We Study Billionaires - The Investor’s Podcast Network - BTC151: This is NOT Capitalism w/ Allen Farrington (Bitcoin Podcast)

Episode Date: October 11, 2023

During Preston Pysh's discussion with Allen Farrington, Allen provides critical thought experiments and challenges to many of the ideas that plague Wall Street and business schools. IN THIS EPISODE, YOU’LL LEARN: 00:00 - Intro 04:56 - What does the UFC have to do with economics and money? 08:28 - The Efficient Market Hypothesis. 19:18 - Is risk volatility? 19:18 - The Capital Asset Pricing Model. 31:10 - This is NOT capitalism. 34:49 - The flaws in using GDP. 44:21 - Thoughts on Bitcoin and derivative markets. 44:21 - The societal implications of Bitcoin and beyond it's economic value. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Allen Farrington's Twitter. Allen's Website. Allen's book, Bitcoin is Venice. NEW TO THE SHOW? Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: River Toyota CI Financial Sun Life AFR The Bitcoin Way Industrious Briggs & Riley Meyka Public Vacasa American Express iFlex Stretch Studios Range Rover Fundrise USPS Shopify Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I have financial expert and the brilliant writer, Alan Farrington. During our discussion, Alan provides critical thought experiments and challenges to many of the ideas that plague Wall Street in business schools when it comes to common investing mantras. We get into deep discussions about performing economic calculation and the metrics that many use to look at economic performance and what their flaws are and how people, should think about their approach if true.

This is a conversation that you won't want to miss. So with that, here's my interview with the thoughtful Alan Farrington. You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey everyone, welcome to the show. I'm here with Alan. And Alan, I have a confession here. I'm a massive, massive fan of this book.

Thank you. massive fan of that book. And here's the reason why is because you take a sledgehammer to so many traditional valuation thoughts, ideas, like anybody who just got an MBA, I would highly recommend that they pick up your book and read it because it'll pretty much take a sledgehammer to their MBA. But I say this all in a really good way because it's like we've been so indoctrinated in how people think about valuation and people think about markets. And I just think that some of your points are so important. So I want to start off the conversation with the start of your book, which when I read this, I literally was like pumping my fist in the air because I was

so thrilled with the way that you started this book off. You start off with a Joe Rogan quote, and you're talking about martial arts. And Rogan says that we had no idea what any of these martial arts like what were the best or whatever until 1993. So talk to our audience, explain to them what you're getting at with this. Tell them a little bit of the story and why you find this to be so important. So even explaining that there's quite a bit of backstory to get to that point picking up on some of the things you've already said in the introduction even besides the Joe Rogan point, even besides the MMA angle. So there is actually co-author on the book as well. His name is Sasha Myers, a very good friend of mine. Former colleague

we met on the job when I still worked in TradFai, which I did for a long time until quite recently. And I bring that up for a couple of reasons. So one is that he wrote that chapter, actually, at my insistence over probably about four or five years, I was telling him to write this. And actually, the book turned out to be a good excuse to finally get all these thoughts down on paper. I'm partly saying that to excuse any ignorance of the minutia of MMA that may come from teasing out this discussion. But also to give him credit, like it is this idea. I think it's a very a good idea. I was very excited when I had. I'll take slight credit for saying it was my idea to put it right at the start of the book because I thought that the ideas it introduced were

important enough, but also accessible enough. And a lot of the rest of the book is not very accessible. Before going into the MMA bit, though, I also wanted to mention that the praise you gave it in that little introduction, which was very kind, by the way, thank you very much. We've never, at least not publicly, at least not to me. I don't think I've ever had exactly that praise before. And I realized, as you were saying it, it's because of what your background is. But I'm so glad that you, that you did say it that way. I will be able to quote it verbatim, but, you know, like, everybody who got an NBA should now read this and like unload and all that, which is, is very nice of you to say because I think that was largely on purpose.

This is maybe something we can get to in the bet. I don't want to go too far off the quest, because you want to talk about the MMA quip. But why I wanted to mention that gives Sasha credit as well and highlight where we used to work. It is very much a reflection of the ethos of our, well, his current employer actually, but I'm a bit more liberty to discuss it, I suppose, given I've left my former employer, their attitude towards, it was an investment firm and their attitudes towards investing towards financial markets as a whole, you know, how best to approach them, how best to think about them. A lot of the book, probably not the MMA part, but a lot of the rest of the book is kind of a distillation of conversations that we'd just been having with each other

for about four or five years. As I mentioned, the MMA angle was kind of incidentally amusing that we managed to get that in. But it's very much, it's come from a place of sort of frustration, if not hate, in some cases with, you know, what we were seeing in our jobs. And then obviously there's a whole other. Alan, tie that into a big point too. It comes out in the book that, and hate is such a strong word, right? It comes out in the book, but it comes out in such a deep critical thinking, just bludgeoning of these. I don't like that.

I'll try to reuse that. Yeah. Of these past, like, mantras that you just hear from business schools and just like. The people believe because everyone else believes them. And very few have actually thought about why it might be true. And, you know, we like to think that we have and we've discussed. covered their false. Yes.

But anyway, should I get back to the MMA part? Yeah. I wanted to make sure I did that before we eventually moved on. Sasha's idea about MMA, which he told me a very long time ago, we spent a lot of time teasing out. I encouraged him to find a way to set up the rest of the ideas that we go into in, as I said, kind of less accessible detail layer in the book. His idea about MMA is that it is a truly free market.

And in particular, it's a free market of. historical interest because until, was it 92, 93, until UFC was set up, it's actually, it's more UFC than MMA, just to be clear, it's like the forcing together of all the different styles to see what actually wins. Prior to that, there had really been no way to know which fighting style actually was superior because of the way that almost all of them were taught and more gate kept, I suppose. Like the way the competitions would run, almost what's kind of nice,

what's interesting, what's unique about UFC is forcing all of them to come together and to actually finally find out which one is the best. And so the reason we include it is that, I mean, the rest of the book is basically about, it's not really about Bitcoin, that's kind of clickbeat, but it's about capitalism and it's about free markets.

And I think it's as much about the philosophy of these, like how to think about them and how to evaluate knowledge within them and what the role and importance of knowledge is in these systems. And so that's really the focus in the chapter about MMA that this UFC was an experiment in attaining knowledge. Because it forced this knowledge to the fore that had never really previously existed. I think it may be an interesting way to kind of weave toward, or I guess weave away from M&A itself, weave towards whether it's economics or whatever other topics we talk about, is that it couldn't have been settled any other way. I think that's like the nice, clean way of describing that one particular angle of thought that we have, that you could not have deduced the answer to this. There's nothing intellectual you could have done to arrive at, basically, which is the best fighting style.

you had to run the experiment and you had to have some kind of appreciation of what it was you were watching to then infer the knowledge that came out of it. And so it's all those threads, practicality versus intellectualism, kind of dynamism in terms of forcing the issue rather than just static analysis, being very clear about what you do and don't know. Like these are the threads that we then take into economics and capitalism and so on. But we really like that. MMA is a great kind of accessible introduction to that. I recently read this book called The Infinite Game by Simon Sinek. That's been highly recommended. I've never read it.

It's really good. But in essence, he's just getting at, like, a lot of people have convinced themselves that they're playing some type of finite game. And I think when you're talking about like martial arts, they have bound themselves. Like if you're doing karate or you're doing, you name it, right? They're bound by the rules, the movements, the whatever. And they were playing this very finite bound game.

And now they were being forced to go into what Simon Sinek would refer to as an infinite game where there's really no rules. The rules are you just got to win, right? Like you got to get out there and you got to beat your opponent with whatever mechanism or whatever school of thought you want to apply to it. And it's so representative of free and open. markets, right? Which is where you go in the book next. And so yeah, you go into the next chapter. Then you're talking about the efficient market hypothesis, which, holy Lord, man. Like, you have a quote. I want to read this quote because I, for me, this just like really represented what you were really getting at with this chapter. You say prices reflect all

available information. If you believe that, you've already been hoodwinked. So get into that idea. and really kind of just some of your broader thoughts on this idea of the efficient market hypothesis, which is basically a religion in these schools, right? I don't mean to put you on the spot too much. Well, I kind of do because I don't want to put myself in the spot too much. It might be helpful if I think you would be better at providing this. I can try if you want. I'm not trying it.

It's not like a gotcha or anything, but if you define the efficient market's hypothesis first. Yeah. I mean. For my idea, I just know exactly what I'm arguing against. because that's another thing that it's, I think you're right, it's kind of become so much of a religion that a lot of people in finance, I should say, obviously not in the wider world.

They operate as if it's true and will repeat sort of some of the very downstream consequences of it, but without actually addressing what the hypothesis is itself. So I just want to make sure that we're being clear about what it is. I'm now attacking. I would maybe even take it a step further. I think that the mantra that's repeated in academia, is around the efficient market hypothesis is all available information the market has

already synthesized and therefore it's impossible to outperform the market so you might as not even try. So yeah, so this this idea that you can't, I'd make it a bit more formal just because that it makes it easier to attack that not just you can't possibly outperform but that any outperformance is luck. Yes. I think it's also a piece part of it. Yes, because all the information is in the price.

Like, that's what the market does is turn it all into something that nobody could possibly know more than, I guess. Which does have, it does have kind of a nice appeal to it. I'm maybe interested in your thoughts on this rest. I'm going to defend it. I'm going to love this. I think the reason a lot of people fall for this is that it superficially resembles a lot of, I wouldn't say mantras. exactly it. I'd be a bit more positive than that, I guess, truisms, let's say, about free markets in general. It kind of taps into a lot of the same sentiment around objecting to central

planning, say that, you know, the central planner could never possibly know anything approaching the combined knowledge that emerges when people engage freely in a market, which I believe I would subscribe to that as a proposition. But it sort of, it superficially uses something like that is a starting point in its own argument, but it arises something that I would argue is just complete nonsense. Well, then you get into this idea of what I value and what you value are very different. And if I have a ton of buying power behind this thing that I value, which might be somewhat nonsensical, right, the reason why I'm buying a particular stock or I'm buying whatever in the market, free and open market, my actions don't have to be efficient, right?

They might actually be extremely inefficient. And if I'm applying a ton of retained earnings and buying power behind that incentive, that self-serving incentive, which isn't, you know, if you lined up 100 people, they would all greatly disagree with the rationale behind why I'm doing something. There's no way that the overall system that we're talking about can possibly be inefficient if an actor like that exists inside of it. And so I go even that. I go further.

I'd say that the way in which the word efficiency or efficient or whatever is being used in this context basically doesn't make any sense. And that's kind of the root of it. This manifests in a number of ways. I think one being that if you subscribe to this, you kind of have to think something like all of the data that markets generate somehow perfectly captures it. Like you don't need any more information. Like that is the information about what's happening, which I think is kind of. kind of insane. And I think the alternative approach, like the first principles place you need to start to unravel all of this is realizing that there is nothing in a market that hasn't originated

with just people making decisions, individuals deciding what to do with their time, money, whatever. And you have to start there and build up rather than start at the data and build down because I think, this might be a little bit of a straw man in this case. But I think what proponents of the efficient market hypothesis would, they probably wouldn't do it publicly, but you know, what they would be thinking privately when they're trying to explain this to themselves is that if you start with the data and you work down and you see that people are doing things that sort of go against whatever the aggregate of the data suggests they ought to, whatever they even mean by that. Even that I think is kind of silly, but they're, you know, they're outliers in some particular direction. They would pathologize that behavior as inefficient. And that's, you know, they're, you know, they're, they're outliers in some particular direction. And that. And that's, you know, they're, they're, they're, they're, they're That's almost what they kind of construct this definition of efficiency as like aligning with whatever ends up happening on average, which I think if you're really critical in, it's almost like a reduct to out absurd at that point. You know, I mentioned a second ago that I doubt they would formulate this argument publicly. But if you force yourself to that point, it's just kind of clear to me at least that that doesn't at all reflect, certainly doesn't reflect how any individuals behave. but given all of the top level data and markets as a whole are emerging from the interactions of individuals,

it can't even possibly explain what's happening at the top level, even though that's where they started. And so was you clear about all of this or at least clearer, in my mind at least what it's kind of freeing, right? It allows you to just get rid of all of this baggage. Yes. Just think about what do individuals do or how are individuals behaving? How are they likely to behave? And then build up from there. And then to go back to something you mentioned a minute ago,

maybe a more kind of a tangible way of understanding all of this is the idea of just outperformance, right? So basically, can you invest in something that is better than the average? Or can you invest in something better than the average? Consist it for a reason other than blind luck. Yeah. It seems to me just completely obvious that you can because, not that you will, obviously, like it's probably also definitely true

that half the people attempting to do it would end up performing below the average, right? but that some people can and that it's not luck because it might be luck as well. But for the people for whom it isn't luck, what they have done is more accurately predicted how individuals are going to behave, what they are going to value and just kind of run that out. Like, okay, well, and you wouldn't, just be clear, like, you wouldn't do it on, you wouldn't try to model everything. It wouldn't be like, okay, this person thinks this, this person thinks this. And then kind of, I don't even know what the approach would be at that.

maybe literally build a model and see what numbers pop out of it. It would be more hypotheses and heuristics about what people in general are likely to do, or even some particular subset, some demographic are likely to value, how they're likely to behave, what else is likely to happen? Ultimately, when you take this approach, you're just reasoning about humans. You're reasoning about other people. It's not remotely mathematical or it shouldn't be really. It's clearly not scientific either.

And so I think that's another thing that rubs up, they rub these people out the wrong way, that if you are starting with the top level data, it's very tempting to do lots of science, right, or statistics, let's say, and then pretend that the outcome of the statistics is scientific when I would say, again, you know, nothing intellectually required for that domain exists, right?

You can't have a, you can't measure properly, you can't have a control, you can't isolate the variables because every individual is like their own infinite set of variables. Like it's the idea, again, when you go down to the individual level of trying to mathematics what it is you value is just clearly, really silly. So again, back to this point about our performance, all you're really needing to do, I say all like it's easy.

It's obviously not easy. But for the ones who do it successfully, what they have done is basically correctly predicted what other people will value. Or predicted it more correctly than the average. person who's also trying to predict the same thing. Yes. And that seems like kind of obvious that you could do it, I guess. I mean, the example we give in the book, you may have been going to mention this anyway,

but it's exaggerated on purpose, but just to make the point like to make it as accessible as possible is that the, I think this is true at least, I checked it when we wrote it, that the best performing large cap, you have to make various caveats around this, but the best performing large cap US stock over the 2010s was Netflix. And you could, I suppose, again, go through that, like, ridiculous process of the top, down, building the model of who's going to do this and what and when and why. Or you could literally just have thought in 2010, streaming is better it is going to win, which is essentially even phrasing it that way, which is probably more natural in, you know,

conversational English makes it seem like it's about technology. Which it kind of is, but it can't. It's really just more about people. That's a commercial proposition. That's like people will prefer to get a Netflix account than well-renting videos, I guess, but also just watching regular linear TV. Let's take a quick break and hear from today's sponsors. All right.

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Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. What's so interesting about academia and how they've tried to develop math around this, one of the most popular models that they have is this capital asset pricing model. And so going to your example of cap M is what this is called.

If you go to business school, you'll definitely be taught this model. You'll have to do these equations. you'll have to figure out the math on this. And taking Netflix as an example, if we could go back to 2010, there's not anywhere in that calculation or in that model where you're talking about streaming, like the underlying assets that's like going to produce the value prop in the future and competitive mode or none of that.

Like you're not talking about the IP. You're not talking. No, you're looking at how much the price has wiggled around from a volatility standpoint. point. And then you're looking at the price of everything else on the market and how it wiggled around over some made up period of time from past five years or three years or whatever arbitrary time you want to select. And then you're plugging this data into the, and you're looking at the risk, quote unquote, risk free rate of treasuries. And you're plugging these numbers into this

model. And then it's telling you potentially how much outperformance Netflix is going to have. again it assumes I'm glad I touched on this briefly it assumes that that is a scientific domain it's for that to make any not even be right because it could be right by but to even make sense that assumes that

everything that went into all those numbers popping out over whatever period you're drawing them from will also be the case in the future and I actually find it kind of baffling I'm sort of just I'm thinking alive now that none of this is in the book but if you believe that like if that made sense to you as a methodology,

why would you want to be an investor? Like, what is it you even think you're doing? I don't know. I honestly don't know. Well, this is the world. A bit less facetiously, though, right? I can link this to a couple of things we've mentioned already. So that approach, the CAPM approach, it assumed to be a bit more rigorous about like why the methodology is really silly.

It assumes a couple of things other than just kind of being, you know, I called it not scientific, right? It assumes a kind of a static environment. It assumes nothing is going to change. Yeah. Whereas I would say this is like a more, a nicer interpretation of that insult I ended on there is that what's fun about investing or one thing that can be fun about it is thinking about what's going to change, right? Like it shouldn't be, I don't think. I mean, I feel really bad for anybody in this position, certainly professionally that their investment decisions are just the result of like running an Excel or something.

Just whatever pops out. It's like, oh, I guess that's what we should invest in. I mean, I've never done that. Sasha's never done that. We like our jobs because it's really interesting, thinking about the human angle to, like, Netflix, for example, but basically anything, right? Which is far more dynamic.

So you've got the dynamic versus static. It's also, it requires a, what would you call it, like a bottom up analysis rather than a top-down one. So the cap-em again is exceptionally top-down. It's only giving you the numbers, right? So all these numbers that you have to plug in, There's no required understanding of where they came from in the first place. It's almost like a non-secretor to even ask.

It's like, what are you talking about? There's no variable for that. Where do we put people's values or feelings or whatever? Whereas the bottom-up approach is obviously starting with thinking about people. Like, what will people want? What will they value? And it's just, yeah, it's both more appropriate and more interesting as well, I think. The next chat, we could talk about that topic.

I could literally go on for hours on that last topic. We just go through every one of these, FAM, EMH. You did the risk-free rate. You made fun of that for half a second or so before moving on. Well, I guess if I was going to, we aren't going to move on. So from a first principle standpoint, like, if I've worked and I've retained buying power, right,

and I'm going to invest that buying power into something, I want to invest in something that is going to produce a product, or service that adds efficiency makes people's lives better because they're freeing up their time. And if I'm looking at it, not from, because that's more of like a VC lens, right, if I'm looking at it as a business that already exists, and I'm saying this business is just really saving people a ton of time. It's adding value to way more people. And my projection is that it's going to continue to outpace their previous amount of efficiencies that they've added to people's lives. And the rest of the market's priced here and this is priced there.

I should probably own this because it's going to perform great. Like, that's investing to me. And like, and I know that it sounds like really basic. But it is controversial. It's not the norm. The norm on Wall Street and people that are actually allocating capital. It is so abstracted away from what we just described. And at least in my opinion, it's been abstracted away. But anyway. Yeah, no, no, I completely agree. I think it's, this might sign a bit harsh. It might require a little bit of elaboration, but it's basically a cargo cult.

You know what I mean by that? No, go ahead. Yeah, you explain that more. Yeah. It's applying methodologies that work in a completely separate domain that seem like they work in this domain, but actually they don't. And actually, they don't capture any of the causality. that is required to understand this domain.

But they seem very serious. They seem very scientific, basically. That's the word I keep coming back to this. I think that is actually really key to unraveling a lot of not just this efficiency markets, but other things that we talk about too, I maybe even try to link it back to the MMA discussion too, that as soon as you let go of the idea that this even can be scientific, you're just freed up to, I think, appreciate it.

far more deeply, far more seriously, even. So like the MMA angle would be something like this, I think this is good both in terms of the accessibility, as I mentioned before, but in this case it's like even more obviously ridiculous. If you, rather than just getting different fighting styles to fight each other, you did some kind of statistical analysis on them in isolation and then built a model that would turn out who's going to win. Like, which do you think is better?

Should you, you know, do you do the analysis? and build the model, or do you just let them fight? I think you just let them fight. It's superior knowledge that you gain from that. And you're freed up to do it if you don't think it's remotely scientific. And I think the main difference, because that may be just seem a bit ridiculous in isolation, but the main difference between that environment and investing financial markets is only really the amount of data there is in the first place.

I actually, the reason I think is a good example, right? We kind of entered this already, but from a different. angle, the reason we like MMA as a comparison so much is that it's just such a great example of competition yielding unpredictable results, right? Like things you can't model, you can't know in advance, you have to just see what happens. Obviously, none of that data I mentioned, you know, for like building the model exists in MMA. Unfortunately, it does in finance. And so this is where I think the cargo call element comes in that people start off just with this absolute flood of data and think, oh, I need to do something with this.

Like, I can't ignore this. This is important. This must be important. Everyone else is doing something with it. I have to do something with it too. And it's incredibly freeing to just say, no, you don't. You can just ignore all of it. I promise.

So the next chapter, just the titling of this, I wish I could scream this from the mountaintops, Alan. And the title is, this is not capitalism. And you get into a lot of your opinions on, on GDP being just such a worthless metric, but it's the thing that everybody's hyper-focused on, among some other things. But I think that there's, I think this is a really important thing just beyond like some of those in-your-face metrics from a societal standpoint where you have these movements of

very young generations that are looking at the branding of this is capitalism. Yeah, yeah, yeah. And like, it's destructive because what they think the label is is nothing of the sort if they actually were able to understand what's the mechanics of all these crazy terms of backstop facilities and quantitative easing and you name it. Reverse repo facilities, like all of this. Give us your down and dirty on what you guys were really trying to accomplish with this. Well, that's, I mean, that's exactly why we named this.

So this was an article before the book. This was, I think, actually, the first article of any that then went into some of the chapters of the book. And we wrote it in, I want to say, April 2020. And what we were responding to was just massive bailouts, right? It was the start of the COVID money printing extravaganza. And it was being labeled in popular press, kind of mainstream culture's understanding of this was that this is capitalism.

And there's quite a few strands to our argument, I think, but this simplest version, this is more or less a quote from the book, because I remember the line I'm about to say went in because we were saying it in real life so many times that, if anything, the article kind of came out of that, that for something to be capital, like, if you're talking about capitalism, it doesn't matter what whatever, or what you're, in fact, analyzing, anything that has the name capitalism. For that to make any sense, be an applicable name.

Surely, at least, it has to refer to growing stocks of capital. And it can potentially even refer to lots of other horrible stuff. I don't think that's really necessary. That's almost like kind of an olive branch to people who would necessarily identify

positively with capitalism, but are, you know, nonetheless, seeing the horrors, I suppose. I don't mean to be too dramatic, but, you know, seeing what is truly awful about endless money printing and some other kind of, I'd say, more obscure, more downstream stuff of Fiat banking, those people who are perhaps even correctly identifying a lot of these symptoms are being told that capitalism is the cause. In some cases, even by people who, you know, are the champions of all the activity in the first

place, a lot of it's kind of apologism. It's that, oh, well, this is what capitalism requires. This is like the occasional downside of capitalism is that, yeah, we need to spend a whole bunch of money and save all these people who made terrible decisions. But yeah, our claim is, which I don't think is even really that controversial because it's not even, it's more just about language than about economics, I guess, that if you're calling something capitalism, even before you're criticizing, right, if you're calling in capitalism, you ought to be mindful of how capital is being treated. and very probably that it's just been lighted. What you're looking at is something else. Hence, this is not capitalism. Well, you do such a great job talking about GDP, right? And so when you're talking about GDP is a great one.

Yeah, yeah. You lay this out and to help people understand it better, you're saying, this is the top line. This would be like me looking at a company and saying, well, their top line keeps expanding. Their top line keeps expanding, but never, never glimpsing at the bottom. line and realizing if there's any actual value accretion happening inside of that entity.

And from a governmental standpoint, you're saying that these people that are looking at GDP and the percent just keeps going up, but they never take a look at the value accretion that's happening and totally ignoring that, I guess the effect of this is a focus on the incentive of consumption as opposed to long-term value accretion that is sustainable over. time is what I was trying to say. Yeah. Yeah. No, I'm really glad that you made the comparison to company's financial statements. I would have done it if you hadn't. And I think actually given your likely audience, right, people with, if not working professionally finance, I guess, with some kind of background, like highly financially literate, it's an extremely useful

comparison to make, I think, because maybe similarly to the MMA example that is, for most people it's more accessible, right? That GDP as a macro term feels, I don't know, it feels distant. It feels beyond being able to analyze straightforwardly. Again, it's one of these things where we argue will know if you have the right tools. If you have the right methodology, it's not at all. And in fact, it compares very, very nicely to the equivalent terms for a company. So just to tease that out a bit further, yeah, what you're, I push your argument a little bit further than just leaving it at revenue versus profit. Yes, it's basically saying, oh, revenue's going up. Therefore, that's a good thing. Like, that's our metric for success, which is kind of obviously

silly in its own right. Profit would clearly be better because that means that revenue, if you think of really first principles terms, revenue proves that somebody values what you're doing. Profit proves that you are providing that value efficient. You're producing. more than you're consuming in delivering that of value. But the thing you, even profit, we would argue, is not enough. The thing that you really need is returns because it's profit going back into your stock of capital, creating the assets that when operated create revenue, it's that cycle that's important.

And so this is the distinction between, I guess, the stocks of capital on the one hand, in a company, it's, you know, it's pretty straightforward to calculate these ratios. It does become a bit more abstract in the case of, well, everything, a country, I don't know, an economy, I guess. But sticking to the right principles, I think, is still fairly straightforward. I think the difference is basically you can't really know what the numbers are, but you can still distinguish between, you know, what you're identifying as good or bad, basically. So GDP is purely the revenue and it's purely consumption. It says nothing at all about what I would argue is just real wealth.

I think that's the kind of the cardinal sin here. It's mistaking GDP for wealth. GDP is the effect of the real wealth of a stock of productive capital. It is not itself wealth, and it certainly doesn't cause wealth. So just being really clear on these distinctions, I think is really important. There's actually, I don't know if you remember this or if you have this sort of noted in detail. There are two other critiques that we have of GDP that made this even worse. So like that's everything I just went through there that is like,

measuring the wrong thing in the first place is only part of the problem. Do you want me to say the other time? Yeah, yeah, please. Yes, sir. Anyway, okay, cool. So the second one is that, and actually, I'll say even before this, the listeners will pick up a lot of the same threads, like again and again. I won't deliberately go back and link it to MMA every time.

But again, the reason we introduce MMA is that the more accessible points in that discussion just come up over and over and over again in a really nice way. So the second one is that because it is such a top-down metric, it obscures the individuals it actually refers to. So it's an average that doesn't really exist in terms of the average person it describes. And the reason is basically that it's weighted by consumption. So first of all, it's bad enough that it's just consumption. But it points to an average individual weighted by the consumption of all the actual individuals,

as opposed to a medium, just to be really clear, right? because that probably sounded all kind of fluffy and abstract. It's entirely possible, just to like really make the point, it's entirely possible that everybody bar one person got poorer or consumed less, but one person consumed so, so much more that they made up for everybody else's losses, and then GDP would still have gone up, right? And like our GDP per capita would still have gone up, whereas obviously the median would have gone down.

And so it's, yeah, it's kind of not, it purports to be more democratic, I suppose, in a democratic in a very loose sense, in speaking for the average rather than just, you know, the 1% or whatever, but it's actually highly skewed towards the already rich. And the example I gave, the kind of deliberately ridiculous example, isn't even that far off reality? I don't think if you look over certain, you know, If you find the right periods, there are indeed times where more than the growth in GDP goes to just some upper percentage. So the entire X percent down have in fact gotten poorer.

But X percent up have gotten richer faster than they've gotten poorer. Again, GDP per capita has gone up. So that's another reason. I wouldn't maybe read too much into that kind of ethically. you could. One could be very offended by this. My point is more you can only make this mistake in the first place. Again, if you're thinking, if your starting point is very much top-down data and you're not clear about where that's leading you. So that's point number two. Point number three is maybe the most interesting of all that it changes over time in a way that is essentially

unmeasurable. This is never really a big deal from, for example, one year to the next. It's still, I'm not claiming like, oh, it just doesn't tell you anything at all. It still clearly does tell you something. But the problem is that every year, and then this is clearly truer on longer and longer time horizons, there are new inventions, right? There are new products. There are new services that come into the overall calculation of GDP, and then they're old ones that drop out. And if you roll your period of time forward long enough, eventually nothing in the old GDP calculation will be in the new one in terms of what is being consumed. Year to year, it's not that big a deal because most of it's still the same. And then the argument,

the kind of, I would say somewhat fallacious argument against what I'm now putting for would be, oh, but that's fine because there are, you know, it's still, the things are repriced, right? There are exchange rate. So you can see how much people value the new things. by how much they're willing to pay for it, which is true in the moment, but it becomes meaningless when everything has changed. And on a long enough time horizon, everything will have changed.

So an example that we given the book, I'm going to get the exact stats wrong here, but it's kind of along the right lines, is that the GDP of, I think it, who is that we chose? I think it was that the GDP per capita of Vietnamese today, I believe is around the GDP per capita of Americans in the, I forget exactly when, but in the late 19th century. We would also argue it's kind of ridiculous to say that therefore they are as wealthy.

Vietnamese today are as wealthy as Americans were then because every single part of their lives didn't exist for those Americans. And you would argue is maybe not every single aspect is better, but everything they consume is, of a higher quality, I suppose. And you can, it's almost definitionally true because they're choosing to consume these newer things. So like, I think probably one of the more pronounced examples we gave, I believe, was something like penicill. There's no, and this kind of winds this way towards like a nice catchy slogan

for this, which is that there's no exchange rates to the future. So you can say, oh, but you can still reprice these things when you do the new calculation. So you can see how much people value them. But you can't, they need to exist before you can, you can't value something that doesn't exist yet. And so to use GDP as, which is how it's almost always used as well, just to be clear, like, I don't think a good way out of this. It's like, oh, just don't use it that way. Like, this is all it exists in order to, like, this is the only point

anybody ever makes with it is, oh, GDP went off, therefore we're better off. Well, the longer you run this out, the more meaningless it becomes. Yes. So that's problem number three. So it's meaningless or no, it's funnier in the other direction, I guess. Problem number one is, it measures the wrong thing. Problem number two is it measures the right thing in the wrong way, in a deeply unfair way. And then problem number three is it's meaningless anyway. So who cares? Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk,

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All right. Back to the show. It's meaningless today and it's going to be even more meaningless tomorrow. Yeah. You have a quote in here and I'm going to transition the conversation more to Bitcoin topics. You have a quote in the book that for me personally as a person that served in the military, this quote is just so profound.

After a millennia of compounding technology advances, taking us from swords, shields, long bows, handguns, fighter jets and atomic bombs, humanity has discovered a technology that only resists and disincentivizes violence and has no other use. This is a big deal. And I think for people that are not Bitcoiners that are hearing that, it's almost like an eye roll, that there's no way that this magic internet money could possibly like reverse human nature of using force and all of those ideas. So lay it on that person.

Sure. Well, one thing I'll say at front, I don't want to take too much credit for the thought behind that line. I think it's a fairly, first of all, it's completely understood anybody in Bitcoin. It's one of the first things you wrap your head around. I think the actual source of it probably predates Bitcoin by quite a bit. In slightly more abstract terms, I think I'd probably trace this to the sovereign individual, although obviously they weren't talking about Bitcoin. They were talking in slightly more general terms about the use of,

of cryptography online. But obviously, Bitcoin is the perfect example of this. And I think to a large extent, validation of that thesis as well. So if people are interested in this line of thinking, I would go read that book. I wouldn't credit me with this thought. But to your point of, okay, so what do you say to someone who just doesn't take this idea seriously at all? I think probably the best resource for this that I've come across is actually extremely

recent, again, because it's just kind of common. knowledge within Bitcoiners for a lot of people, you know, you probably don't even really need to write it down or explain it. But Linna Alden's new book, Broken Money, explains this very, very well. Yes. So I'd recommend probably people to just go by that as well. And she says it better than I will now effectively try to summarize what she says. But her argument, I mean, one of many, many arguments in that book is that what is different about fiat money, the kind of money that we have ended up with now. What is really historically unique about it is that it has reduced the cost of violence to basically zero. And to be fair, actually, this is something that we

touch on at the very end of Bitcoin is Venice, but I think Lynn does a far better job of explaining it. And I think the effects of this are so pervasive that it's almost like this is water in a way that you can go your whole life without ever actually noticing it. So in some sense, I understand where the eye roll maybe comes from. But once it's pointed out that to maybe make it a bit more tangible that there is now, or there hasn't been for 50 years or so at least definitely for the US and then less so for basically the more allied to the, US you are, there is no cost whatsoever to waging war. Previously, like for all of history, to some or other extent, and basically the extent gets less and less, the closer you get to pure fiat, a government that wanted to wage a war would require the consent of its populace, the consent of the governed, to fund it by a taxation. And by and large, people really hate that.

Like, they really don't like being taxed for war. I think a key turning point in all of this, actually, which Safedine has done a really good job sort of articulating. And actually, with some historical research into this as well, like popularizing this previously, apparently just unknown historical fact of what the Bank of England did at the start of World War I. And so Safe has this great line, which is that Bitcoin is the technology that will finally end World War I. And so this is what he's referring to that when, so at the time the Hans Stirling was the World Reserve currency. And in order to finance World War I, the Bank of England had to break the peg to gold. But the way that they, the process by which they went about doing this, and this is what lend details in broken money, like in a lot of detail.

She doesn't just mention it. Like she really examines this episode is that they in fact tried to issue war bonds. and they were incredibly unpopular, which I guess is in part because of the somewhat unusual circumstances that World War I came out of. It wasn't like the UK was being invaded or anything. It's kind of obvious knowing the web of alliances and so on that the British people would not care about this.

They would not be interested in it. But the Bank of England just lied. They said that the war bond was massively oversubscribed. They roped in the Financial Times as well. to propagate this official lie. And then the FTE published an apology or like kind of a correction, kind of an apology in something like 2017, you know, more than 100 years later, when the records proving it, which had been hidden at the time, where finally dug up from the Bank of England and the

Bank of England themselves admitted that this had happened. Then the FTA was like, okay, well, we can apologize this for it too. And so this is like really pivotal because the peg to gold was never returned. I mean, no, you know, once any peg to a hard money is broken, you never really get it back. But that's that you could argue that was the first domino that led right the way up to WGF happened in 1971. I'm obviously skipping over an enormous amount there, but that's why you should go re broken money anyway. All right, Alan, such a pleasure chatting with you. This has been a blast, but I'm curious, like, what does your next three to five years?

Like, what do you got in store? What are you working on right now? You always seem to be up to something pretty awesome. I don't even know my next three to five months is going to be like, but I can speculate, I guess. So, yeah, I mentioned before I used to work at this big asset management company, Sacha still works. I left a little over a year ago to start this company Axiom. For now, we have a venture fund that is focused on Bitcoin companies or Bitcoin adjacent companies. We did a kind of a public launch maybe two months ago now, which coincided with just, I guess, maybe some of your listeners.

will be interested. It was kind of pitched around a new piece of writing that I had done, kind of an essay, I guess, which is actually the first I'd done since Bitcoin is Venice, I've been saving it up for a while for the launch. Talking about a lot of the same things, the tagline, I guess, is that the killer app of Bitcoin is fixing the cost of capital. So it's, you know, covering a lot of the same topics that we've covered now. But I think also part of the point was to set out the vision for the business because we have, we have this venture fund, you know, we're hoping that we'll be able to raise and launch, you know, many more down the lines so long as there is a need for funding in the Bitcoin ecosystem, we want to try to

contribute to that. But we also have plans to launch, let's say, more exotic financing instruments for Bitcoin companies. I don't want to say too much more about that now, just knowing the stage they're at and how much of a regulatory nightmare, basically every part of that is. I'll wait until they actually exist before I start bragging about them. But I'm excited at what we're hopeful we're going to be able to do. And yeah, hopefully contribute to or maybe even take advantage of, I guess, if we're successful enough Bitcoin fixing the cost of capital. I love it.

I love that theme and that branding, by the way. For people that are not familiar with this book that we were talking about, it's Bitcoin is Venice. Wow. Very, very impressive. I wish I could, to be quite honest with you, I wish I could write like this well. I cannot. Like, I promise you, I cannot even come close to this level of writing skill. But just an honor and a pleasure to get to know you and to have you on the show and to talk

about this amazing book. And thank you for your time for coming on. Yeah, thank you for having me. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it's something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I'll catch you again next week. Thank you for listening to TIP.

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