

It's a great observation. What happens now? I mean, because you're looking right now at the crypto stocks that are down 50 to 80%, the growth stocks that are down 70 to 80%. Do you think that right now we're near the bottom of this tech crash? Or are we rather, as Keith Raboy said, a general partner at Founders Fund and former executive at LinkedIn and Square, he said he's getting, quote, June 2000 vibes. Now, June 2000 is when the absolute bottom fell out of the NASDAQ. The NASDAQ fell from about 4,900, at the beginning of 2000, down into the 1000s,

didn't get back to its 2000 peak for 14 years, right? So if this is June 2000 vibes, as some people, I guess, are saying, we're not going to get back to November 2021 until the mid-2030s, right? So that's a very different picture than even a lot of pessimistic people might be holding out today. It's not going to be that bad. Yeah, yeah, it won't be that bad because, remember, like the apples and the Teslas and the Googles didn't exist back then, really, in their current iteration. You're talking about grown-up middle-aged businesses that have enormous value and aren't going

to fall 30, 40, 50 percent. And printing money. Yeah, they're not going to fall. And they're printing so much money. And they're sitting on so much cash. And they have these franchises that you just can't imagine going away. Nobody's giving up their iPhone. Nobody's giving up, you know, their Amazon Prime account.

Like, these things do have staying power. Nobody's, like, stopping their Google searches. So that is a difference. But I would say we're bouncing along the bottom right now. And so each stock has to go through this capitulation moment where people say, what is the actual value of this company? How much cash do they throw off? And how much value do I put? You have to like, it's basically now a weighing machine as opposed to voting.

I think this is going to be successful. The market is a famous quote. I don't know who. I was told to me by Bill Gurley, famous venture. capital, who was a mentor of mine, I don't know who told it to him, but the markets are a voting machine initially, and then they become a weighing machine. And what you're weighing is the earnings. So if this company is throwing off a billion dollars in profits a year, how much do you value the company at? 20 billion? Because you're going to get 20 billion in returns, and then you

still own the company in 20 years? Okay. What is the future earnings of this? And so a whole group of companies that didn't really have product market fit are going to quickly have to get to product market fit. In other words, customers are going to want to have their products. They have the second group of people. People love their products, but maybe they're spending more than they make. Well, now they're going to have to prove that they can continue to grow while not blowing through this cash, which means operational excellence and discipline. That means free lunches, crazy office spaces, huge ridiculous salaries, redundancies, having 10 times as many employees as you need, and a bunch of pet.

projects all over the place like Google has with their, you know, project, you know, X projects and, you know, all these kind of things that drain money. All that's going to have to go away. You've got to focus on your core business. And so each stock is going through that. Can this stock be viable? Uber is just one of the great examples because people said, hey, ride sharing, it just will never work.

And that's obviously not true. The prices of ride sharing have gone way up in the pandemic to get drivers to come back. People are still paying. And it's back to pre-pandemic levels. people are paying, you know, what would be, according to some, like really high fees, 20 bucks to have their food delivered to their house. Seems like a pretty good deal, actually. If you had an assistant who you were paying 20 or 30 bucks an hour or two, it would be the same

amount probably, or maybe it's a little less to actually use DoorDash or Uber-Eat. So I think each of those businesses is now going to have to tighten their belts, austerity measures, and just prove to the public markets, hey, this is a profitable company. The free cash flow is there. and we're worth believing in, and we're disciplined, and we're not going away. I think it's going to be a bouncing along the bottom, and then companies go private, layoffs, the entire austerity measures across the entire economy, and there's a layoff contagion that occurs. I saw this, you know, both the other crises, 2000, 2008.

Everybody starts laying off 10 to 25%. If any company, according to Jack Welch, can get rid of the bottom 5% and operate better. So then everybody says, well, we're not going to be able to. to waste this crisis. So we're going to do a, we're going to do layoffs. Sorry, we have to do layoffs. It's bullshit. They're just like, we're just going to get rid of the people we don't like here who are slackers. And that everybody has 10%. When you see that 25% layoff, that means the fundamental of the business needed to cut costs. But it was five or 10%, that's people being opportunistic. But it's a contagion. Right. So then if you're not laying people off.

I was going to say, to stick with a theme, there's contagions and layoffs as well. Contagious in investing, contagion's in selling off. And then it seems to me like if you're in an industry where all of your competitors are laying off 5% of their workforce. Your investors are looking at you thinking, why aren't you trimming the so-called fat as well? You don't want to call them fat. What's wrong with you? Are you an idiot? Are you delusional?

And that's, I think you're, I think you're prescient to see the possibility of layoffs being a contagion too. Yeah. It's happening already. Right. It's happening. A lot of what you're saying reminds me of a previous episode that we did with

the writer Morgan Housel, who was on a week or two ago where he said, you know, when rates are low, money's flush, you're in the narrative economy, because the company with the best story attracts the most easy money. But now the rates are rising, money gets tighter. You're shifting from the narrative economy into the value economy. You have to prove that you can produce cash flow and profits. And that's why we're shifting that only are investors shifting from stories to earnings. But also in the answer that you just gave, companies themselves are shifting from,

we have this incredible story, give us money. The total addressable market is $3 trillion to, oh, no, no, that's a story. That was for a different economy. This is the values economy. We have to show we have cheap offices. We're a remote workforce. We lay off the people who don't work for the company. We focus on a very specific bottom line, unit economics.

And so you're going to see a lot more discipline, I think, come out of tech. Well, when I like about that, the narrative versus like the reality and the economic is that's like voting and weighing, right? Like the voting is you're voting on the story. And the weighing is you're weighing the earnings. So that actually does fit, I think, pretty well. Speaking of voting and weighing, I want to get your thoughts on the crypto crash specifically. And before I do that, I want to remind myself and listeners where you are on crypto, because I can't really remember another subject where I know so many really, really smart people who think this

is like the next internet and a bunch of really, really smart people who think this is absolute beanie babies in the cloud. So just briefly, before I ask you the deeper step, where do you place yourself on the crypto spectrum? Yeah. So there's a very interesting collection of technologies that are being bundled together. Some of them are new, and some of them are not. Like, blockchain, very new, NFT is very new. Other things like distributed and decentralized, not new. We had that with Napster and Nutella and a lot of different services were not centralized. Actually, Napster was, Nutella wasn't. Bitcoin, BitTorrent wasn't. So this has existed before. In fact, Travis's company before Uber was called Red Soosh, which was a distributed way to share big files, right, to save money on bandwidth charges.

So crypto is an interesting collection of technologies. Some of them are very real and have great application or profound. And then there was an entire level of grift laid on top of those and a religion. And I watched the same grift happen in the dot-com era, the same hucksters, literally some of them. would say their names, but there were people who had dot-com companies who then became like these incredible kingmakers in crypto. In other words, they spent a good yarn. They told a really compelling story about how this was going to change the world, and they weren't necessarily wrong. And the thing that was in common is there's a grift here of like some future promise, some future

product to come, and we'll see if it comes. But we've been at this crypto thing for 10 years. And I think because money is embedded in the technology, tokens, NFTs, because the money is embedded in it, people are getting rewarded for not doing work. You're rewarded for putting a white paper out or an idea or a promise of future tokens and things to come on these projects. So people get these huge rewards before they actually do the milestones. Like I talked about the milestone-based system here in Silicon Valley. So if you don't have the milestone-based system, it perverts the whole thing. And that's what's happened in crypto. 99% of these projects are run by grifters or idiots in some combination in some cases.

Like some people don't know they're a grifter. And they're telling everybody, hey, give us your money, buy more Bitcoin. Like I saw this Michael Saylor guy telling people like, you know, if you believe in Bitcoin, the only thing you can do that's sensible is mortgage your house, take any business you have and convert it into Bitcoin. And he said that when Bitcoin was 50 or 60, according to. you know, what I saw online. So yeah, if you took that guy's advice, then your house is now worth, or the equity formerly inside of your house is now worth 40% less than it was three months

ago, which is not exactly good investing. I'm very careful with giving this kind of advice. So that's, it's a new, I have a nuanced take on crypto. I do think that if you were going to make an analogy between the tech companies today and the dot com era and then crypto, crypto would be very much more like the dot com era than this new cohort of companies because they have haven't built anything yet. And every time I talk to these crypto folks, they asked me to invest at a $50 million valuation on a white paper. I'm like, this thing's got spelling errors in it, bruh. And these ideas are obvious, and they exist. And like, I don't think you're going to disintermediate Airbnb with their, with your token. I know who you are. You're not as talented as them. I know

them. I know you. You're not them. And you are writing a white paper and getting $20 million, and then you're absconding with it to Puerto Rico? Like, is this not obvious to everybody what's going on. Apparently it's not. It feels sometimes extremely obvious to me, but sometimes I feel like I'm going crazy because extremely brilliant people who are unbelievably intelligent in all sorts of other ideas or other domains are true fanatics, true believers when it comes to crypto. And they talk like anthropomorphized fortune cookies. It's like all they say is just stuff that you can break open a cookie and find inside of it, except the word crypto is printed on the label. It's what you said, might want to know what their book is.

Yeah, you know, like... That's right. That's right. I want to find out what their holdings are because this thing is just about who holds the next bag. Your line about religion reminded me, was it a Winston Churchill, Lucid of Stalin, a riddle wrapped in a mystery inside an enigma? I feel like I'm going to think of crypto from now on is a real technology wrapped inside a grift inside a religion. Like that is what crypto is. There is something real in there that I remain curious about, but it is so difficult to dig through the religious proselytizing.

And then through the GIFT, it's worse than that. And to get to the final technology. It's worse than that. They're running sciops on everybody, especially if you're a journalist or in the media or you have some kind of influence. Anytime I would say, be careful, you know, Bitcoin zero is a real possibility. You know, most technologies do get replaced. There will be something better than Bitcoin.

By definition, there always is, and nothing lasts forever. Bitcoin will go to zero someday. We just don't know when that day is. It could be 100 days from now. It could be 100 years from now. But almost in technology, looks like things have a 20-year run, you know, whether it's AOL or Yahoo or Facebook. You get a good 20-year run, 30-year run. Sometimes things can cross the chasm like Apple did, but it was a little struggle in the middle there.

So what they do is if you put up anything, they're like, okay, boomer, have fun being poor, you don't get it. And toxic Bitcoin toxicity is an established strategy of the group. You have to tell everybody all other projects are shit. and if you don't buy this, you're going to be poor. And it's really like a PSIOps that's run on Twitter, run on Reddit, and they have all these accounts, and they're just trying to make you feel like an idiot. And then you go over to Signal or Discord, and you see pump and dump rooms where they're like, we're going to have a new coin to pump.

Well, just put these things together. It's a giant grift where SciOps is being done on people who call out the grift, and then they're like, oh, you put laser eyes in your Twitter. Now you're part of the group, and people want to affiliate. Well, speaking of crypto potentially going to zero, I just want to read a couple of facts and figures that I saw as I was researching for this show. So Coinbase, the crypto trading platform, announced its earnings this week, I think just today. Retail trading volume on Coinbase was $177 billion in the fourth quarter of 2021, down to $74 billion in the first quarter of 2022.

That's a 59% decline in retail trading volume. Monthly traders also declined by $2 million. You move on to NFTs. Wall Street Journal recently reported that by some measures, NFT interest is plunged by up to past 70%, worldwide search interest in the term NFT, which peaked in January this year, has also now declined by 70%.

I mean, what are the odds that we're looking at a shakeout in crypto that could be truly catastrophic for these founders, for their investors, and for some major venture capitalists that put their reputation and their principal money on the line in this industry? I would say 90% plus of the projects go to zero, yeah, pretty clearly. And 95% of the value of NFTs goes to zero. And then you're left with whatever's a real project.

So I do think with the NFTs, tying real-world benefits to them, is clever. So you can put IP, intellectual property, copyright, which the board ape club did. So you can take your board ape and then you could put it on the front of your building and make a board ape yacht club bar with your monkey. And then that can kind of draft off of somebody else who's creating a nursery school or a TV show with it. That's kind of interesting and weird. It's almost like if the Marvel characters, like you own Dr. Strange and I owned, you know, the Scarlet Witch. And I could make a Scarlet Witch show and you can make a Doctor. Dr. Strange, you know, theme park.

It's kind of weird and trippy. And that's where, like, you can kind of get excited about it and say, well, there's something interesting there. NFT is like the Fryfish Club that I guess Gary Vee was doing. They raised like $15 million. You get ownership, not in the, you get a membership, but it's transferable. So imagine if Soho House memberships could be flipped and sold on an open market without the permission of Sohouse.

That is kind of interesting. So I think there will be some interesting NFT projects where they, they have some rights that come with it. Okay, that's cool, but that's 1% of what's going on now. And also, that's Soho House. Like, Soho House is cool. Like, Soho House is a great idea. It's a great product. When crypto was at its- Highly profitable. Highly profitable. I'll give it all the plot. Real business, yeah. When crypto was at its peak of proselyization, people weren't saying, we're inventing a better Soho House. They said we're inventing a better world. They said we're making human nature, we're taking over the internet? This isn't, this is, we had Web 2,

it's broken, we're building Web 3. Web 3 and slightly better Soho House, like, are two extremely different ideas. And I don't want to reduce the benefits of the real technology here to just a distributed Soho House token. But it's, it continues to astonish me when I hear the real world implications of things like Board 8, Ape Yachts Club, and it really does accumulate to we created a club. And they have a really neat piece of art that is truly unique to each individual art holder and it opens access to all sorts of things

like owning an American Express. Like that is real. I'm not saying it's not real. But holy shit, that's so different than the promise of Web 3. Yeah. And I think making it seem like it's going to change everything is kind of gets people to buy in

and maybe be the next bag holder. And that's kind of what you need in all of these scams and griff. is somebody else has to buy whatever you bought at a higher price. Bitcoin included, you know, Ethereum included, all of these. So they do have to have some fundamental value in the world. So with those NFTs, like you could imagine if Getty images, right? It's a pretty, stock photography, pretty big industry or music and music licensing,

the rights to songs. Hey, if the rights to songs and you and I collaborated, we wrote a folk song together, and you wrote the lyrics, and I wrote some of the lyrics, and we say, okay, you go 70, 30 on the lyrics, you did most of them. I did the music arrangements, so I'll do 70-30 on that and mechanicals. And all of that's recorded somewhere. And then some third party could listen to the song and say, I want to buy 1% of the song and they bought 1% of Freebird and we wrote it.

Like, okay, this is a really interesting way to democratize and open up the ability to invest in music. So I really do like some of those IP-based ideas. And I think they'll come and I think they will be successful and they could change the music industry. But for every example, you have like that, the way I describe it, it's going to take decades. It's probably not going to work, but if it does, it could be game-changing, and most ideas will not be. And so, you know, I applaud the risk, but I don't like the grift, right, if I'm being clear there. And I just don't think people should get the rewards for work not done. And I think that's like a big,

when you look at entrepreneurs, they're at their best when they have their backs up against the wall. They have constraints, just like an artist. You know, Bob Dylan said, they were like, why did you write blood on the tracks? It's one of his seminal albums. And he's like, because I owed Columbia Records an album, and it was two years overdue. And they're like, okay, yeah, but tangled up in blue

and this song and that song, and Shelton from the Storm, it's like incredible. Like, how did you get those done? And he's like, because I owed them the album, and it was like two years overdue. It was like, you know, discipline. This Bob Dylan.

You know, so sometimes great constraints make for great art. I totally agree. There's a great line from Robert Frost. Writing poetry without rhyme is like playing tennis without a net. And I feel like a lot of entrepreneurs in the last two years, particularly in the crypto space, have been playing tennis without a net. And now with interest rates rising, the net is being reinstalled on the tennis course. I don't think they learn tennis without a net. I don't think they're just swinging their arms thinking they're spiking. The throat rackets, there's no net. They totally made it up.

They're just swinging empty hands and pretend balls. It's totally true. So let's talk about some of the economic aftershocks here. I want to actually start with history. How did the dot-com bubble shape the next generation of tech? And is there any lesson from the dot-com bubble that can inform our understanding of what's going to come after this mini crash? So it was like a nuclear winter.

You could not raise money for basically a year and a half, two years. and companies couldn't go public for five or six years. And it was very severe. Venture firms were afraid to make capital calls to their LPs. So if you were Fred Wilson or, you know, doing flat-ion partners at the time, Unisquare Ventures eventually, like, do you want to call your endowment, Harvard or whoever, you know, Ford Foundation and say, hey, we need money when their stock market portfolios are off 70% or something, you don't. Because then they would have to liquidate and the whole thing becomes messy.

So you had this just, everything was frozen. What that did was it led to a group of people, myself, Nick Denton with Gawker, the Flickr Team, Delicious. We just built products that cost no money. So Brian Alvey and I and Peter Rojas started Weblogs Inc. We found somebody to be a salesperson, Sean Gold, who worked basically for no salary, but for, you know, on contingency for sales. And we built a gadget and autoblog, a joystick. And Nick built Gawker. And Nick was paying Elizabeth Spires $1,500 a month.

And Peter Rojas, $1,500 a month. I offered them $2,000 a month. at Samsung to do a sponsorship. Like, we just bootstrapped everything. And it created this really, Flickr was bootstrapped, Delicious was bootstrapped. And then all of those companies started to grow. And you were able to capture people's imagination

because you were the one new company was that was launched that month. And then next month, there were two companies launched. So this idea that there were like 100 new startups getting funded a week. There wasn't 100 new startups getting founded a year. There were two dozen. So it became very quiet.

It became very bespoke. And, you know, there just weren't a lot of albums or restaurants opening every year. And everybody who was in it was super qualified. And there was a density of talent and everything was affordable. Because nobody had jobs and everybody went back to work at Sony or Macy's, the idea that you could work at a startup, you know, make 50 grand or you could be a writer, a journalist, freelance for Nick Denton for 30,000 a year and you could work as a waiter on the weekends or something.

Like, that was like, great. I could do something interesting with my life. And then the rebuild process began in the economy. It won't be as acute this time because so much venture has been raised over the last couple years and the business models are so secure now. And iPhones exist that three or four X or the mobile phones exist, three or four X, the amount of consumption going on, high speed, all that stuff we talked about, the rails of money flowing.

It's not going to crash down to that level of nuclear winter. But what you will see is people are not going to have four or four or four. five job offers like they did for the next couple of years or maybe a year or two. There'll still be a lot of jobs. You're still going to have the big companies. But like I said, people had to go work at the big companies. Like, Facebook's got a hiring freeze. Apple's forcing people to come to the office and they're letting their machine learning guru leave and they're not fighting for him. That tells you they're too prideful to do layoffs. So they're just like, come back to the office or quit. And basically, they're challenging their own employees to quit.

And I think they'd be very satisfied if 10 or 20%. So what's going to happen is these crazy offers, crazy, you know, a competition for talent, that's going to get muted. It doesn't mean that great talent's not going to be competed for. It's just not going to be as insane and illogical, which then starts the process anew. Right.

It's like a forest fire effect, you know? Correct. The forest burns down and then there's nothing. and it's terrible, and then it creates biodiversity, that new kinds of plants that couldn't grow because of the canopy that would ever block the sunlight suddenly grow and you have the cycle rejuvenated again. That's exactly what's happening.

I want to ask about the after shock that you see to the broader economy because I'm piecing together a couple different ideas you're putting out here. Number one, stocks are falling, obviously. That's declining wealth. Declining wealth leads to less spending. And this is the converse of the so-called wealth effect.

People feel less rich, so they spurge less. Number two, less spending means the labor market cools off. Like, we've had years of worker power over the last few years. Lots of quitting, wage growth at the bottom. I think that's going to slow down, too. Number three, during the pandemic, you saw an increase in so-called early retirements, but now that a lot of those nest eggs that people who left the labor force during the pandemic had, those are 20% smaller now than they were four months ago.

And prices are still rising. So I think you're going to have a great unretirement. I think you're going to see a lot of people who left the labor force of the last two years start to come back to the labor force, rising participation rate. And number four, when you put all this together, more workers, smaller portfolios, less spending, I think all of it will pull down inflation over the next six months, unless supply chains are just disgusting. And I think that'll probably coincide with a mild recession.

So more workers, a little bit less spending, a little bit less wealth, a decline in inflation, and a mild recession. Pick up that thread wherever you want. How do you see the economic aftershocks? So labor participation has been going down since the 90s, peaked in the 99 era, especially amongst 25 to 55-year-olds. Labor force participation is the share of prime age workers 25 to 54. Typically, that's how they look at it. the share of all people in the country that are 25 to 54 years old who are either working or looking for work in the economy. Correct. And I think a lot of people gave up.

They don't want to work. They don't see value in these jobs. And they've figured out a way to make enough money. We can parse that a bit to basically opt out of the labor force. And you also pointed out the early retirement. You know, hey, I'm a nurse. This has really sucked being a health care worker in the pandemic. I'm 66.

I was going to retire at 68. I'll just cut out now. or I'm a journalist, and I got a buyout package from New York Times, whatever it is. So the number of people who are refusing to go back to work has led to, awesomely, minimum wage going up, not because Bernie Sanders and Elizabeth Warren are screaming about it, but because there's a competition for entry-wrung jobs. Supply and demand. Demand for workers went up, up, up, and supply of workers went down.

Yep. So we now see labor having a lot more power, Amazon offering 15 to 20 bucks, and hour and paying for your associate's degree and giving you health care day one. Like they're really in a massive competition here. Apple got shamed into it. Even McDonald's, which has fought for decades to keep minimum wage low, has said, you know what, screw it. We're going to get rid of cashiers and put kiosks in, and then we're going to pay everybody

else in the business a little more money and try to keep people motivated. So this is a pretty interesting moment in time. So to get out of this, what we'll probably see, and this is a maelstrom. So it's like you and I trying to predict it is like trying to predict a well. pattern and like this crazy, you know, 19 world pool of billiard balls crashing into 18 other billiard balls. We're trying to say where they're going to go. Yeah. Some version of this will happen where, okay, inflation, maybe we get it to come down a little bit. Maybe people do austerity measures themselves. They do a staycation instead of going to Europe, they move in with their

cousin instead of getting the apartment, instead of being in a one bedroom alone or getting a two bedroom so they could have an office, they move into somebody else's two bedroom and there's no office and they start going back to the office and people lower their personal balance sheets, build up a little bit of cash, pay down their debt, and then start spending again. And so the same thing we're seeing in those companies that have to like maybe, you know, and Dara said this on Sunday in his email, which I thought was very great leadership. This is Dara, the CEO of Uber. Yeah.

Of Uber. He wrote a really great message like, hey, listen, hiring is going to be, you know, something that's a luxury and we're going to have austerity measures essentially. I'm interpreting it for him. You know, we're going to see some rebalance. of people's personal balance sheets, and then that's how the country gets out of this. I think labor participation is a major one,

because what you really want in an economy to be vibrant is not printing money and giving people stimulus checks. That doesn't help, actually. That creates inflation, as we've seen. What you really want is a productive workforce, and you want technology creating efficiencies. Right, right. I think it's important to say that a lot of the things

that we're describing are very likely to accumulate to a recession. It might be a micro recession. We're in a recession now. Yeah. Yeah, we had one quarter of negative GDP growth, and I believe that a technical recession is two consecutive quarters. So what's the chances we got out of it in this quarter?

I agree. I think the odds are very likely that we are headed into either a minor technical recession or a micro-recession, which, to be clear, is also what we had in 2000, 2001. We had a very brief recession that we then sort of swung. out of, even though the rest of that decade was relatively bad for growth. Last question for you is actually about the future of investing and how investing is going to change. There are like 15, 20 million investors who came online since 2020 and meme stocked their way through the pandemic. And I saw research from Morgan Stanley today that concluded that the typical amateur investor

who got into the market in 2020, like the diamond hands generation, boarding the meme stock roller coaster, has now lost more than 100% of their gains. So what do you think this is going to do for the future of investing in America? I think this next generation is like beast mode when it comes to finances. Like they understand how to do puts and calls and to buy derivatives and to build a portfolio. This is stuff people learned in their late 30s or 40s. Like most people in my generation, Gen X were like, yeah, 401K, fuck you, it's a scam. And then they hit like they had a kid at 34 and they're like, yeah, maybe I should look at that 401K again.

You got 22-year-olds who have been trading stocks for a year or two. They understand the market. Yeah, they may have placed some wrong bets, but they know what a put in a call is. I don't do puts and calls. Like, I just buy stocks at home for 10 years, like companies I believe in. So I think you have this incredibly sophisticated group of people on their finances. Maybe Gen X and some of millennials were on autopilot. Yeah, the economy works.

My parents told me to go to college, get a job. Get a good paying job. Like, that was kind of people's financial literacy. Now, this group really understands it. Now, did they wipe out a couple grand? Sure. Could they make that back in a year? Yes.

And are some of them becoming, like, really good at this? Like, yeah. Like, and I think they're looking at it and saying, I'm going to go work for you for $50 grand a year, $60 grand a year. I think I could make that in the market. Yeah. Well, it's interesting because I, that's an interesting answer. There's parts of it that I think I disagree with.

But it's possible that I think they might be beast mode on tactics. but dumb on strategy. You can understand what a put is, you can understand what an option is, you can understand what a call is, you can still think that you can beat the market consistently by knowing a little bit and day trading at 2 p.m.

rather than getting a full-time job, which absolutely is going to make you maybe $100,000, $200,000, $300,000 if every year is 2021. But here we are in 2022, understanding fundamentally that every year is not 2021, and you can't just say stock go up,

I bet, to the moon. That isn't a strategy that's going to get you through your 20s, 30s, 40s, because stocks go up and down. So can they change gears is the question? From a strategy standpoint, you know, there's, I think there's a lot of, I think there's a lot of truth in understanding that markets are relatively efficient. It's really, really hard for most people to beat them on a day-to-day basis.

And as a result, it makes sense to put your money in a relatively diverse index fund and use your time to actually build things that make the world better. that are an expression of your skills. And so I think that if they take the tactics that they've learned and they apply it to maybe a more sophisticated strategy and go out and build something with their time rather than just hang out on Reddit looking at AMC posts, that to me is a better vision of Gen Y, Gen Z.

I think they should go back to Reddit, re-examine their thinking when they bought AMC, and then say, what's the anti-AMC? What's a company that's actually underappreciated, that prints money and that I love their product or service? And let me, instead of trying to beat Citadel in some game of chicken, let me see if I can get that job for 100K,

and every month put $1,000 into my wealth front, my Robin Hood, still a shareholder in Robin Hood, was an investor in wealth front. If I can put a little bit money into this balanced portfolio instead and forget it, and yeah, I'm going to pick some stonks over here, but I'm going to pick the ones that have a ton of, a cash, free cash flow, that do a dividend, and they'll learn that next part of it, right? So you learn the momentum investing, now learned, like, fundamental investing and free cash flow investing.

Like, turn over another card. Like, you learned how to play ACEs, now learn how to play 10-jack-suited. Like, these are different starting hands. Like, try to learn how to play a full poker game. Try to improve your post-flop play, not just your, you know, shoving the chips in pre-flop play, right? That's my words of encouragement. Now the hard work begins. Again, sharpen your pencil, everybody, because this is what it's like to run a company in wartime, right? It's going to be like wartime CEO time. You cannot be like an overfunded CEO in this market. Like, you're going to be way too soft.

I already see it. I see it in my portfolio already. I see people coming to me like, ah, I think I should, you know, I can't raise or I should shut down. I'm like, you've got nine months of runway. Get rid of a third of your company. Raise your price as a third. You've now got 20 months of runway. We'll figure it up.

They're like, yeah, I just don't know if I'm up for it. I'm like, up for it? What are we talking about here? What else are you going to do? And they're like, yeah, I don't know. Let me save the whales or something. I don't know. I hadn't thought of exactly this frame, but it's almost as if the last few years

have raised a micro generation of fundraisers that now has to become a microgeneration of CEOs. And this is the moment where the fundraisers have to become CEOs and you're looking at your portfolio thinking, who am I backing who's just really talented at getting the bag? and who have I backed that can lead a company? Making money from customers is hard and learning how to be a storyteller and gaming investors in a hot market pretty easy.

In fact, it got easier for them to raise money each round. That's not supposed to be how it goes. Jason, thank you so much. You really appreciate it. My pleasure. Thank you very much for listening. Plain English is produced by Devin Manzi. If you have a comment, a concern,

a question, an idea for a future show, please email us at Plain English at Spotify.com. That's plain, no space, English at Spotify.com.