The Breakdown - How the Purpose of the Stock Market Has Changed

Episode Date: August 9, 2020

On this week’s Long Reads Sunday, NLW reads three pieces: Public Markets Don’t Matter Like They Used To - Matt Levine in Bloomberg A look at how public markets are less and less about accessing new capital and more about narrative and liquidity for early investors. Two Reasons Crypto’s Bull Market Is Coming - Anil Lulla on CoinDesk The next bull market isn’t just about the bitcoin-dollar devaluation narrative but about decentralized finance providing a solid place to redeploy existing crypto capital. The Business Behind Marshmello - Kevin Lee on Twitter The unlikely story of the world’s second-highest paid DJ, including a bet on anonymity, a viral billboard making fun of Instagram influencers, and a cultural cooking channel on YouTube.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, bitstamp, and nexo.io, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, August 9th, and that means it is time for long reads Sunday. This week, instead of one long piece, I decided to read three short. shorter pieces. In fact, one of them is actually a tweet storm. The first is about private markets. The second is about the emerging crypto and Bitcoin bull run. And the third is about marshmallow. Let's start with a piece by the goat Matt Levine from his money stuff column from Wednesday,

August 5th. This is called Private Markets are the new public markets. Not that long ago, the stock market was a place where companies raise money to invest in their businesses. If you were a company and you needed money to build a factory, you could sell stock to investors. Investors would give you the money in hopes that the factory would be profitable, and you'd have more money later on, which you could give back to the shareholders in the form of dividends. Now the stock market is a place where companies return money to shareholders. If you are a company and you have a factory, it probably makes money, and you use the money to buy back stock from your shareholders. Investors trade your stock with each other on the stock exchange and

the hope that your factory will be profitable and you'll buy back their stock. You don't sell stock to raise money, you buy stock to do something with your money. Where did you get the factory? How do companies raise money if not on a stock exchange? One simple answer is, you built the factory back in the olden days when you raise money on the stock market. Now you already have the factory, so you don't need money to build it and can buy back stock instead. More specifically, this answer might mean that public companies are older than they used to be. In the olden days, lots of companies would go public and raise money and spend it on investments. Now, fewer companies raise money, and the ones that are still around from the olden days, and already mature and profitable

and ready to return capital to shareholders, are relatively more important. Another answer is that companies borrow the money to build the factories. Dead is cheap, and companies have a more aggressive view of optimal leverage levels than they used to, so they are happier borrowing more money and using less equity. In practice, if you've already got the factory, this often means borrowing money to buy back stock. A third answer is that companies still finance themselves by selling stock, just not on the public markets. Companies can raise a lot more money privately than they used to, so they can build their factories before going public. It used to be that if you needed to raise a lot of money, the most efficient way to do that was to sell stock to public

investors, the biggest and deepest pool of capital around. But now there is, you know, soft bank. There are huge pools of late-stage ventureish capital, and private fundraising can be faster and more efficient. Just talk to one investor, and potentially cheaper, unicorn bubbles, than a public offering. You raise your money and build your business privately, and then you go public to get liquidity for the early investors who actually paid to build a business. A fourth answer is that companies don't build factories at all anymore, that factories are no longer how companies make money. The companies that go public these days make things like social media apps and online marketplaces and software as a service, and they have just less need for capital from investors. In the extreme stylized case, a company consists of a founder having an idea that can instantly and costlessly turn into a steady stream of profits. The company goes public not because it needs a lot of money to turn the idea into profits,

but because the founder needs a lot of money to buy yachts. The initial public offering is purely a liquidity event for insiders, not a fundraising event for the company. All of this is extremely stylized and overgeneralized, but it does get at something real in modern markets. Public companies are older and larger than they used to be. Stock buybacks are more important, and stock offerings are less important, intangible investments are more important, and tangible less ones, etc.

At Morgan Stanley, Michael Mabousin and Dan Callahan have a fascinating long research note on public-to-private equity in the United States, a long-term look. I have been saying things like what I wrote above for a while now, but what I actually wrote above was mostly inspired by their argument. It is not a fair summary. They cover a lot more ground, and if you like this sort of stuff, you should read it. It's hard to excerpt, but here's a good little fact. Virtually none of the $1.3 trillion in value that Amazon built was in the private market.

3% of the value created by Alphabet, which controls Google, was in the private market, and that percentage was about 17% for Facebook. And the implied value of Uber in the private market was more than 100% of the total value created, as the company's market capitalization is below what its IPO price implied. I also liked this passage on the importance of intangible investment for the current state of public and private markets. The mix of tangible and intangible investments has changed over the last 40 years. In the late 1970s, tangible investments were nearly double those of,

intangible investments. Today, intangible investments are one and a half times larger than tangible investments. A watershed change in the form of investment has occurred over a couple of generations. This shift has a few implications for our discussion. To begin, companies need less capital because they need fewer physical assets. For example, sales per employee for Facebook were nearly double those of Ford Motor Company in 2019. From 1956 to 1976, the number of public companies grew five-fold, as many companies needed to finance, quote, their mass production and mass distribution. Today, companies simply do not require as much capital as they once did. This, along with freer access to private capital, allows private companies to remain private longer. Another implication is that

the rate of change, which we can measure by longevity, appears to be speeding up. The idea is that if longevity is decreasing, the rate of change is increasing. About 1,500 companies went public during the 1970s, 3,000 in the 1980s, 3,900 in the 1990s, and 2100 in the 2000s. Companies that had listed before 1970 had a 92% probability of surviving the next five years, and those listed in the 2000s have a probability of only 63%. The chance of survival has dropped in each successive decade. The main reason companies delist is that they are acquired. This contributes to the last implication. In corporate America, the strong are getting stronger. This is giving rise to superstar firms. For example, the gap in return on invested capital between a U.S. company

in the top 10% and the median has risen sharply in recent decades. Consolidation explains part of this. Measures of concentration have shown a substantial increase for many industries since the mid-1990s. These include industries that rely on tangible assets. When the proper conditions are in place, certain businesses exhibit increasing returns, which include very high market shares and economic profits. Increasing returns are pronounced in intangible-based businesses, and there has been a growing gap between the intangible spending of the large firms relative to small ones. The shift from tangible to intangible assets has had a meaningful effect on the mix between public and private companies. That many young companies have less capital intensity means they don't

need to go public to raise capital. The mix of the companies that are public has shifted to more reliance on intangible investment, which in turn has led to a reduction in longevity, and the economics of information goods, combined with the concentration of traditional industries and outsourcing of low-value ad activities, means that a handful of leading companies earn much higher economic rents than their competitors and businesses of the past. In a world of intangible investment, small private companies don't particularly need to go public to raise money to build factories, and large public companies, one, get bigger because there are increasing returns to scale, two, are very profitable, and three, don't need to invest their profits in capital-intensive

projects, so they have a lot of money to return to shareholders. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is Crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping. When you buy gift cards with the crypto.com app, you can get up to 20% sent back. Download the crypto.com app today and enjoy these offers until the end of September. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the

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Two Reasons Crypto's Bull Market is coming. In the past few months, at least four crypto hedge funds have shuttered, yet there's never been a better time for institutions to get involved in this sector. Despite an unprecedented global pandemic wreaking havoc on just about every major economy on the planet, investors have made quite a lot of money in recent months in both traditional and crypto markets. When it comes to the latter, this is just the beginning for those with the discipline to seek out underappreciated opportunities in this fast-paced industry. The incoming bull market for crypto will look completely different than the last one,

mostly because there won't be just one but two different bull markets simultaneously playing out over the next 12 to 18 months. One will involve the rotation of capital from zombie projects to protocols where the underlying product is actually being used in accruing value. Even without an influx of new capital or users, there is still too much money tied up in ghost protocols, many of which dominate today's large-cap names. After the last bull market, we were left with many projects with no real usage other than speculation. They were more focused on marketing efforts than actual product development.

Take XRP, for example, it is the king of worth us all coins due to its ability to accrue very little to no value, even if adoption skyrockets. Even after the mid-March carnage, it still held a total market cap value north of $6 billion, and currently trades close to $13 billion. Stellar's native asset, XLM, is still in top 15 at nearly $2 billion. Neo, another celebrated project in the ICO Bull Run that has yet to deliver, has a market cap of $1 billion. There is an important difference between the adoption or success of a certain protocol and the potential for value to accrue to its native token, but as I've

written before, the reallocation of capital away from zombie protocols has already begun. The crypto tourists of the last bull market have been driven out by inactivity, while the initial coin offerings and token projects they threw money at are shuddering. Decentralized finance or defy-isiding alts, and investors now demand properly designed systems that actually contribute to the broader crypto ecosystem. The speed at which these projects innovate and adapt to new market conditions makes them extremely dynamic. They show the advantage of open source development versus more traditional top-down methods. Square may have an incredible team that's been doing great work on all fronts, but even it can compete with the optionality of Defi protocols. Now that DeFi base

pieces have been laid, the sector is becoming more like an ecosystem than an industry with a bunch of different startup teams. Defi looks completely different today than even a few months ago. This time last year, there were only four DeFi projects in the top 100 crypto projects by market capitalization, Maker, ZeroX, Auger, and Ren. Today, there are 11, with the addition of Ave, Synthetics, Compound, Khyber, Kava, Banquhar, and Loopring. By this time next year, I believe there will be at least 25 in the top 200. That's a lot of redistribution of capital even without an influx of new money coming in. The second bull market will be led by the usual suspect Bitcoin.

As policymakers around the world continue to provide pandemic-related economic relief, Bitcoin's long-term value proposition as a hedge against fiat currency debasement only grows stronger. Circumstances are converging to accelerate us towards precisely the kind of world crypto was designed for. In the short run, non-sovereign scarce assets, i.e. Bitcoin and gold, could be challenged by increasing deflationary pressures. But such conditions would undoubtedly force policymakers to provide even greater monetary relief, compounding our conviction in Bitcoin's long-term value proposition as a hedge against fiat currency debasement. It's easy in hindsight to say the investments made in the last period of market exuberance were doomed to failure, but there has been a shift in the standards

of the industry. The foundation for the base infrastructure of the decentralized economy is being laid as we speak. The composability between projects allow teams to iterate much faster than traditional software companies and opens up experimentation going forward. My partner, Medio de Marco said it best last year when tweeting that it was a bigger risk staying in traditional finance than getting involved in crypto. Eventually, I expect high-profile tech investors like Chamath Palahapitia and Mark Cuban, who have expressed interest in crypto in the past to go deeper and become champions of the sector. As of this weekend, the top 100 DeFi projects had a market cap of $7.3 billion. The total crypto market cap is around $370 billion. It's crazy to think that

DeFi deserves less than 2% of this. At the top of the 2017, bubble, a friend of mine gave me a shirt as a joke. It says Moon, the moment when the crypto market cap reaches a total market cap of one trillion USD. I can't remember if I've ever worn it, but as these two crypto bull markets converge, I think I may be caught wearing it sooner than I initially thought. By the way, if you haven't checked out Delphi Digital's new website, which is much bigger set of resources than their previous site, you definitely need to go do that now. Finally, let's go to Twitter for a thread on Marshmallow. This is from Kevin Lee, who is a principal at Pear v.C.

Marshmallow is the second highest paid DJ in the world and rakes in 40 million per year while wearing a marshmallow helmet. His secret? His brilliant unknown manager, Mo Chalizi. This is a lesson in how creative approaches in the music industry built a global phenomenon. Mo Chalizi grew up in Section 8 low-income housing. When he was 17, his dad died and he was forced to do whatever it took to provide for his mom and sister. He bought candy and sold it to other kids. He started fixing cars and flipping them on Craigslist. He discovered the music industry which played to his strengths. If you don't have street smarts to know the game, you get run over. You have to know how to apply

creativity to catch culture. No textbook will capture that because culture changes every single day. For two years, he manages artists with no pay while sustaining himself with other hustles. Every dollar he makes, he reinvest back into the business. He preaches the importance of investing in yourself and that theme of ownership comes into play throughout his career. After some moderate success with managing artists, he creates his own management group called Chalizi Group and begins to work with a friend and artist named Christopher Comstock. This is where the interesting part begins. Mo recognizes Chris's talent, but he wants to manage Chris differently.

He sits down with Chris and deconstructs the typical path of other dance DJs throughout the industry. Many become popular, seem untouchable, but get sucked into the fame and then fade off in the public eye. He wants Chris to create an accessible brand to everyone that isn't driven by ego. They begin tossing out names. At the time, Chris is making mellow music, so they come up with the name Marshmallow. Chris's parents say it's the stupidest name they've ever heard. Mo studies the market and knows that dance music lives on SoundCloud. He takes Chris's music and begins to release one marshmallow track for free every single week on SoundCloud.

He asks a few other artists he manages to help promote those tracks. Mo needs a logo for marshmallow, so he sits and looks at anime character. for hours. He finds one character who stands out and he asks a graphic designer friend to make a logo that looks like the character. He also reaches out to someone who builds physical helmets and the guy sends back a rolled yoga mat that's cement glued on the back with a signature crisscrossed eye design on the front. The two of them are still poor and they have no money for PR. Coachella, a world-famous music festival, comes around and Mo thinks of a creative way to get eyeballs on marshmallow, even though marshmallow isn't playing at the festival. He decides to take a gamble. He invests

$5,000 into a single billboard off the highway exit to Coachella. The billboard has a photo of marshmallow with his helmet, his Instagram handle, and the words, I'm working hard now so that my future daughter doesn't have to sell detox tea on social media. For those who don't remember, detox tea was a popular network marketing item on Instagram, where aspiring influencers promoted the tea on behalf of brands and peer pressured their friends into buying. Some of these tea companies were accused of being pyramid schemes. While it doesn't sound like much, the timing of the billboard was brilliant. It required an understanding of who attended Coachella, the hipsters in the millennial crowd. At that time, Instagram models were at a peak. Everybody was trying to be a model

with bios that said wanderlust. Mo wanted a billboard that would make people say, that's hilarious because I know a girl at school who sells detox tea. Within a week, the billboard went viral. The kicker was that everyone was desperate to solve the mystery of who was behind the helmet. People thought that Marshmallow was a famous DJ using an alter ego. The speculation only brought more popularity to Marshmallow's music. Keeping Marshmallow Anonymous was one of the most brilliant creative moves of all time. By hiding Chris behind the helmet, Mo created a movement for people to connect through to the music versus a false idol. People built their own interpretations of why they liked marshmallow. Fans began to make their own marshmallow helmets to wear. Kids who had

been bullied or gone through depression wear marshmallow helmets and other people stop to take photos with them, which makes them feel like heroes. The marshmallow brand grows organically in a positive light. Mo then takes a deeper look into the biggest fan bases, Indonesia, Singapore, Brazil. He realizes that to help marshmallow form a deeper cultural connection with these global audiences, and what bridges cultures more than anything else? Food. Mo works with Chris to start their own YouTube channel called Cooking with Marshmallow. In each video, marshmallow cooks in the kitchen with his helmet on and makes representative dishes from each country. For Indonesians, they make Nasi-Goring, an Indonesian fried rice. Their hope is that kids in Indonesia are excited that marshmallow knows their

culture. By cooking unique dishes for each country, marshmallow is no longer tied to a single race. It doesn't matter if you're a fan from Malaysia or from Croatia, you're able to see yourself in marshmallow, which evokes a stronger emotional connection. Their YouTube channel now has 47 million subscribers and they rank on the first page of unique food dishes of every culture. Mo's not your typical music manager. At the time, he's still in his late 20s, he's 30 this year, and he doesn't stop there. He looks for more creative opportunities to grow marshmallows' global audience. While other managers look at traditional music festivals and concerts, Mo negotiates a deal with epic games to have Marshmallow play an exclusive in-game concert for 10 million global concurrent users.

He then negotiates with artists original, the in-house record label of Spotify rival Gio Savan, which is India's biggest streaming service. As part of the deal, Marshmallow does a collaboration with Bollywood composer Pretam for a new single, Biba. He encourages Chris to incorporate authentic cultural music that generations in India grew up listening to. His goal was to have marshmallow be a part of the culture, not just feature in it, and that meant a lot to fans. Mo believes deeply in the necessity of genuine emotional connection between artists and fans. He says, everything we've done has been organic. You can't fool culture.

You can't fool people. They can sense when it's not authentic. Mo's creative genius in Chris's incredible music make the perfect pair. But there's another unifying trait I love that has made them so successful. They're both fundamentally good people at heart. They use their global popularity to spread positivity through their work. Marshmallow's most popular music video is called Alone, with 1.7 billion views on YouTube. The video tells the story of a lonely bullied boy who focuses on self-expression by creating music,

which causes other students to embrace his authenticity. It's a powerful message of anti-bullying, investing in yourself and transformation. Chris doesn't care about fame. He loves the anonymity because he enjoys walking down the street without hordes of people crowding around him. He can live his life and produce the music he loves. People who work with him praises humility and love of music. Moe knows what's important. In interviews, he says, money doesn't bring happiness. Success in money, in the end, you lose when you

allow that to change you. This could all be gone tomorrow if you burn everybody on the way up. The way down is going to be terrible for you. I meet people, especially in L.A., that are like, do you know who I am? And I'm like, no, I don't really care. You're no different than anybody else. You could be the president of whoever and whatever. It's honestly doesn't matter. We all believe the same blood. Watch marshmallow music and Shalizi carefully. There's a lot more they've accomplished, that I couldn't fit here and they're just getting started. Anyways, guys, a little random one. A little known fact before I was doing what I do now.

I almost was in the music management business. So spent a little bit of time watching this happen as it happened and thought it would be cool to share this great threat on it. So anyways, guys, I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.