How to ruin a hobby

If you ask the internet, the card collecting hobby has been ruined.

If you look at the numbers, its never been better. Card Ladders reported that August 2025 was a record month for resales with over $400mil in value across 6mil transactions. New card sales are strong too. Target and Walmart sold over $1bil in 2025 and Ebay logged $2.6b in used sales. Altogether sales of sports and trading cards are a ~$20bil market, almost double what they were in 2019 and nearly the size of the global box office.

Card collecting is booming yet passionate hobbyists are saturating the internet with heart-aching requiems for a bygone golden age. For while the market has never been bigger, the hobby is evaporating. Card collecting is no longer a casual pursuit. A single pack of collectible NBA or Pokemon cards starts at $8 and runs much, much higher. That’s if you can even find the stuff. Scalpers painstakingly scout retailers for restockings of any valuable packs, razing the shelves like maggots cleaning flesh off a carcass. Filling an old-fashioned binder with collectible cards costs hundreds of dollars. Collecting used cards has changed too. Once, casual collectors could find valuable used cards in musty boxes at garage sales or thrift shops. Now rare cards find their way to Ebay. If they do end up at a garage sale, rest assured professionals or semi-professionals will aggressively crowd out any casuals. And of course, prices of individual rare cards have appreciated 2x, 5x, 10x, and often 100x in the last decade.

Gone are the days of schoolkids innocently swapping their heroes on the blacktop. Actually, that’s not true. There are still cheaper cards available. Low-tier, mass produced cards that have no possibility of retaining any value. Those aren’t collectibles. For anyone who wants to collect cards, who wants even a long-shot at owning paper worth more than the paper paid for it, there is no entry-level tier. The $20bil card industry caters almost exclusively to high spenders. Who are the big spenders? Serious collectors, compulsive gamblers, professional investors, and social-media crazed speculators. Anyone with deep pockets and a willingness to empty them. In other words, card collecting is not a hobby, it’s an asset class. An asset class with a liquid and efficient market.

The transformation of the card collecting hobby into a bonafide asset class was a conscious effort that began with intellectual property (IP) owners. That includes the major sport leagues, Hasbro (owner of Magic the Gathering), Shueisha (Yu-Gi-Oh) and The Pokemon Company. Every new card sold is sanctioned via licenses granted by the IP owners. These IP owners paid close attention as card collecting became more and more popular throughout the 2000s. Once an afterthought, IP owners have come to appreciate trading cards, particularly the collectibility of trading cards, as serious media assets and avenues for fan engagement. Sports cards are the best example. Within the last five years major sports leagues (NFL, MLB, NBA) have granted exclusive trading card licenses to Fanatics (the same Fanatics that operate exclusive merchandise licenses for many leagues). Fanatics in turn acquired Topps, a leading card brand. Competing sport card brands like Panini or Upper Deck have struggled to stay relevant without key sport licenses.

Consolidating licenses is good business sense. Card collecting as a trend ebbs and flows. In the late 1990s card collecting became a frenzy and competing suppliers responded by printing excessive amounts of cards, tapping into crazed demand. The entire industry was caught up in a bubble. When the bubble burst and demand softened, the world was awash in worthless cards. It almost destroyed the industry. To this day cards from the ‘90s era sell at a steep discount, even typically valuable ones like Rookie cards, because of their overabundance. Collectors call this the “Junk Wax Era".

For sports leagues, the solution to the Junk Wax problem was a sole exclusive license. Fanatics operates on long-term licenses (10 or 20 years with renewal options), incentivizing and empowering them to match supply with demand in a way that optimizes the long-term health of the asset class. The other major trading card brands (Pokemon, Yu-Gi-Oh) have similarly gotten much more sophisticated about supply.

The distribution of cards has changed too. Collectible cards used to be sold everywhere. Convenience stores, grocery stores, newsstands, drugstores, mall kiosks, even Dollar General. Those places still sell low-tier cards, but not collectible ones. Collectible cards (also called hobby decks) are sold through three main channels: breakers, hobby shops, and big-box retailers.

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Breakers are collectors who open new packs (and cases of packs), sometimes on a live-stream, and sell off the valuable cards individually. Many collectors are only interested in their favorite teams or players. Breakers can arbitrage risk by opening, say, a $10,000 case of NBA cards, assembling team packs (like all Lakers) and selling those packs to collectors. Many breakers are influencers who amplify popularity and interest in trading cards. Popular breakers swallow huge numbers of packs. Single livestream sessions can burn through hundreds or thousands. Fanatics owns Fanatics Live and Fanatics Connect, streaming platforms for breakers, which means they can keep the breaking economy in a closed loop.

Hobby Shops are another avenue for new card packs. These shops are mainly run by true fans dedicated to spreading passion for card game collecting and playing (yes, people still play the card games). However, Hobby Shops are being increasingly marginalized as a distribution channel. They can’t move the volume of big-box retailers and don’t attract as much attention as breakers. Watch five hobby shop collectors discuss how their access to collectible packs has waned over time:

Big-box retailers sell at scale. Card brands have excised the long tail of retail partners in favor of mega-retailers like Target or Walmart because those retailers can move huge volumes of product efficiently. These retailers mostly stock non-collectible, low-tier cards targeting kids. When they do get the higher-value packs collectors chase, it can cause a riot:

All this means that in the new era of trading cards, sales are bifurcated into two buckets: collectible (hobby) and non-collectible (retail). Retail cards are lower-price and mass-produced. Great for kids or people playing the actual card games, but lacking the one quality collectors desire (scarcity). Retail cards are primarily sold through big-box or general retailers.

The real meat of the $20bil market value of trading cards is in the hobby cards. These collectible cards are ones produced in smaller volumes and sold at higher prices. There’s no public data on this, but a lot of industry insiders seem to think breakers are getting >60% of collectible cards. Hobby retailers get most of the remaining allocation of valuable cards but any regular consumers have to compete with scalpers. Scalpers buy packs and resell at a markup online, or they operate as small-time breakers.

Ten years ago a card hobbyist could acquire a respectable collection through buying $3 card packs at local retailers. Building a hobby collection meant buying those packs, opening them, pulling out the rare cards, and putting them in a binder. Building a collection that way is now all but impossible. Hobby cards, the scarce ones collectors desire, mostly end up in the hands of breakers & scalpers. Not until those cards are unboxed and sold as individuals on resale sites are they accessible to casuals. On resale sites these cards fetch their market value.

No more can casuals can’t buy a $3 pack and hope to luck out on a $4,000 Cooper Flagg rookie card. They can either buy the card outright for $4,000 or pay a scalper over $100 for that pack. On my math, at $100 a pack, hobby cards have worse expected return than lotto tickets.

The entire collector card ecosystem is now geared to people willing to spend way more on cards. That means amateurs have been cut out in favor of:

• Influencers or aspiring influencers for whom pricey cards are a cost of business

• Serious collectors willing to invest the time and money to build their collections

• Speculators who buy cards expecting the value to go up (maybe because the athlete performs well or because the character gets more popular).

• Gamblers who are irrationally wasting money on packs (think scratch-offs)

• Institutional investors who have raised serious amounts of money to invest in cards as an asset class

There’s one last leg to this ecosystem, and that is the resale market. Card collecting does not work without a healthy resale market. Here, too, there are signs of a hobby maturing into an asset class.

First, the resale platforms. Ebay has always been the largest marketplace for selling cards. Ebay fees on trading cards have moved from 10% in the mid-2010s to 15% or higher today, which have squeezed hobbyists. More recently other platforms, especially ones that specialize in live-streamed breaking, have emerged. The main two are Whatnot and Fanatics Live. Both have lower fees than Ebay but only allowed verified sellers. A hobbyist cannot realistically sell their collection on these platforms. Again, the casual is squeezed.

Second is card shows. Over 100,000 collectors swarmed Rosemont, IL for last year’s NSCC convention. Trading, comparing, buying, selling, and otherwise talking shop.

Then there is the grading industry. Any efficient market needs a way to reduce counterparty risk, authenticate assets, and standardize securities for comparability. Grading firms do just that. Owners ship their cards to graders and receive a numerical quality grade and a unique authentication ID.

Grading is a huge business. PSA, the P/E backed industry leader, grades over 15 million cards per year (likely a $1bil+ revenue business). Ungraded cards, lacking verifiability, can trade at a >60% discount to their graded counterparts. In other words, anyone who wants to sell their valuable card needs grading. The problem is that grading has gotten expensive. Collectors Universe, which owns PSA, now controls ~80% of the grading market after acquiring two competitors. PSA has increased pricing 40% since 2019 (or more depending how restructured pricing tiers are accounted for). Cards now cost a minimum of $22 to grade.

While grading is great for transparency and trust, its cost has squashed the low-end of the collectors range. Say a casual collector finds a card worth $30 graded. Grading costs $22 and Ebay fees will cost another $5. All of the value is extracted by these third-parties. Instead, the collector can sell the card ungraded at a steep discount and net a few dollars. The ungraded world is the wild west, rife with fraud on both the buyer and seller side. The value is on the graded cards, and given the economics of grading, that means cards above $50 and often much, much higher. Again, this means that casual and amateur participants are crowded out of the market in favor of those with deeper pockets looking to buy big-ticket cards.

That is how the trading cards industry formalized. What was once a casual, fragmented hobby grew into a large market. Large markets attract serious commercial interests. IP owners (ex. NBA), major retailers (Walmart), private-equity (PSA, Whatnot), large corporates (Fanatics), all realizing the value of sports cards, invested heavily in consolidating key nodes of the value chain. These parties then cooperated to restructure the industry to their own benefit. For example, see how interconnected the big players in the NBA trading card market are:

Industry leaders, the ones consolidating and formalizing the card collecting hobby, are webbed together through a series of formal and informal partnerships. They clearly share a vision for what card collecting should be (and who should profit), and are working together to enact that vision.

These changes have brought positives and negatives. Of course it benefits the entities who engineered it. The parent of grading company PSA. Collectors Universe, for example, reported <$100mil in revenue in its 2019 filing, and today likely makes >$1bil in revenue. Some market participants, too, may benefit. Long-time collectors have seen their portfolios skyrocket in value. A Wayne Gretzky O-Pee-Chee rookie card that sold for ~$20,000 in the early 2010s now fetches $2mil at auction. There’s also much greater transparency and liquidity in the market, which should (theoretically) reduce levels of fraud. Undeniably, though, the hobby of sports card collecting is on its last leg. There’s no room in the market for a casual hobbyist. Card collecting has been professionalized; it’s too expensive and risky for a hobbyist. There are still passionate collectors trafficking in low-cost cards for the love of the game. And there are still groups of friends gathering at hobby shops to actually play Pokemon, Magic the Gathering and Yu-Gi-Oh card games. But the industry has moved on, focused on supply and demand and maximizing expected return. What was once a hobby is now an asset class.

The formalization of sports cards echoes a broader trend across popular media. Over the last few decades corporates and investors have come to appreciate the value of strong IP and dedicated fandom. Again and again, across different industries, business-minded leaders have assumed control of popular media and increased their financial value. Disney bought LucasFilm for $4bil, began cranking out new movies, and easily made its money back on box office alone (let alone the merchandise). Sports teams have gone up in value >10x this decade, according to Forbes, in large part because they’ve become much more professional in how they manage their business. Savvy international expansion, centralized media rights, data-driven front offices, and smarter licensing deals (like in sports cards) are all examples. Other collectible IPs, like sneakers, have gone the way of sports cards. Then there’s Harry Potter, Marvel, Lego, and an endless list of valuable IPs that have industrialized in their own way. In almost every case IP management has been professionalized and formalized. The financial results have been stellar. By many metrics, fans are more invested than ever. And yet, something is slipping away. It’s harder than ever to be a fan. It’s more expensive. It’s more crowded. It’s more corporate. At the core of any valuable IP is authentic human connection. That resonance can be magnified, monetized and mimeographed a million times, but it risks wearing away. What happens then? Will that guiding energy of fandom, which seeks authenticity and originality, naturally migrate audiences away from the tired IP and toward new, fresh IP that is not devoid of personality? Will IP that is professionally managed like a stock portfolio be forced to respond by reigniting its creative core or, if it can’t, collapse under the weight of its own greed? Or might incumbent IP have too firm a grip on the commercial landscape? Could there be a soulless future where creative industries are cornered by professionally managed IP owners? IP owners who form an industrial complex that effectively controls all the many paths to fandom: box offices, concert venues, retail merchandise, social media, live streaming. These IPs could flood the world with mediocre, over-monetized content, drowning out any authentically creative projects, and there’d be nothing to stop them. One immense, inane stormcloud, crowding out the competition, raining endless slop on the helpless fandoms of the world. Albeit, at very impressive 30% return on invested capital.

I was thinking about 2015 lately because 2015 is closer to the 1990s than today, and the 1990s are the current unanimous choice for the best decade of American history. Last decade that title belonged to the 1980s, and in the 1990s it was the 1960s. It was never the 50s and hopefully never will be. Personally, I got punched a lot more in the 90s but I guess Prince was still making music. Anyways, one big thing in 2015 was the USPS crisis. The financial failure of the postal service was a staple of Trump’s campaign:

I remember, or maybe misremember, this being a politically contentious take. USPS may be a cost center but aren’t most government services? Also, people love the post office and always have. 84% of Americans approved of USPS in 2015 and >75% do today, according to Pew polls. Any American can conjure the image of their friendly mail carrier trudging through the rain, sleet or snow with their trusty blue canvas bags. It’s transcendentally American, like marines at Iwo Jima or Johnny Appleseed’s tin hat (need to get me a tin hat).

Actually, the USPS being in a gradual decline was a bipartisan consensus for decades. Obama’s White House dedicated a whole blog post to it. It wasn’t even an argument. The USPS was categorically failing to deliver on its mission in two ways. First, USPS is legally required to operate in a self-sufficient manner, or at least not lose money (Postal Reorganization Act of 1970, Postal Accountability Act of 2006). And yet:

Also, USPS is required to deliver mail to every American household in a timely manner, where timely is defined by specific service levels. And yet:

Each year USPS was failing ever shorter of its mission. A turnaround was necessary. In 2021 USPS rolled out a 10-year plan for fixing USPS.

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What was the 2020 USPS turnaround plan?

USPS published “Delivering for America” in 2021 (DFA). The report laid out five structural reforms that would enable USPS to meet its goals. Lawmakers were the intended target of the report, as Congress would have to rewrite the USPS governance framework to effectively greenlight the plan. The proposed reforms were

Structural Reform 1: Retirement & Healthcare Mandates

By way of a legislative quirk USPS was mandated to funnel excessive amounts of cash into its healthcare and retirement plans. Specifically, the 2006 Postal Accountability Act required USPS to make conservative actuarial assumptions and prevented Medicare integration. The report’s position was that all of this extra cash wasn’t even benefitting taxpayers or employees. For example, the USPS had to put aside ~$5bil per year to cover potential future costs for future employees who hadn’t been hired yet, and in some cases hadn’t even been born yet. Those billions of dollars were deposited into a treasury account, helping nobody. This rule is especially crazy. Only the Dalai Lama worries about selecting future employees before birth, and even he isn’t pre-funding their retirement account. By contrast, most American institutions are massively underfunding their retirement obligations:

Underfunding future obligations isn’t a good thing, but neither is overfunding. Swiping a credit card to buy a Thanksgiving turkey and then paying it back later is at least defensible; pre-paying for the turkey in July is crazy. USPS was at a major disadvantage to competition. Normal organizations reinvest cash flow into their business; USPS is forced to divert cash to a checking account.

This rule was put in place around 2006, after which USPS losses began mounting:

Proposed Structural Reform 2: Update Pricing Architecture

Legislation prevented USPS from freely raising prices, limiting them to inflation-level bumps in most cases. At first glance this makes sense because nobody wants to see price gouging from a public service. The problem was that the pricing architecture was built on a pre-internet world. Total mail volumes have collapsed in the last 20 years: The collapse is probably even worse than this chart suggests. Nobody has received an interesting piece of snail mail since Harry Potter got accepted to Hogwarts. The entire letter complex is propped up by home mortgage or auto warrant spammers. Oh, if only the Pony Express pioneers could say how far they’ve fallen! What this means in practice is that USPS has many large, expensive facilities dedicated to processing mail that are sitting half-empty. Underutilized facilities are margin-killers! USPS is bleeding cash operating these legacy sites. Unless Gen Alpha decides writing longform Antebellum-style love letters is vintage-chic then USPS losses will continue to spiral out.

Meanwhile, as e-commerce went from 2% of retail sales to 15%, USPS has been overwhelmed by packages:USPS was built as a letter-delivery service but is becoming a package-delivery service. What does this have to do with pricing? USPS is a logistics business and logistics businesses have centralized costs. The direct cost of delivering an envelope or package is almost nothing, it’s the labor of having the postal worker walk from their vehicle to a doorstep. Most of the cost of delivering mail comes from operating post offices, running huge mail sorting centers, and transporting truckloads of mail. These are centralized costs. These centralized costs are much higher when delivering big boxes instead of flat envelopes. This has meant USPS internal costs have gone up way faster than they are allowed to increase prices (which is pegged to the Consumer Price Index). This has pressured USPS’s profitability.

One final related challenge is corporate logistics partners. Amazon, FedEx, UPS and the likes account for an increasing share of USPS deliveries. Since USPS is mandated to deliver to every address in America, these partners have the benefit of dumping all the most difficult-to-deliver packages to USPS. Small square box going to 5th Avenue in New York? Oh, FedEx will handle that. Poorly wrapped pair of skis going to a swamp house in the Everglades? Eh, USPS can have that one. This is not a bad thing. The whole point of USPS is to make sure Americans have equal access to mail services. The problem is the USPS ability to negotiate with these partners was tightly regulated to their own detriment. Also, these partners were increasingly competing with USPS because they specialize in parcels, whereas USPS has a near-monopoly on letters.

“Deliver for America” asked Congress to rethink regulation around USPS pricing, and promised taxpayer savings of over $50bil by 2030.

Structural Reform 3: Lower Service Standards

The fastest way to meet expectations is to lower them. USPS proposed a new service level framework that would accept ~70% of mail delivered within three-days instead of the old 100%. This one simple hack will let you immediately meet your congressionally mandated targets! Improving performance by lowering service levels would be a meaningless paper victory, the type of thing that could be misleadingly sold to voters as effective policy. Even better, the adverse change would mainly impact remote, rural and poor communities. What does Congress love more than a) further disenfranchising marginalized communities and b) parading around meaningless bureaucratic changes as legislative victories? That is one fat worm dangling in front of the pea-brained trout that is the American Congressperson.

Reducing service levels seems like a total copout but it’s actually a reasonable solution. The collapse of the mail market means total USPS volumes (packages + parcels) halved. Let’s say Erect, North Carolina (real town, awesome name) used to get 10,000 letters a day in the 1980s. Today it gets 5,000 letters a day. USPS still has to send out its carriers in full force each day to meet service levels, but it’s getting ½ the revenue it used to. The fixed cost nature of logistics + inability to increase pricing = broken business model.

Another insidious way aggressive service levels hamstring USPS is overreliance on air freight. To meet unrealistically fast service levels USPS increasingly relied on planes to move its product. Air freight is fast but expensive. As of 2021, USPS was moving 21% of volume via air but expected that its newly proposed service levels could reduce that to 12%, a significant cost savings.

“The current standards do not reflect dramatically declining mail volumes, and require the Postal Service to use complex, high cost and unreliable transportation networks. They are simply unsuitable for setting realistic expectations for timely and reliable mail delivery in today’s environment.” - Delivering for America, 2021 Plan

Structural Reform #4: Scrap & Rebuild the USPS Operation

If there’s one common theme so far, it’s that the obsolescence of the USPS business model. The Postal Service was like Playboy Magazine: there was without question demand for what they produce, but in the digital age they no longer had an economically viable way to produce it. USPS, possibly seeing the grotesque final years of Hugh Hefner and taking a hint, had a plan to modernize. The Postal Service estimated that it had deferred over $20bil in necessary investment because of its cash flow problems. In its 2021 plan USPS directly asked Congress to help it make up for missed investment by injecting $40bil over a ten year period ($16bil more than was budgeted). They would use that money to:

• Upgrade its retail footprint. USPS stores would receive a $4bil makeover to modernize stores. This included basic stuff like uniform refreshes and fresh paint as well as new & improved technology like self-service kiosks. Store layout and use of space could change too. Most of USPS 31,000 locations were designed to accept huge volumes of letters but have no space to store parcels.

• Deploy a new state-of-the-art logistics software platform. This would help them optimize route efficiency, track lost packages, and offer basic services that competitors like Amazon had been offering for 10+ years.

• Automation: more package-picking and sorting robots. Competitors have leveraged this technology to drive down costs for decades and USPS is way behind.

• Upgrade & electrify the fleet: USPS wanted to buy a new fleet of vehicles, including over 50,000 electric vehicles. Its fleet was aging and maintaining an aging fleet was expensive.

Altogether USPS thought this extra $16bil from Congress could save as much as $40bil in operational costs by 2040.

Structural Reform #5: Restructuring the organization

This is the most boring, but still important reform. Delivering for America argued that the organizational structure of USPS hampered efficiency and obstructed good decision-making. They shared a snapshot of the existing orgchart, and reader warning, it is hard to look at without vomiting:

Summarizing the 5 proposed reforms

To summarize everything so far, USPS proposed five reforms to solve its fiscal and operational ineptitude:

1. Changing the legislative mandates that force the USPS to overfund its healthcare and retirement accounts, freeing up billions of dollars for reinvestment.

2. Fix the pricing architecture to reflect the shift from high-volume, low-cost letters to lower-volume, high-cost parcels, and to improve negotiation power with corporate logistics partners.

3. Lower unrealistic service standards to better align with reduced mail volumes

4. Ask Congress for $40 billion to modernize the obsolete USPS operation by upgrading retail locations, deploying state-of-the-art logistics software, increasing automation, and electrifying the aging vehicle fleet.

5. Restructure the organization to make it more effective.

Did USPS deliver on the Delivering for America plan?

Service levels have undeniably improved since the DFA:

Financial losses, on the other hand, got a bit better before getting worse:

So at first glance, it’s mixed results. A closer look reveals clear signs of progress, but also increasing risk of failure.

USPS was able to pretty much totally deliver on two of its proposed reforms. First, Congress agreed that the accounting requirements around healthcare & retirement were unnecessarily onerous (proposed reform #1). In 2022 lawmakers passed The Postal Service Reform Act to update the requirements, and USPS thinks this will save >$40bil over the next decade.

Second, USPS underwent a corporate reorganization (proposed reform #5). USPS has the authority to determine how it is organized, so they didn’t need Congressional approval. Changes are ongoing but seem to have delivered so far (made it this far without making a stupid mail pun).

USPS was also able to relax its service levels a little bit (proposed reform #3). Congress didn’t formally change any rules, but USPS has the power to make some alterations, like shifting First Class Mail delivery windows from 1-3 days to 1-5 days. This mechanically helped improve service levels, but also helped USPS transition away from expensive air freight and toward ground freight, which they say has saved >$1bil. USPS reports are very clear that there is more to do, but congressional support is needed.

Congress has also not made any changes to its rules around postal pricing (proposed reform #2). This was especially painful over the last three years for two reasons. First, USPS internal inflation was more severe than the broader CPI inflation in 2022 and 2023. Second, COVID accelerated the growth of e-commerce which meant more parcels and exacerbated USPS pre-existing pricing issues with parcels. Congress did offer $10bil to USPS as pandemic relief and another $3bil as part of the Inflation Reduction Act, but losses still mounted. Still, USPS was able to make some changes without Congressional help. For instance their 2025 update claims they “increased revenue by $3.5 billion annually while transitioning its product offerings in the face of significant declines in mail volume.”

Congress has also not provided USPS with any of the $16bil in extra funding to help it modernize its footprint (proposed reform #4). However, USPS has been able to leverage its savings in other areas, as well as extra funding during COVID, to make some of the investments it laid out:

Among its achievements, USPS says it has cut “$1.8 billion in annual transportation costs by eliminating redundant networks…and reduced $2.3 billion annually by improving plant productivity, and eliminating unnecessary facilities.”

USPS losses have increased the last two years, but USPS has started reporting an “adjusted loss” number that only shows numbers in its control. Adjusted or Pro Forma numbers shared by management teams should always be taken with a healthy dose of skepticism, but the above information does make a good case that USPS has improved its business operationally, and the financial benefits should start to manifest over time. Often with big investments like warehouses and sorting facilities it can take a few years for utilizations to mature and best practices to be implemented.

Putting it all together, USPS has made some progress on its 2021 turnaround plan and the most recent annual report indicates there is a clear roadmap for more operational improvement and investment in the future. Yet financial losses continue to mount and the crisis is becoming existential. In the Postal Service’s own words (from it’s 2024 annual report):

“We have vastly improved the financial health of our organization over the last three years. Still, if we do nothing more, we remain on the path to either a government bailout or the end of this great organization as we know it. We must ensure that we have the infrastructure, equipment and people we need, when and where we need it. We must be free to act like Congress designed us to act: As an independent agency free from political interference and unnecessary regulation. Our progress must not be halted, or unreasonably slowed, by policymakers that are resistant to change for short-sighted, parochial reasons.”

In other words, Congress needs to get off its ass if it wants USPS to survive long term.

What’s next for USPS?

David Steiner became the new Postmaster General this year. Like his predecessor Louis Dejoy, Steiner is a Trump appointee from the private sector; he previously was CEO of Waste Management and on the board of FedEx. He gave a sort of State of the Union speech at November’s USPS Board of Governors meeting. Most of his points were what is outlined above: USPS can become more efficient by modernizing its platform and infrastructure. He also called on Congress to step up with major reform, especially on pricing. A new wrinkle from Steiner was emphasis on more partnership with the private sector especially last mile (last mile = the final leg of the delivery journey). Steiner’s point was that the USPS is the de facto last mile logistics firm of the US. The USPS is legally must deliver to every house in America on a regular basis. Any alternative, be it Amazon or DHL, can pick and choose when to deliver. Steiner wants USPS to find a way to double-down on this and deliver more packages for corporate logistics firms at fair and mutually beneficial prices. He went on to announce a new deal with UPS in which the Postal Service will deliver more of their last-mile packages. “We are open to working with customers, big and small, by offering expanded last-mile service to serve their customers, fulfill market demand, and maximize our revenue.” Apparently, according to Steiner’s speech, more similar deals will be announced soon. And those deals may be on better terms for USPS - the latest rumors around the USPS are that they are taking a hardline stance in price negotiations with Amazon. Still, that doesn’t change the fact that without serious Congressional reform the USPS will not be able to complete its turnaround, and risks being a failure of a government agency.

Parting thoughts

I’m interested to hear perspectives from employees of USPS. What’s it been like working there the last five years? Are a lot of the reported cost-savings really efficiency gains or are short-sighted corporate budget cuts that will end up harming USPS longer-term? There are a number of US Postal Unions that openly spoke out against the initiatives of the last few years. That said, it does seem that USPS has credibly improved operations. It’s hard to know for sure from the outside.

In the 2024 US Presidential election mega-donors swung Republican; Trump raised over $500 million from super PACs vs. $100 million in 2020. One large, vocal contingent of Trump mega-donors was the Silicon Valley elite. A faction of ultra-rich tech entrepreneurs & investors, all historically loyal liberals, made news when they publicly swung conservative. It was the greatest defection of American elites since Not Like Us dropped.

This is all last year’s news so why bring it up now? Because I never fully understood why the defection happened. Silicon Valley royalty became royalty under Democrat administrations. Ben Horowitz and Marc Andreseen launched the venture capital fund that made them billionaires, a16z, in 2009. Chamath Palihapitiya made a fortune at Facebook and then backed startups like Slack in the early 2010s. Yet they, and a dozen other high-profile technologists, decided that the party they had supported, under whose rule they ascended to the highest echelons of wealth & status, was suddenly no longer the right one. It’s a year late but I finally tried to break down why the great defection happened. Based on interviews, podcasts, and essays there are three explanations for these decisions.

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Explanation 1: Purely a business decision

Most of the Silicon Valley defectors focused on economic, not social, policy. A common complaint was that the Biden administration over-reached on regulation. Marc Andreseen said he was “absolutely horrified” by the Biden advisors approach to AI, which he described as treating AI something like a government-controlled utility rather than a burgeoning, limitless technology. The Winklevoss twins announced “Biden has declared war on crypto.” Other grievances include Linda Khan’s FTC, which blocked the Nvidia-ARM merger and filed lawsuits against big tech, and complaints from senior tech leaders, including Mark Zuckerberg, that the Biden White House was pressuring big tech to moderate content via unofficial backchannels. All this together paints the picture of a Democratic agenda that was at-odds with the business agenda of tech elites. Whether this was true, or whether the aggressive oversight was bad for the economy or just bad for the big tech monopolists, is besides the point. The Silicon Valley defectors believed it, or at least cited it as rationale for switching support.

It might not have been about any of that, though. It’s entirely possible that this incredibly well-informed and powerful group of people realized a Trump win was very likely. The betting and stock markets seemed to tilt toward Trump by late summer, and presumably well-connected insiders might have been able to figure it out sooner. Maybe some defectors were just backing a winning horse and justified it using Biden’s administrative overreach. In either case, the defection was just good business.

Explanation 2: Threat of disenfranchisement

Silicon Valley elites have a lot to lose. They are super-rich, politically powerful, and are celebrated socially despite, and I’m generalizing here, having the charisma of a sewer rat. Seriously, these people are annoying. I’ve spent hours listening to all the podcasts and Charlie Rose style interviews with venture capitalists. If you poked their forehead with a thumbtack the atmospheric temperature would rise three degrees. That’s regardless of political affiliation! Anyways, they have it all. A repeat Democratic administration threatened their empires in two ways. First, the wealth. Biden had publicly been considering some sort of ultra-rich tax, maybe on unrealized capital gains. Marc Andreseen called this “the final straw” as he saw it as a threat to American dynamism. Maybe true, but it was definitely a threat to his personal financial dynamism. These elites also seemed to fear for their social status by way of cancel culture. “Go woke, go broke” tweets & quotes are not hard to find from this crowd. This is reading between the lines a little bit, but it seems the risk of indiscriminate cancellation, the idea that any of them could be removed from Twitter, from Met Gala invitation lists, from lecture circuits, really struck home. Importantly the anti-woke sentiment is a big bridge between Silicon Valley elites and the more populist wing of Trump’s supporters, two factions who don’t share much else in terms of public policy goals.

Explanation 3: you need to listen to me

“I was a megadonor to the Democrats. I couldn’t get a phone call returned from the White House to save my life.” This is a complaint from Chamath Palihapitiya. It is reasonable, if not profoundly undemocratic, to expect a seven-figure check to be reciprocated with political access. Corporate leaders, not just from Silicon Valley but from all over, were spurned from the Biden White House:

If political donations are investments, and these investments weren’t yielding returns, it makes sense that capital would be re-allocated. I think there might have been another layer of frustration beyond this. One thing about Silicon Valley elites is they have an opinion on everything. They are very successful and well-informed investors and founders, and they seem to believe their acumen qualifies them to investigate any problem. The a16z or All In podcasts talk about business but also about education, healthcare, anthropology, longevity, relationships, sociology, and more. I wonder if their frustration wasn’t just transactional, i.e. that they weren’t getting access & policy they paid for. It could also be a perceived personal slight, that the Biden administration was not valuing them as modern-day Rasputins, confidants able to advise on any topic.

Will the megadonors swing back?

I think so, at least some of them. The 2024 election doesn’t seem to be a seismic shift in the Silicon Valley electorate. For one thing, outside of the elites, there isn’t evidence of a conservative groundswell. Among the mega-donors, much of the anger seems to have been directed specifically at the Biden administration and the prospect of Kamala being a continuance of Biden. On the other hand, the Trump campaign made specific promises around crypto and de-regulation and running mate J.D. Vance was one of Silicon Valley’s own. In theory Democrats can replicate that next election. Some of the mega-donors, like Ben Horowitz, have already resumed donations to the Democrats. The 2028 election is a long time away but it doesn’t seem like the Democratic Party has forever lost the funding of Silicon Valley.

The premise of this post is that advanced lifeforms have invaded Earth. After slicing through humanity’s strongest defenses (Steven Segal, King Tutankhamun’s cursed tomb) they show up at the steps of the UN with their demand. They want 100 billion pounds of pasta. If they don’t receive the pasta, they will crack the whole planet like an egg, drizzle its contents onto Venus and let it fry. With their fate on the line, can the humans of earth put aside their differences and unite for pasta?

The world consumes 17 million tons of pasta per year, or ~35 billion pounds.

The supply chain for basic non-fresh food products looks something like this:

1. Manufacturers will hold ~1 month of demand in stock.

2. Food wholesalers typically hold about two weeks of orders.

3. Food retailers, like grocers, will hold roughly three weeks of sales in stock.

4. Customers & businesses hold about two weeks of consumption in their pantries.

5. There’s maybe a few more weeks worth of demand in transit (on ships or trucks).

Therefore at any given time Planet Earth has three months worth of pasta consumption sitting somewhere. That’s ~9 billion pounds. Collecting all that pasta as alien tribute would be logistically difficult, but humanity has proven that it can pool resources and cooperate for important causes like the Eras Tour or proxy wars.

Over the course of a month thousands of pasta-filled trucks & ships arrive in New York City’s ports and are hauled to the aliens occupying the UN. The aliens weigh each bag by hand and beam them up toward their mothership. As expected, they tabulate 9.02 billion pounds of dry pasta.

The aliens then call a meeting with humanity’s leadership committee. The leadership committee is a delegation of eight people elected by a global popular vote to represent Earth. It’s four Indian cricketers and four Chinese influencers.

The aliens are not sated. They tell the committee that 9.02 billion pounds of pasta isn’t enough. If humanity doesn’t deliver another 91 billion pounds of pasta the invaders will line up every living being and punch its stomach through its butt. The committee pleads with the aliens for more time. Virat Kohli, the great Indian cricketer and winner of the global popular vote, is a surprisingly good negotiator. He convinces the aliens to give humanity 9 more months. The aliens spent 45 years traveling to Earth so it’s actually not a big ask (that’s right, there’s a ton of worldbuilding behind this post).

In nine months the world normally produces ~25 billion pounds of pasta. That normal production can be handed right over to the aliens. Humanity can find its calories elsewhere pretty easily. The Italians will suffer the most without their favorite dish but they still have their two other great loves, pizza and deep-rooted misogyny.

Even then, humanity needs to come up with another 66 billion pounds of pasta. Is it possible? Pasta is made of Durum wheat and water. According to world-grain.com Durum wheat is only 5-8% of global wheat production. The crop takes 3-4 months to mature. Wheat farms around the world should be able to quickly switch production to Durum wheat and within 4 months there would be more than enough available to make 66 billion extra pounds of pasta.

The next step is to mill the Durum wheat into pasta dough. ~75% of the world’s wheat is already milled (mostly into flour) so there’s plenty of industrial milling capacity. Milling plants around the world should be able to quickly reconfigure their production lines so that they turn Durum wheat into past dough.

Then the pasta dough has to be extruded into shapes and dried into a cookable form. Extrusion is done by big machines that press, cut, and shape the pasta. These same machines make chips, cereals, pet food, baby food, and all sorts of snacks. Again, the industrial capacity for turning pasta dough into dried pasta is abundant.

Humanity no doubt has the capacity to deliver 100 billion pounds of dried pasta to aliens in a nine month period. Realizing that capacity would mean re-appropriating a significant chunk of global industry in a short period of time. In normal times such an economic reconfiguration would be impractical and unrealistic. However, with aliens threatening to rip out humanity’s collective intestines, string them to the moon like a clothesline, and then hang paper-cut flowers as a decoration and warning to other non-cooperative life forms, humanity is motivated. As such, the global economy would mobilize like never before. Entire supply chains would re-orient around pasta. During WWII automobile factories started rolling out tanks and radio factories became bomb plants. The pasta mobilization would be just like that.

The pasta industrialization would require capital. People can’t farm wheat, mill it, extrude it, or ship it to the UN for free. Similar to wartime, governments would pool taxpayer resources and channel capital into the pasta industry. Governments would pay top dollar for pasta, and then orchestrate the shipping of that pasta to the aliens in the UN. Investments in pasta factories or Durum wheat farms would also be extensively subsidized. Households would grow small batches of wheat and handmake pasta in their kitchens, like the old Victory Gardens. They wouldn’t make much of a dent in overall production but A for effort.

It’s likely that the world ends up producing far more than 100 billion pounds of pasta. Given that anything less than 100 billion pounds leads to a planetary evisceration whereas extra pasta would just mean more food to eat, demand for pasta will be effectively infinite. That’s what happens with circumstances of extreme asymmetric utility. Governments would be desperately printing cash and handing it out to pasta entrepreneurs, pasta war dogs, pasta mobsters, anyone who can deliver even a kilo of the good stuff. The scale would be much larger than COVID stimulus checks and this would inevitably lead to a Keynesian boom. It would be like the roaring twenties. Flush with cash and pasta, people would party late into the night, Bitcoin would kiss new all time highs, and politicians would declare a new golden age of pasta-induced peace & prosperity.

Then it would come to a ripping stop. The aliens would take their fill, leave the planet and suddenly there would be no excess demand for pasta. Humans, having overeaten pasta for 9 months, have grown weary of it. They want back their baguettes, their chips, their hot dog buns. The world is stuck with trillions of dollars invested in pasta-making equipment but no demand for that pasta. It’s a glutenous glut.

Soon after the bills come due. Entrepreneurs who took out loans to build pasta factories, farmers who eroded their soil growing Durum wheat, logistics companies who refitted their trucks and boats to maximize pasta load, they all go bankrupt. Governments went into debt to finance their domestic pasta industries and now face enormous interest costs, a shrinking tax base, and runaway inflation from all the money-printing. A depression engulfs the world, the worst one in a century. The upshot is that, with all this excess pasta-making capacity, pasta is super cheap. Like 25 cents a pound. Of course with unemployment at 45% nobody can afford even that.

It takes almost a decade for the global economy to recover from the pasta depression. Industrial capacity slowly reorients to meet global demand. Governments and businesses gradually digest their debt. It’s a dark and trying time for humanity. Eventually, though, things return to normal. But not for long. Because the aliens, unsated by their pasta tribute, return. This time they want water. They suck up the world’s oceans in a giant hose and then, because they are cruel and unempathetic, use their powerful lasers to push Earth into the Sun, which swallows the pale blue ball in a tiny flicker of light.

**update** Readers keep asking, “what about non-wheat pasta” so I’ll answer here: The aliens have made it very clear that if they receive any non-wheat based noodles they will turn all of humanity into porcelain dolls and then toss them over a waterfall of boulders that exists in an adjacent galaxy. Yes, their technology and knowledge-base is fascinating, but unfortunately these aliens are food motivated and not fulfilled by enlightening primitive species. Surprisingly, the aliens do seem pretty open to different pasta shapes. They even like the Rochetti (humanity’s least favorite pasta). You can read about all this and more in my upcoming 3,000 page novel “Pastacalypse” It’s a deep worldbuilding epic that fleshes out some of the more provocative ideas in this post.

Harvard is one of the world’s greatest businesses. A brand stronger than Disney, a galactic endowment, an alumni base whose cumulative tax avoidance surpasses most country’s GDP. It begs the question: what is this company actually worth?

The conventional approach to valuing a business is to collect publicly reported financials and other available information then apply different investment techniques such as a discounted cash flow model. That’s the general approach of this post but it requires some imagination to get there. To value Harvard like a stock will mean pretending Harvard is trying to maximize value for shareholders. Right now it’s not doing that. Harvard’s a non-profit.

This is more a thought experiment on what would happen if Harvard converted its structure to for-profit to enrich supposedly philanthropic founders and investors. Which, of course, is unrealistic because who would do that?

Harvard University consists of twelve schools enrolling a total of 25,000 students. That’s not all though. There’s also the $53 billion endowment. There’s also the library system, a dozen museums, online education platform HarvardX, and 5,000 acres of real estate. And, in an undisclosed location, there’s a cryochamber containing a couch cushion with a perfectly preserved imprint of Henry Kissinger’s ass, priceless in its own right. Given this sprawl of assets a sum-of-the-parts valuation approach makes sense. Sum-of-the-parts = each division is valued separately and the total valuation is calculated as…a sum of the parts.

Harvard Colleges

The first challenge is that the university itself is funded by grants, gifts, and from the endowment. For this exercise we’ll assume that all of those go away as part of the for-profit conversion. Or maybe it all gets taken away by the President. Either way, we’ll assume Harvard operates like a normal for-profit school where operating revenue comes primarily from tuition & fees.

The second challenge is that Harvard doesn’t set its tuition at a market clearing price. For example, Poets & Quants estimates that Harvard MBAs go on to have average career earnings of $8.5mil. That’s about $4mil more to comparable skilled workers without Harvard MBAs. Some rough math ($4mil discounted back to the present at a 5% rate) suggests the fair value for a Harvard MBA is something like $2mil whereas tuition is <$200k. In other words, if Harvard behaved like an American health insurer then it would be charging 10x the tuition.

One way to get around all of this is to value Harvard per seat. Harvard has 25,000 seats across all its programs today. There are publicly traded for-profit universities in the US like Grand Canyon Education (LOPE) which runs University of Phoenix. On average these companies have current market valuations (enterprise value) of ~$40,000 per enrolled student. Applying that valuation to Harvard would yield ~$1bil valuation. That’s not really fair though because comparing a Harvard degree to a University of Phoenix degree is like comparing a Ferrari to a Fiat. Harvard degrees are worth way more and therefore the company should be valued more. Actually, the Ferrari to Fiat analogy can be useful because Ferrari is publicly traded. Ferrari trades at 42x earnings, whereas the typical European auto company trades close to 5x earnings. Ferrari’s valuation premium is 8x. If Harvard is the Ferrari of schools, then it should trade not at $40,000 per seat (like University of Phoenix) but at 8x that - $320,000 per seat. That yields a total valuation for Harvard of $8bil.

$8bil doesn’t seem like enough for one of the most influential cultural organizations in the world. Yet financially it makes sense. After stripping out the endowment revenue (valued separately), philanthropy revenue (already excluded) Harvard makes about $3bil in revenue. Looking at publicly traded universities around the world, most do about a 10% net profit margin. Run as a business, the colleges of Harvard would probably earn $300mil a year in profit. That’s less profit that Albertson’s grocery store chain made (market cap $12bil). It’s about what Nordstrom made last year (market cap $4bil).

But maybe Harvard colleges would be more valuable to a strategic buyer. As in, a buyer who doesn’t care about making profit but cares more about extracting some other type of value. Like when Elon Musk bought Twitter or Jeff Bezos bought the Washington Post. Whoever buys Harvard colleges might be interested in exploiting the soft power of the school, the alumni network, and the research institutions. Elon Musk paid ~10x revenue for Twitter. If we apply that revenue to Harvard’s $3bil (with the earlier exclusions) then we reach a valuation of $30bil. That seems like a much more realistic price tag. Another trophy asset, the Boston Celtics, recently sold for 13x revenue, so it could be argued that $30bil is the floor.

Final value: $30bil

Library System

Say the library and its assets were sold off to the highest bidder. And say the highest bidder was a profit-seeking vulture, a real heartless capitalist, the type that french their own grandma if it got them an invite to Davos. Well the first thing the buyer would do is fire everybody. Who needs a librarian? The second thing they’d do is close down operations. Libraries don’t make money. This vulture cares about one thing: the rare book collection. The Harvard Library book collection is estimated to be one of the most valuable on the planet, alongside the British National Library and Yale’s Beinecke Library. It includes a Gutenberg Bible (estimated worth $25 million), first edition Shakespeares, original prints of Galileo’s books, and presumably hundreds of JFK’s schoolboy sketchbooks filled with busty stick figures. If the vulture sold the library off piece by piece, what would it fetch? It’s really impossible to say because there isn’t even a publicly available inventory of the collection. What is known is that Harvard Library has 250,000 rare books. Not all will be worth $25 million like the Gutenberg, but if the average rare book fetches $10,000 then the total collection of the library is at minimum $2.5 billion. This puts no value on the library’s digital assets, millions of non-rare books, or the other rare manuscripts and documents it may have. At the very least, an average value of $100 per item, adds another $1 billion to the value. This might be conservative. French Historian Patrice de Moncan went through the Louvre’s collection and valued it at $35bil.

Final Value: $3.5 billion

Museums

Harvard owns and operates over a dozen museums. This is the same exercise as the library - the value is in the collection. There are public estimates of collections for other large museums (like the Louvre) but it’s still guesswork. Sparing the reader another long paragraph, the estimated figure is $10 billion for the Harvard museums & their collection.

Final Value: $10 billion.

HarvardX

This is Harvard’s online education platform. It’s mostly free online classes based on Harvard’s curriculum. Coursera, a competitor, is publicly traded and has a market cap of about $1 billion. This is a small part of the total portfolio so it doesn't make sense to spend too much time here.

Final Value: $1 billion

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Real Estate

Harvard owns 5,000 acres of real estate. 4,500 of those acres are ecological forests & arboretums. To simplify, assume those lands are worth $0. They are mostly not in prime real estate areas and might be legally difficult to commercialize anyways. The valuable real estate is 500 acres in downtown Cambridge. Land in Cambridge goes for $15mil/acre. That means Harvard’s real estate is worth a minimum of $7.5bil.

FInal Value: $7.5bil.

Endowment

Harvard has a $53bil endowment. This includes financial assets (but not the aforementioned real estate & artwork). It stands to reason that the endowment should therefore be valued at $53bil. The catch is that at least 80% of the endowment is donor-restricted, meaning that the university is contractually obligated to spend the money on a specific use. For example an alumni might donate $1mil to fund a scholarship program. Therefore the actual monetizable value of the endowment could be a fraction of the reported value today. One simplifying assumption is that Harvard has graduated many of the world’s pre-eminent money launderers, tax evaders, and contract disputers. If anyone can find the loophole in these restricted donations, it’s Harvard. The verdict here is that the endowment is to be treated like cash on the balance sheet.

Final value: $53 billion

Brand

Maybe the most compelling asset Harvard has is its brand. Disney’s brand is valued at $50bil, shouldn’t Harvard be more? Not for this exercise. The value of the brand is indirectly incorporated in other valuations, like the colleges.

An investment banker really trying to inflate the value of Harvard might argue for untapped brand potential that isn’t captured in other areas. Could Harvard double the number of students? License the brand to foreign entities to open Harvard campuses in Thailand? Bring in the management team from Disney to really milk this thing to the bone? Dig up alumni John Quincy Adams and sell his bones on Ebay? Anything is possible. Call it prudence, but none of that can reasonably be added into today’s valuation. Leave that as future upside for any buyer of the business.

Final value: $0

& Other Assets

There are some other odds & ends, like the inventory (books, food, paper), the cafeterias, but nothing that would move the needle. The Harvard Hospital system is a massive, multi-billion dollar operation but it’s actually an independent organization, not under the Harvard University umbrella.

Final value: $0

Final Valuation

Colleges: $30bil

Library: $3.5bil

Museums: $10bil

Harvardx: $1bil

Real Estate: $7.5bil

Endowment: $53bil

Brand: $0

Other: $0

Total: $105bil

In conclusion, Harvard University is worth ~$105bil. If Harvard IPO’d at this valuation, it would be one of the 100 most valuable companies in the United States. Slightly more valuable than Starbucks, slightly less valuable than Cigna health insurance.

Harvard is a national treasure whose heritage is irrevocably intertwined with American history. An absolute intellectual asset and symbol of innovation, cultivator of great leaders and thinkers. Who thinks it should be stripped down and sold for parts like a stolen Honda?

The internet (or at least my internet) is inundated with ads for budgeting apps. Apparently there’s a lot of people who subscribe to stuff and then forget they subscribed.

These apps log into financial accounts and flag subscription charges so that the user can tighten their spending. The catch, of course, is that the apps get user data which they can use to sell you toasters or infiltrate your subconscious and manipulate you into a marital relationship with a Waifu pillow. Remember if the meatball is free then you are the meatball.

Free apps that collect data are nothing new, and budgeting apps are nothing new, but advertising for this specific value proposition - identifying subscriptions across all a user’s accounts - is new. Or at least, it’s being promoted heavier than ever. Rocket Money paid ~$8 million for a Superbowl ad. What’s changed?

The answer is open banking. Open banking is a concept where financial institutions can securely and effectively share data. In a utopian open banking future all financial transactions are instant and seamless. No waiting three days for Venmo to move money to your checking account, no having to retype your credit card information on a thousand sites, no more having your card declined for suspicious activity when you try to buy a bottle of wine that costs more than $8.

It’s a beautiful future, but getting there has been a slow and arduous journey. The main challenge has been technological. Banks and Fintech companies (like Plaid, founded in 2013 and recently valued at $13 billion) have spent billions of dollars building up the IT infrastructure to support an integrated ecosystem. The second challenge has been resistance from incumbent financial institutions who make a lot of money in a closed banking system. Big banks in the US dragged their feet on integrating with open banking partners and in some cases actively tried to suffocate them by cutting off access.

Around 2021 open banking adoption accelerated for two reasons.

First, policy changes. Europe passed a regulation called ASD2 in 2015 which effectively forced large financial institutions to adopt open banking. The Consumer Financial Protection Bureau announced a similar rule coming into effect in 2026. However, it was clear much earlier that such a rule was coming. In 2020 the Justice Department blocked Visa from acquiring Plaid and industry executives saw the writing on the wall: open banking was inevitable. The big banks accelerated their open banking investments and the ecosystem started rapidly improving.

Second, and somewhat related, were that technology improvements dramatically improved reliability, security, and performance of features like APIs. I think the improvements were mainly a function of investment. Once big banks realized open banking was inevitable, they increased their spending. More coders, better computing resources, more senior executives coordinating between banks and boom: acceleration in open banking features & performance. Of course Substack writers are contractually obligated to attribute any technology advance this decade to AI. So, open banking has seen a massive productivity explosion attributable to AI.

One consequence of an improving ecosystem was that by the early 2020s budgeting apps got way better. Ten years ago budgeting apps were clunky and glitchy. If an app like Mint Mobile wanted to amalgamate the financial activities of an individual into one app, it had to rely on screen scraping and manual work by the user. A lot of data in the app was stale or required the user to spend a lot of time cleaning up. However by 2022 the apps could rely on APIs which seamlessly pull data real-time from banks and credit card companies.

Large financial service companies like Rocket Mortgage, Quicken Loans, and Credit Karma have always had budgeting apps but thanks to open banking they have much better budgeting apps than ever before. My guess is that these apps are demonstrating high loyalty, strong retention, and are generating treasure troves of data. That’s created a gold rush scenario where companies are racing to vacuum up as many users as possible before those users end up on a competitors platform. And that is why these budgeting ads have become ubiquitous.

What exactly is all this data good for? Here’s Rocket Money’s CEO explaining the company’s vision:

“You leverage AI capabilities to understand what mindset the client is in. When they are ready to engage in another transaction. AI equips us with the ability to have a specific and quantifiable understanding of the intent of the consumer. We leverage that for better targeting and personalization.”

In other words, these companies are happy to give you a free budgeting because they believe the data will help build mortgage products, better 401ks funds, better financial advice, and all around better products. Those are all things they can charge you for. And that is why there are so many ads for budgeting apps right now.

There’s also a longer game being played around the open banking disruption. Look at the path of mobile phones. Early phones differentiated on hardware: battery life, cell service, portability, etc. Today, that technology is mostly commoditized, at least as far as the average user is concerned. Modern phones are mostly differentiated on software. People choose their phones based on the operating system. Apple’s biggest selling point for the latest iPhones is its AI features. Banking could go a similar route. Before open banking the most important financial institutions were the ones doing the plumbing: storing, lending, borrowing and otherwise moving money. Rocket Mortgage, for example, became a $30bil company by offering fast approval on loans at competitive interest rates.

In an open banking world it will be harder to differentiate on the plumbing because the whole point of open banking is the plumbing is easily accessible. If anyone can offer instant loan approval at similar rates, Rocket Mortgage isn’t differentiated at all. That’s why Rocket Mortgage’s CEO talks about Rocket becoming the “Apple of Home Ownership.” Similar to how Apple built an integrated software ecosystem that creates a great experience for the user, Rocket wants to create an integrated financial experience. Rocket Mortgage is not alone. Financial institutions are increasingly looking to make user experience and software the cornerstone of the business rather than plumbing (prices, rates, fees, basic features, etc).

Special thanks to Jeff Slater, a former employee of Andy Capp’s parent company Goodmark. He helped me get the scoop on the Andy Capp story. He also writes Marketing Sage, a blog you should check out.

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Lately I’ve been thinking a lot about Andy Capp’s Hot Fries. A staple of 90s American childhoods, Hot Fries seemed to be available at cafeteria vending machines, gas stations, and nowhere else. A choice item to be sure, but not a regularly available victual. Has anyone ever kept a big bag of hot fries next to the Doritos? Andy Capp’s are an elusive treat, a speciality alimentation like Dippin Dots (focused on sports & amusement parks) or Brach’s Sweethearts (targeting sexually active youth). They’re branded differently too. You won’t find Andy Capp on TV or billboards. Andy Capp is nothing like Chester Cheetah with his James Dean swag tempting you to naughtiness like the serpent of Eden. Nor is he the Kool-Aid man, self-promotional to the point of demolition. Andy Capp’s is none of these things, but he does have a story to tell, one that I spent the last 72 waking hours of my life collecting. This post is for Andy Capp’s fans, by an Andy Capp’s fan. 

What are hot fries anyways?

In the late 1970 General Mills acquired the Slim Jim brand and created a subsidiary called Goodmark Foods to house it. Slim Jim had been a successful but sleepy business - a mono-product company that never branched out the way General Mills did with its >100 brands. Goodmark Foods, by contrast, would be run by ambitious General Mills executives. Almost immediately Goodmark began developing new snack brands. These new products would of course be grain-based. 

Grain was the obvious choice for a new food product because it was so cheap it was practically free. After the Great Depression US Food Policy focused on abundance. Americans could never go hungry again if food was cheap as, and available as, dirt. Agricultural producers were subsidized and incentivized to make huge quantities of staple crops like corn and soybean. The result was that, by the 1970s, corn was literally cheaper than water. 

Abundant grain was a new resource and American industry set about trying to use it for everything. Ethanol for fuel. High Fructose Corn Syrup for sugar. Corn flour for baking. Livestock feed, bioplastics, vitamins, fabrics, alcohol, packaging material, grain was used for everything. In Omnivore’s Dilemma, Michael Pollen comments what that has meant for grocery stores:

Supermarkets look like they contain a huge variety of food. The shelves are stuffed with thousands of different items. There are dozens of different soups and salad dressings, cases stuffed with frozen dinners and ice cream and meat. The range of food choices is amazing. Yet if you look a little closer, you begin to discover: it’s all corn.

One of the biggest technological successes was a series of chimeric food manufacturing techniques that morphed simple grains into a rainbow of shapes, flavors, and colors. 

One such technique was extrusion, where big machines would press and squeeze grains into all sorts of new textures:

These techniques unleashed a wave of food innovation that produced many shelf-stable snacks still popular today. Cheetos, Cheese Balls, Pringles, Chex Mix, Goldfish, Wheat Thins, and hundreds of others pretzel, chip, popcorn, and puffed rice brands were released during this time. They were cheap, delicious, and looked new and fresh. As for the health consequences, people hadn’t even figured out cigarettes were bad, who would question grain-based snacks? It was a golden age for junk food.

In 1971, in the heat of the junk food revolution, Goodmark rolled out Andy Capp Hot Fries. Hot fries were supposed to be a new category, like potato chips. The idea was to make a shelf-stable version of french fries. For whatever reason the category never really took off. Andy Capp’s became what’s called a proprietary eponym, where the brand is synonymous with the category, like Band-Aids or Kleenex.

Who is Andy Capp and why does he sell hot fries?

Andy Capp is a British comic strip character who has been a fixture in the Daily Mirror since 1957. He was a middle-aged degenerate and, were he still relevant, he would certainly be canceled today.

As to why Andy Capp’s image headlines an American snack food brand, there is no readily available explanation. The British comics were syndicated in US newspapers and may have had some recognition among an audience. It’s possible Goodmark underwent a rigorous Q-scoring process to determine the optimal celebrity endorser for their customer. Maybe they considered Fonzi’s Hot Fries. Probably not. Regardless, Goodmark licensed the Andy Capp image and initially included Andy Capp comics on the bag. 

Why were Andy Capp’s only available in gas stations and vending machines?

I asked this question to Jeff Slater, a food entrepreneur who sold is business to Goodmark in the 1980s and worked there as an executive. In the 1970s the typical path for a successful food product was through the grocery stores. This was pre-internet and before other formats like convenience stores started selling lots of food. If you want to sell a food product, you have to be where food gets bought. The problem is, and always has been, that competition to break into retailer shelves is stiff. For any given product, say like maple syrup, retailers have a few square feet of space and hundreds of brands to choose from. Big food companies like Nestle or Unilever have a huge edge here because they have fat marketing budgets and established brands. Grocery stores are competing against other grocery stores and will gravitate to the products they know will sell. 

At the time of Andy Capp’s launch Goodmark was still a small company with just one brand (Slim Jim’s) and they lacked the cache of bigger peers (apparently parent General Mills wasn’t providing that). Convincing a grocery store to cut shelf space from Pepsi (owner of Frito’s, Lay’s, Cheeto’s and others) in order to make room for a new, unproven product with a dipsomaniacal Brit on the package would be an uphill battle. Goodmark’s solution was to work around the food retailers. Specifically they identified local gas stations and vending machine networks as ways to get in front of consumers without having to compete against major snack companies. These channels were too small for big brands to spend a ton of attention on, but big enough to get Andy Capp’s started. The strategy worked, and that’s why, at least for the first few decades of its existence, Andy Capp’s seemed to be never in normal food places (like grocery stores) but always in less conventional ones like vending machines.

Where are they now?

In 1998 Goodmark was acquired by Conagra, a food behemoth known for brands like Healthy Choice, Orville Redenbacher, and Hunt’s tomato products. With the big guns of Conagra, Goodmark was able to scale the Andy Capp enterprise in a more traditional way - entering major grocery stores and convenience chains. Andy Capp’s now comes in seven flavors, including beer battered onion rings. 

I wrote this post after chatting with Andrew Watson who writes an interesting e-commerce blog you should check out!

Dollar Commerce

An open floor to all things e-commerce 🚀

By Andrew Watson

For a long time stuff has been getting cheaper here in America (cheaper = more affordable, not deflationary). I’m not talking about healthcare, college tuition, haircuts, dog walkers, or car insurance. Those are services. If the American household balance sheet is a stomach then services are an infectious tapeworm sucking up all nutrients and leaving their hosts emaciated. Stuff, consumer goods, has truly gotten cheaper:

The general explanation for why consumer goods have gotten cheaper (and why consumer services have not) is globalization. Over the past 50 years richer countries outsourced manufacturing to countries where labor, land, and other factors of production are cheaper. Improving technology (LEDs for TVs) and economies of scale (cheaper microchips that go in the TV) further pushed down costs.

I think there’s another factor which is less appreciated: retail innovation.

Retail is the art of getting stuff to the customer. Take a banana. The cost of producing bananas has come down 20x over the past 200 years. However, if a crate of ten cent bananas just gets dumped at a New York harbor then that’s not going to do much for most people. Unless swinging by the banana docks is part of your regular schedule (note to self, swinging by the banana docks is a great euphemism for sex).

The job of the retailer is to get the bananas from the docks to the folks. Retailing will always require another layer of extra cost beyond manufacturing. Whether it’s a storefront with cashiers or a fulfillment center where online orders are packaged and shipped, retailing has to cost something. Retail innovation describes the efforts businesses have made to reduce that cost to a minimum. Two of the greatest retail innovators, Walmart & Aldi, started in the post-war era. Both have led prices on their downtrade trend for decades, but each in their own way.

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Walmart: high volumes, low price

Walmart is the world’s largest retailer. But just as the Wicked Witch of the West was once an earnest schoolgirl, Walmart was once a scrappy upstart. Sam Walton founded Walmart in 1962 with one goal in mind: make the shopping experience as soul-sucking as possible. And boy did he succeed. Alright, fine, the goal was to sell things as cheap as possible.

Mid-century retailers typically tried to maximize gross profit per item. The gross profit of an item is the sale price minus the cost of that item. Sell a banana that cost you a dollar for $1.10, and you’ve made ten cents in gross profit. Walton realized that if he made his goal minimizing gross profit per item, he would attract more customers with low prices. He would sell his banana for $1.05 and make a nickel per banana, but he would sell 3x as many bananas as a normal retailer. His margins might be lower but his total profit would be higher. In modern retail economics parlance, Walton emphasized volume over price (where volume x price = revenue). Walton built his empire around this golden principle of gross profit minimization. You can go back to his earliest annual reports and read it in his own words:

Aldi: low costs, low price

Around the time the first Walmart opened, two German brothers took over their family grocery store. They too were obsessed with price minimization but took a different angle. Whereas Walmart’s insight was on gross profit, Aldi’s focus was on SG&A. The economics of retail profit can be broken down into Gross Profit and SG&A. SG&A (selling, general and administrative) is all the costs a store has that are not specific to any item. Cashier wages, shelving, electricity, rent, mopping up puke, monkeys living in the vents shoplifting your bananas.

The Albrecht brothers realized that a retailer’s ability to minimize price is constrained by SG&A. If a store buys a banana for $1.00 and sells it for $1.01 they make a gross profit of a penny. But they’ll never sell enough bananas to cover SG&A costs. A retailer’s ability to reduce prices is therefore constrained by its SG&A. Minimizing price was about minimizing SG&A. The less overhead a store has, the cheaper it can sell products. Whereas Walmart made volume maximization its religion (high volumes, low price), the Albrecht brothers worshipped cost minimization (low cost, low price). And if frugality was their god, they’re piety was unmatched. Once Theo Albrecht (one of the brothers) got kidnapped, paid his ransom, then negotiated a ransom tax deduction with the German government.

Aldi’s stores are indecorous warehouses in offbeat locations. Checkout lines are long and employee help is nonexistent. The merchandise is displayed like a shipwreck, as if a pallet of oranges had washed ashore and spilled into an aisle. But man is it cheap. No-frills means cutthroat SG&A which means Aldi can sell stuff for less than anyone.

Walmart vs. Aldi, which can sell cheaper?

Both Walmart and Aldi were true retail innovators. Both reinvented how to run a retail store and in doing so brought down prices for consumers. Which one did it better?

Walmart’s gross profit margin is 25%, and Aldi’s is around 20% (they aren’t public so they don’t share that, but an industry insider once told me it was around that range). That means that, if Walmart buys a banana for $1.00 they will sell it for $1.25. Aldi will sell that same banana for $1.20, or 4% cheaper. Ok, so Aldi is cheaper.

The catch is that the typical Aldi store has about 1,500 SKUs (stock-keeping units, meaning unique items on the shelf). This goes back to Albrecht's goal of minimizing SG&A. The brothers wanted small stores to keep costs down. A typical Walmart store, meanwhile, has 150,000 SKUs. Walmart sells everything from dog food to motor oil because they’re goal is to maximize volumes (sell more stuff at lower prices, make more absolute money). Therefore if both Walmart and Aldi sell a product, Aldi can sell it cheaper because they have so little overhead. But, because they have so little overhead, they don’t offer much breadth. 95% of what Walmart sells isn’t available at Aldi. That means it’s a tie! Both are winners!

What’s interesting is that Walmart’s fixation on volume maximization led to lower SG&A, and Aldi’s fixation on SG&A led to higher volumes. For example, Walmart’s strategy to become a superstore (sell everything to everyone) led to them to have lower SG&A. SG&A, as explained earlier, is largely a fixed cost, meaning it doesn’t increase when the units sold increase. Bananas, by contrast, are a variable cost for a retailer. Each additional banana you sell requires you to go out and buy a banana. Walmart maximized the volumes it sold. In doing so, it increased its revenue but SG&A was constant. In other words, Walmart’s SG&A as a percentage of sales became low, nearly as low as Aldi’s. Walmart also chose to open its megastores in remote areas (that’s why it’s headquartered in Bentonville, AK). The idea was there was less competition which meant more volumes for Walmart (less places to shop = more market share for Walmart). But it also meant cheaper rent (lower SG&A, probably even lower than most Aldi’s on a square foot basis).

Aldi, meanwhile, kept its stores small to keep costs down. That also forced them to choose only the best-selling 1,500 items to stock in their store. Naturally they choose the best-selling items. As a result Aldi has probably the highest inventory turnover (an industry metric for volumes sold per product) out of all retailers, even higher than Walmart (the original volume maximizers).

Retail innovation never ends!

Aldi & Walmart were founded in the post-war world, but retail innovation didn’t end with them. Costco pioneered the warehouse membership model. Costco’s strategy is to sell everything at cost and make all their profit off their customer’s annual membership fee. Costco’s 13% GPM is lower even than Aldi’s!

Amazon’s e-commerce marketplace was premised on the idea that a website can strip out most of the SG&A of a regular store (aisles, checkouts, lights, automatic doors, high-rent areas, cashiers) and allow them to sell products cheaper than any store. Now Temu is going one step further and trying to let factories in China sell directly to US consumers (cut out the Amazon fees).

Different low-cost retail strategies work well for different products. Amazon or Temu is probably the cheapest place to find a simple electronic product like a charger. But a jug of olive oil, which is more expensive to ship, might be cheaper at Costco which specializes in bulk products. Meanwhile, Walmart can probably sell a branded food product (like a can of tomato sauce) cheaper than anyone else because they get massive volume discounts (Walmart has 25% market share of US grocery). If you don’t mind buying unbranded, then Aldi can probably undercut Walmart with a generic brand of sauce.

The beauty of retail innovation is people are always finding ways to sell things cheaper. Right now there is a fast-growing discount retailer (sort of like a dollar store) in Europe. They’ve found a way to sell basic toiletries, household items, toys, and all sorts of other stuff cheaper than anyone, even Walmart. You can check out this post by Dollar Commerce (who I shouted on in the intro) to learn more about them:

Dollar Commerce

The European Walmart nobody's talking about

A mighty Dutch Pancake…

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a year ago · 5 likes · 1 comment · Andrew Watson

My word of the year is connovation. I just made it up.

Connovation describes a technology that has objectively improved over time, but has also been subject to increased criticism. The better something gets the more people hate it.

Weather forecasting is a great example of a connovation. A century ago humans were no better at predicting tornadoes than barnyard animals.

Now it takes three swipes on an iPhone to find out what type of hat to pack for a Panamanian cruise. And yet, American country clubs brim with crusty executives questioning the legitimacy of their local weatherman’s college degree because the humidity is a tick higher than anticipated leaving them with pit stains on their Peter Millar polo, and they have deals to close, deals to close! That is connovation.

It’s all about perspective. Say you showed up in Ancient Egypt with modern-era meteorological equipment. Forecast a few storms, seed some clouds in a drought. People would notice. In a matter of weeks you’d definitely get a special appointment as the Pharaoh’s most trusted vizier (a Rasputin/Jafar position).

At least four of the ten plagues would have shown on the radar loud & clear. Oh the trouble you could save. They would name a god after you! To the modern technologist, though, meteorology is so maddeningly unreliable that one might as well resort to astrology.

Telecommunication is another connovation. A few years back I trekked Siciliy’s Mt. Etna, an active volcano. I got to see lava IRL #goals. A sublime moment interrupted by a young man in a cutoff, histrionic because he couldn’t get his selfie posted until he returned to the base of the mountain. The founding fathers had to pose motionless for 8 hours, jaws aching from clamping their wooden teeth, just to get an approximate image of their likeness. But bro, absolutely crushing that you have to wait twenty minutes for a photo of such high-resolution that it would show the glue peeling off Thomas Jefferson’s powdered wig. Don’t worry, I shoved that guy right over the crater. It was easy, he was topheavy from skipping leg day (#2025goals).

Connovation, word of the year, 2025. Now I’m focused on 2026 (step ahead).

One of the great feel-good stories of early COVID was animal shelter’s emptying out. Bored at home, or inspired by The Secret Life of Pets 2, 23 million American households adopted an animal during the 2020 lockdowns. Reliable pet population data is hard to come by, but a combination of surveys and experts seem to suggest the total number of American pet dogs increased by more than 10% in 2020 and the year-on-year growth in dogs adopted at least doubled. This was a mania, an absolute boom in pet ownership, and it led to Hollywood moments like this:

Shelters weren’t the only part of the animal industry booming. Sitters, walkers, pet insurers, vets, groomers, toy makers, drug makers and food makers all saw their kibble bowls overrun. It was a great time to be in the pet business. And, a great time to be an investor in a pet business:

These stocks absolutely ripped. It’s easy to see why: pets live, on average, ten years. They need to be fed, brushed, belly-rubbed and have their insufferable personal instagrams zealously maintained that whole time. The huge spike in pet adoption wasn’t a one-year bump to revenue, it was a 10+ year bump. It’s hard to imagine a better situation for the pet industry. Take it from Chewy’s CEO at their fiscal year 2020 earnings call:

We've seen a 35% increase in creation of pet profiles for puppies and kittens. And a 40% increase in pet profiles for adoption. I think what makes the category attractive to us, is the fact that pet sales are mostly recurring in consumables and healthcare, and the puppy is going to grow up and eat more food and shred more toys and require greater healthcare needs. And we are here to service all of them. So any kind of impact that we're seeing right now, we do believe, ultimately, there's sustainable momentum.

That’s corporate speak for “oh hell yeah, son.” Being in the pet business in 2020 was like being in the guillotine business in 18th century France. Sometimes business is all about right time, right place. And so, pet stocks rode off into the sunset, making everyone involved a fortune. Right? Right?? Ehh…no.

Pet stocks tanked in 2021 and 2022, giving back all of their 2020 gains. When one stock crashes, it can be for any number of reasons. But when a group of stocks all exposed to the same endmarket engage in a correlated crash, that says something about the endmarket. In this case the big negative surprise was that the pet companies didn’t make as much money as everyone thought they would. What happened to all those pets? What happened to the sustainable momentum? Chewy’s CEO answered that question, obliquely, in 2024:

For the first time since 2022 we observed a positive balance between adoption and relinquishment.

The CEO of the Canadian Pet Valu (PET.CA) made a similarly vague statement:

Our channel checks suggest surrender rates have returned to pre-pandemic levels. 

In other words, a lot of those COVID pets seemed to disappear, or at least their owners stopped buying pet related goods & services. Vox has a great article outlining what happened to all the COVID pets: a significant proportion were returned to shelters, abandoned, became quasi-strays or otherwise disappeared. Some people couldn’t handle the behavior issues. Others couldn’t make it work with the drastic lifestyle shift of reopening. Many could no longer afford pets when inflation hit in 2022. Pet executives did not directly address this trend reversal, after all what could they say? Now that lockdowns are ended, our beloved customers are tossing out their pandemic pets like sourdough yeast. Probably not the best PR. Hence the euphemisms like “surrender rates” or “relinquishments.” But their reported financial data supports the Vox article’s argument that pets ownership trends reversed post-COVID. All of this led to a series of way less inspiring headlines:

Surprisingly, publicly available industry data doesn’t corroborate the reversal in pet ownership rates. This AVMA publication, suggests pet ownership was unchanged between 2020 and 2022. This recent NAPHIA survey makes no mention of declining rates. This could be because most of the public data is survey-based. People are probably ashamed to admit, even anonymously, that they weren’t able to take care of their animals. There could also be a lot of street animals, especially cats, who technically belong to an owner, but that owner doesn’t provide anything, i.e., a pet owner who doesn’t buy pet food or services. Or it could be that the providers of this data - like pet insurers and pet food brands - are incentivized to downplay a pet abandonment crisis because it might discourage prospective pet owners (bad for business). Whatever the reason, following the money gives a much clearer answer: the pet market shrank post-COVID. This is a case where publicly reported, audited financial data backs up testimony from industry insiders (like animal shelter owners). The golden age of pet ownership ended far faster than anyone anticipated. That’s the overlap between our money and our world (and the tagline for this newsletter!).

Thanks for reading.

A few months back I collaborated on a post with Alts.co. The team at Alts are experts on alternative investments. They cover everything from buying uranium to appraising vintage action figures. I’d recommend checking them out - they cover fun investing topics you won’t find anywhere else.

Vending machines are to Tokyo what red phone booths are to London or leaky bags of garbage are to New York. They pepper the streets like lost coins and constitute iconic landscape features; the type that trigger almost subliminal recognition in a photograph. Anyone who knows London instantly recognizes the red phone booths. And anyone who knows Tokyo instantly recognizes this:

Japan has over 5 million vending machines. That’s twice the density of any other country, and amounts to one vending machine per 25 residents.

Read more about peak vending machines

Follow the money. Fines and forfeitures together make up $16 billion in state and local government revenue annually, the majority coming from traffic violations.

While that’s less than 1% of the total revenue for those entities, it’s still important. The 1% figure is an average number and masks the fact that over 600 U.S. jurisdictions rely heavily (>10% of revenue) on fines for revenue.

In Chicago traffic tickets alone make up 7% of city revenue. Henderson, LA, a town of ~2,000, collected $1.7 million in speeding tickets in 2019. What’s more, traffic violation revenue can make up most (or all) of funding for specific agencies, often the police departments who issue the violations, a sure conflict of interest. But the economic problems of traffic tickets pale in comparison to the social ones: they serve as a regressive tax, they are systemically racist, and they’re dangerous. Also, and not to totally bury the lede here, traffic tickets are quite ineffective at curbing dangerous behavior. Most of the reduction in motorway deaths has come from technology and design improvements, not enforcement. Only the enforcement of DWI laws seems to have made roads safer in a meaningful way, and of course that’s one of the few traffic violations that is punishable with prison time, not just a fine. Putting all of this together, our traffic system is so indefensible even Johnnie Cochrane wouldn't take it on as a client. Surely this isn’t what our founding fathers intended. If Paul Revere got caught in a speed trap there might not even be an America! How did we get here?

A brief history of the traffic-industrial complex

In the beginning there were no rules. The first automobile was invented by Carl Benz in 1886 but it was so expensive that even at the turn of the 20th century there were still just 0.1 cars per 1,000 people. In other words, so few cars that rules weren’t needed. And so a young Jay Gatsby might have been seen in his yellow Rolls-Royce, flappers dangling off the fender, careening around the bend of a treacherous mountain road, all without any worry of prosecution. The introduction of Ford’s mass-produced Model T marked the end of lawlessness. In 1909, its first year of production, the Model T sold about 10,000 units at a cost of $825 ($25,000 in current dollars). By 1921 the Model T sold over a million units for $300 a piece ($5,000 in today’s dollars). The Model T drove mass adoption of the automobile:

As more Americans bought cars, car problems piled up. Governments started passing road regulations, but this created a new problem: all the sudden, in a very short period of time, everyone in America became a criminal. Historian Sarah Seo explains (in this awesome podcast):

“An average town like Berkely, California had about half a dozen officers on their force. They didn’t have a lot of power to proactively investigate and go after crime and criminals and they mostly focused on the margins of society, like drunk people and vagrants…that was the state of policing before cars. Now after cars…police grew in numbers to dozens, even hundreds. And they got a lot more discretionary power and for the very first time they started enforcing the law against respectable citizens, citizen drivers [because] people were killing each other in their cars, there were so many traffic accidents. [As the traffic code became bigger] everybody became a misdemeanor offender and it was a huge problem. How do you get respectable citizens to obey traffic laws?”

The solution to this problem, and the answer to the question that opens this post, was to punish traffic offenders with small fines. That’s why vehicular crimes often don’t “count” as criminal offenses. If they did, we’d have to build a jail big enough to house the whole country. Administering these fines, Seo points out, meant expanding the size of police departments, which cost money, which, conveniently, fines provided. In this way, the invention of the Model T catalyzed a massive expansion of the American police force. However, this transformation happened very slowly. By mid-century there was a hodgepodge of state and local laws, but they were inconsistent and applied unevenly. Meanwhile, motor vehicle deaths continued to rise:

What really sped up the emergence of the modern day traffic-industrial complex was a raft of federal regulation in the 1960s and 1970s. Responding to both rising oil prices and the steadily increasing motor vehicle death rate, the government introduced the Federal Motor Vehicle Safety Standard, The National Highway Safety Act, the National Maximum Speed Limit Provision, and other regulations aimed at making driving safer, more fuel-efficient. Enforcing traffic laws was part of this structural reform. To get federal and state funding, communities had to start policing traffic. To this day, the National Highway Traffic Safety Administration provides $600 million to states each year, and those states send more money down to the local level. As you can imagine, this economic system supercharged traffic violations. Paying local governments to issue traffic tickets is like paying the Grinch to steal Christmas presents. The governments already get the money from the fine. There’s no need for more economic incentives, they come built-in!

These technological, economic, and legal changes manifested in our culture. To Americans cars have always symbolized freedom, but the type of freedom they symbolize has evolved. Until the 1970s, cars tapped into the endless frontier mentality - that pure, unbridled freedom of the road. The most popular 1970s movies and books about cars were “On the Road,” by Jack Kerouac, “Easy Rider” starring Jack Nicholason, “Two Lane Blacktop” starring Warren Oates or even George Lucas’ “American Grafitti.” In these movies, cars were a promise of limitless opportunity. But as regulation and enforcement of the rules of the road mounted, the car went from symbolizing a youthful, innocent freedom to outlaw freedom. More recent car movies like The Fast and the Furious, Gone in Sixty Seconds, and The Italian Job focus on criminal protagonists. In early movies cars were a tunnel to freedom, but now cars represent a propositional freedom that comes only at the expense of good standing in society. The meaning of this cultural shift is best explained by Department of Tranpsortation head John Volpe, one of the masterminds behind the modern road transport system. In an open letter to Motor Trend Magazine readers in 1973 Volpe wrote: “when you get on a public road, you surrender your private life and autonomous rights.” Today this statement seems obvious. To 1970s America this was a radical statement.The road didn’t mean surrendering your liberty, it meant seizing it! Volpe’s argument brings to the surface how a single technology can be both empowering and disenfranchising. 

That’s how, if we trace traffic violations to its roots, we get a fascinating unfolding. A new technology (the mass-produced car) led to a structural change in our legal system (traffic laws, professionalization of police) which led to structural change in our economic system (road fines as government revenue) which led to cultural changes (technology and the nature of freedom). This topic truly is the overlap between our money and our world (hey, that’s the tagline for this blog!).

changing the system

The history of traffic tickets is a history of how sensible policy can lead to senseless political systems. It’s hard, almost impossible, to defend the traffic-industrial complex in its current state. It’s an illegitimate mechanism for supposedly democratic governments to extort their own citizens. The system is not transparent, it’s not fair, it incentivizes excessive and unnecessary traffic enforcement (like speed traps and ticket quotas) and it’s an overall waste of resources. Changing that system, though, will be a challenge. The political institutions that decide how to enforce traffic laws are reliant on the current system. It’s not as simple as voting in a new mayor who promises to make a change. There are thousands, maybe hundreds of thousands, of civil servants in this country whose salary is paid by fine revenue. The best way to begin to unwind the current system is piecewise. Start with a reduction in the federal highway grant money that is tied to traffic ticketing. Instead tie that money to outcomes, like reduced traffic fatalities.

Fantasy Football is like a back-to-school sale. The leaves are beginning to turn, optimism hangs in the air, and as you pick out sweet tye-dye binders and groovy gel pens you can’t help but think “this is going to be my year.” By the end of September your notebooks have unspiraled and your folders are bent. Your pens prove to be as reliable as a supplement Joe Rogan promotes. And someone keeps leaving little deer turd pellets in your gym shoes so that when it’s time to run laps you have to get crap all over your socks and now everybody calls you Dungfoot. It’s like that every year, without fail. But next year can actually, really, be different. What does it take to turn things around? Don’t be a fantasy football player, be a fantasy football investor. Fantasy football is portfolio management. Players are assets, and the goal is to create a portfolio of these assets that outperforms competitors.

Portfolio Management Fundamentals

Building an investment portfolio is all about diversification. Don’t put all your eggs in one basket. Diversification works because the returns of different investments tend to be uncorrelated, like this:

In this scenario, each investment returns either -$5 or +$10 with a 50% probability of each. That’s an average, or expected, return of $2.50. By creating a portfolio that is ½ option A and ½ option B (called Portfolio C), we can get a $2.50 return every single time because the two options are uncorrelated:

Whether or not we diversify, we can still expect $10 return on average. The role of diversification is to reduce risk (not increase return). Diversification makes that $10 return guaranteed. However, diversification can also reduce upside. In this example, portfolio C will never return above $2.50 - it sacrifices upside to remove downside. So why is portfolio C better? Risk aversion. Humans hate uncertainty. Oftentimes investors dismiss risk aversion as irrational, a plague of the unenlightened. But there are real reasons that risk should be avoided where possible. 

First is the pain of downside risk. Downside risk is when things go bad. Remember the little squirrel, Scrat, from the Ice Age movies? All he wants is to forage one little acorn, but everytime he gets close catastrophe strikes and he loses everything. In this case, Scrat is investing his best asset (himself) in acorn hunting. The upside risk is that he gets to munch on an acorn but the downside risk is that he gets buried in an avalanche. As is often the case, the downside risk is far more painful than the upside is pleasurable. 

Second is that risk is uncertainty, and uncertainty complicates things. Say you’re a master thief planning to steal the Mona Lisa from the Louvre. Things are going well until the security guard you bribed tells you there’s a 30% chance he may not be working the planned night of the heist.  Then the getaway driver tells you that he doesn’t work on full moons because he was attacked by a werewolf as a kid. Then the black market buyer you found gets inducted to the French Academy and begins showing signs of patriotic remorse. Alone, each one of these uncertainties is manageable, but taken all at once they doom the heist. That’s because uncertainty compounds. People like to eliminate uncertainty wherever possible because it makes planning - for business and life - much easier.

Risk aversion is covered more on MoneyLemma’s post on paying down debt, but the end result is this:

In most cases, a loss of $10 is more painful than a win of $10. A loss of $100 is more painful than a win of $100. Same for $1,000 and $10,000 and every other number. That’s why good portfolio management optimizes risk-adjusted returns, which takes into account the downside and upside risk.  Diversification improves risk-adjusted returns by lowering the amount of risk needed for a given level of return. 

Building a Fantasy Football Portfolio

Fantasy football is cool because it allows people who don’t have the talent to play in the NFL, like Tim Tebow, participate in the sport. Fantasy football is not cool because basically everyone loses every year. The stakes for a typical 12-team league are as follows: every team owner contributes money to a prize pool and at the end of the season, the league winner gets all of the prize pool. 11 losers and 1 winner. That means the payoffs look like this:

In investment terms, there’s no gradient for performance. The reward for 3rd place is the same as for 11th place: you lose. If you’re not first, you’re last. This fact inverts the earlier conclusions about diversification. Fantasy players should not diversify. In a normal environment, diversification improves risk-adjusted returns by lowering risk. However, diversification will also reduce upside. In fantasy football, diversification will lower the probability of a low-scoring team but also reduce the probability of a high-scoring team - you would be optimizing for a 4th place finish.

Fantasy players should only be satisfied if their team ends up in the top 8% (the top 1/12th of the league). That’s the only way to make money. Probabilistic scenarios that are positive outliers, like winning fantasy football, are called “the right tail.” The right tail is usually a best-case scenario for investors, like a fire alarm getting pulled during an AP exam. Fantasy players need to maximize the probability of a first-place finish - fantasy is all about getting into the right tail. The way to get an entire portfolio into the right tail is to have a bunch of individual bets pay off at once. That requires correlation, the opposite of diversification. Good fantasy teams need to have all their eggs in one basket! Here’s three ideas of how to do that:

Pick players on the same team, or go all-in on an offense. If a quarterback has a good game, chances are his star wide receiver had one as well. That means a higher chance of a high-scoring week. Here’s an example:

Target high-risk assets: Those players coming off injuries and suspensions, the ones that have “high-ceilings.” The normal rules of investing dictate that risky assets are discounted, and in fantasy that typically holds true. But it shouldn’t:

Adopt a Venture Capital Mindset: Venture Capitalists (what are venture capitalists?) spend more time in the right tail than Henry VIII wive’s spent in guillotines. Venture Capitalists invest in early stage companies, and they are looking for the ~0.01% of all companies that will ever achieve a $1 billion valuation. That requires some serious right-tail thinking.

Y Combinator is one of the most successful venture capital investment funds ever. Their website lists all of the investments they’ve ever made. Many rational investors would flip through that list and laugh. At-home MRI machines, sandwich-making robots, an app that fights parking tickets, smart dishwashers fueled by coal (I made that last one up). These are ideas that have a 99% chance of failing. To a normal investor, those are bad odds. But to a VC investor, 1% chance of success is great if that success is big, fat, right-tail success. The majority of Y Combinator companies fail, but the successes include Airbnb, Doordash, Stripe, Instacart, and a bunch of other investments that have been so lucrative that they could cover the losses of a million failures. Fantasy football managers can learn from this: what many people mistake for a bad investment can be an opportunity for those who understand the fundamentals of risk and reward. 

What fantasy football can teach us about investing

Fantasy football is a great example of how blindly following oversimplified advice, like “always diversify” can lead to poor results. Smart portfolio managers optimize for risk-adjusted returns by understanding the fundamental drivers of success in their portfolio. 

Go birds. 🦅

Further Reading

https://core.ac.uk/download/84312418.pdf 

https://medium.com/@grahamguthrie_14946/creating-a-profitable-daily-fantasy-sports-strategy-using-genetic-algorithms-and-free-data-15418ec0bd3d 

http://www.columbia.edu/~mh2078/DFS_Revision_1_May2019.pdf 

Globalization pinches together the ends of the world to make sails of progress. For the last century a global economic order has created unprecedented wealth, peace, and technology. It has also destroyed ways of life and sowed seeds of discord and discontent. The Economist believes the globalization regime is under serious strain as the human costs (job loss, social changes) have reached a breaking point. Globalization has become less a sail, and more a ripped parachute. Still pinching the corners of the world, still harnessing the wind, but careening uncontrollably toward an unpleasant fate. 

What the world needs is less economic integration and more human integration. Strangers meeting strangers not to negotiate outsourcing terms or plan a joint venture into nickel mining, but for the sake of meeting. With this in mind, I introduce the Curacao-Okinawa Exchange Program. These two islands on opposite ends of the world have so much in common historically, economically, and even ecologically. People from these places need to meet and hang out. Will flying a group of Okinawans out to Curacao for three weeks, and a similar reverse trip, make anyone rich? Don’t care. Will it solve the world’s problems? Don’t care. It should be done because it’s a cool idea. Not every idea has to be a startup. In fact, this is a good idea because it doesn’t have to be pitched to some overconfident and unaccountable venture capitalist whose lifelong goal is to get their surname on a Stanford dorm.

To cement this already bullet-proof case, consider the similarities between these two islands.

Imperial History

Okinawa is a Japanese prefecture (state) that was an independent kingdom until the 17th century, when it came under control of Japan, officially gaining prefecture status in the late 19th century. Curacao, in the Caribbean, was also minding its own business until it was colonized by the Spanish in the 16th century, and eventually became an autonomous state within the Kingdom of the Netherlands in the 20th century. Two small islands on opposite ends of the world, both forced under the thumb of large empires around the same time, both achieving some form of autonomy around three hundred years later.

American Military Bases

Both islands are home to American military bases. In fact, Okinawa has <1% of Japan’s population but 75% of American soldiers stationed in Japan are on Okinawa. Okinawa has more active American servicemen per capita than the United States does. About two in every one hundred people on Okinawa are US soldiers. Curacao, similarly, is home to US military bases and servicemen.

Strategically Important in WWII

Both were strategically important in WWII. Curucao housed some of the world’s largest oil refineries and were critical to the Allies fuel supply in the Pacific theater. Okinawa was the halfway point between Japan and Taiwan, making it a critical hopping point for the Allies and home to one of the bloodiest battles of the war. 

Tourism Economies

Both are home to beautiful beaches that are destinations for global travelers. In terms of employment and contribution to GDP, both are heavily reliant on tourism.

Lower Income States in Rich Countries

Okinawa is one of the poorest Japanese prefectures, while Curacao is significantly poorer than most parts of the Netherlands (of which it is part). This creates unique political dynamics in both areas. Okinawa, for example, receives billions in subsidies from the rest of Japan, partially to compensate for the burden of hosting American military bases. 

Island Cultures

Both are influenced by their colonial histories, both have unique dialects, both have delicious local cuisines, both are known for being a bit more “laid back” culturally relative to their mainland counterparts, and both have some of the longest life expectancy rates in the world.

Coral Reefs

Summary Table

Please support the Curacao-Okinawa Exchange Program

I don’t know anybody from either of these islands, and I’ve never visited either, yet I’m confident they need an exchange program. A formal, recurring program that introduces random people from each island to each other. These two islands have a strange amount in common given how fundamentally different they are. One island in the Caribbean, one in Japan. Different languages, different histories, different food, different music, different religions, different everything. Yet they share so much. It’s fate! A Hugh Grant rom-com that practically writes itself (editors note: all Hugh Grant rom-coms write themselves). I believe this program will create lasting, meaningful relationships, uncover amazing insights into the human condition, and make the world at least 1% better. There are many exchanges in our globalized world, but this one will be special.

Lately, I’ve been thinking a lot about this scene from Fievel Goes West:

Cat R. Waul, of course, is a robber baron, a monopolist of the Gilded Age. An era where, much like Kanye West in the early 2010s, a veneer of prosperity masked deep depravity and a way of life which would eventually destabilize and lead to a shift of political sentiments. What I really like about this scene is how thoughtful Cat R. Waul is about eating Fievel. He realizes that while he has all the power, he could extract more value over time by actually foregoing current profits (profits here being a delicious buttered mouse). Delayed gratification strikes again! Cat R. Waul might be a bad cat, but he’s a good businessperson. This is classic smart monopolist behavior.

Smart monopolies know who to target. Monopolies exist at the will of the state. J.D. Rockefeller monopolized the US oil supply for decades until the Supreme Court forced his company Standard Oil to break up (The Sherman Antitrust Act). As in, the state changed the rules. Prior to the Antitrust Act, Standard Oil was permitted a monopoly. Afterwards, it was not. Why did the Antitrust Act get passed? The simple answer is pressure. Pressure from consumers, laborers, farmers, and other stakeholders. People in power want to stay in power, and when Standard Oil became a threat to social stability, change happened. For decades, though, this pressure wasn’t enough to trigger a change. How did the Gilded Age monopolies survive this long? Why didn’t discontent in the system build faster? The answer is that they behaved like Cat R. Waul - they were careful to bend, but not break, their customers.

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Here’s the price of oil during the Gilded Age:

Isn’t that strange? Standard Oil controlled 90% of the nation’s supply, but the prices people paid at the pump (or whatever they had before the pump) actually came down over time. Some sources contend that consumers were paying more hidden fees, but looking at the above chart, it’s clear that Standard Oil wasn’t raising prices as much as they could. Rockefeller could have tripled the price of oil - he controlled the entire supply. But like all smart monopolists, he knew that wasn’t in his best interest. Higher energy prices would mean lower economic growth, which would mean lower long-term oil demand. Plus, ultra-high prices would make his company a villain in the public eye, and the state would put a target on his back. Any monopolist that wants to survive must artfully manage how much profit they take, so that they can take more later.

Great monopolists are exploitation virtuosos. Consider the case of railroad prices in the 19th century. Railway monopolies had two key classes of customers. Farmers who used rails to ship food, and industrialists who used rails to ship goods. Farmers, mostly small-scale, had little political power and little economic power. Industrialists were organized, politically powerful, and rich. The railways knew they could price gauge farmers but not industrialists, so they invented rate discrimination. They just charged farmers way more: 

In Minnesota, local farmers paid 25 cents per hundred pounds of grain going to St. Paul. But elevator operators shipped grain at 12.5 cents per hundred pounds between the Twin Cities and Chicago. (source)

The Robber Barons exploited vulnerable populations like farmers, but were careful not to exploit more powerful populations. As a result, the railroad monopolies went on for decades, making their owners some of the richest people in history, before finally getting regulated. Only a bad monopolist will rip off all their customers. A good monopolist only rips off some people.

In conclusion, Cat R. Waul is unhinged and easily one of the top 5 scariest Disney characters of the 1990s. King Louis is #1 as he wanted to wear Mowgli’s skin (I mean, wtf was that about) and Ursula is a close #2 as she haunted my dreams for the better part of my youth. But make no mistake - Cat R. Waul would cut out your tongue and stick a UPC code on it if he thought it would sell. 

Recently, through sheer happenstance, I flew business class on an overseas flight. What a revelation. I always knew business class was better, but I had no idea it was that much better. As I sipped complimentary champagne and watched an elderly man in coach struggle to get his luggage into the overhead, I mused to myself: “is this fair?” 

I have no problem with business class being better than coach. The tickets cost more, so the passengers should get more. More generally, I have no qualms with economic inequality. Economic inequality is fine. It’s even a sign of health for capitalist societies. Someone willing to study an extra decade to be a doctor or to risk their life savings on a startup should get paid more. AARP members should get discounted bus passes. Military veterans should get to board airplanes first. People who smell like oysters get their own row in the movie theater even if they pay the same ticket price. The system isn’t perfect. But in principle our entire governmental, legal, economic, and societal system was designed around the idea that people respond to incentives. Incentive-systems mean that some people will end up with more, and others less. Plus, if America is a melting pot, it must also be a hot stew of inequality. One comes from the other. You can’t acknowledge that everyone is different and then expect everyone to be the same. Equality of opportunity is sacrosanct, but equality of outcomes is sacrilegious. 

So again: I have no problem with business class being better than coach. I have no problem with economic inequality. My hangup, though, is how much better. How unequal should our society be?

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How much is too much?

This is not the first time MoneyLemma has raised this question. Past posts have examined tax burdens by income level, Americans spending habits, and American household income inequality over time. Each time the results are inconclusive. No matter how much data one pulls, there’s no correct answer. It’s absolutely an opinion. If someone thinks Rutherford B. Hayes was America’s greatest president or that Bowser is justified in kidnapping Princess Peach, they’re not wrong. At least not in the way that flat-earthers or anti-vaxxers are wrong. As long as they have their facts straight, people are entitled to draw their own idiotic conclusions. That’s the first thing to know: the right amount of inequality is subjective.

The second thing to know is that most people don’t even know what they believe because they don’t know the facts. In 2011 PBS did this amazing survey where they asked respondents which of the below pie charts represents the “ideal” amount of inequality, and then asked which one represents America:

Most people figured the middle pie was the best looking, and of course the best looking is America. But America is on the left, Sweden is the middle:

If that wasn’t enough, there’s a third complicating factor: the data itself is subjective. As covered in MoneyLemma’s post on wealth inequality, there’s many different ways to measure inequality and each one yields a different result. That means that nobody will ever change their mind on the topic, because when shown data that contradicts their beliefs they’ll just find different data. 

If you combine all these three together, you realize that any attempt to determine the ideal level of inequality, or even quantify the current level of inequality, bears no fruit. The data is inconsistent, people don’t know the data, and even if they do they draw different conclusions.

It’s the motion of the ocean not the size of the boat

Forget absolutes. Everybody can pick their favorite metric, and everybody can be their own Goldilocks and decide if inequality is a squidge too high or low or just right. But when it comes to public discourse, the conversation should be around the direction, not the level. The question shouldn’t be “how unequal do we want our society?” it should be “is our society getting more or less equal?” Using that as the standard, a clear, consistent answer emerges: inequality is increasing.

That’s true if you measure by wages:

That’s true if you measure by share of profits, which shows that corporate income is taking share from labor. I.e., business owners are getting a bigger piece of the pie:

And it’s true using Gini coefficient, an economic measure of inequality:

It’s hard to find a metric that doesn’t show US inequality increasing.

Measure better to get better

This is the current state of discourse on wealth inequality: one person says “things are good” and another person, with a different perspective, says “I totally disagree, things are bad.” Each person uses different data and a different lens through which to view the world, and so finding common ground is difficult. The conversation devolves into recriminations, and pretty soon the usual suspects are brought up. Corrupt politicians, greedy billionaires, the lazy working class, gratuitously violent video games, art as content, the Rats of Nimh, increasingly potent strains of marijuana, the Disneyfication of everything. None of these things (with the possible exception of the Rats of Nimh) are relevant to the topic of inequality at all. The path to better discourse is a focus on the direction of travel. The current state of affairs, no matter what you think of it, is a product of history. Today’s level of inequality shows us yesterday’s world. Tomorrow’s inequality will be where we are today plus the direction we are headed. 

Short post offering updates on two of my favorite topics.

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Last year I wrote about Judge Judy’s high-stakes move to Amazon Prime. My argument was that Judge Judy’s massive viewership might not follow. People who watch Judge Judy have been watching Judge Judy for decades. It’s a routine. They watch it while they tidy up or whittle or stack matchsticks. Inertia will prevent people from breaking in a new habit. They’ll watch whatever comes on in Judy’s place instead of logging on to Prime and watching on demand. That's what I said, but I was wrong. The New York Times wrote that viewers watched Judge Judy for 150 million hours. If you’re wondering whether that’s good or bad, I can’t help you. Conventional TV has third-party rating systems so the public (and advertisers) can measure popularity. THere isn’t yet an alternative for streaming platforms, so Amazon will just make up a metric like “hours watched.” However, more importantly, Amazon renewed Judy’s show and authorized three spin-offs. We may not have the viewership numbers, but we do know the Judy-verse has arrived. America’s greatest judge clearly blew through Amazon’s expectations.

Toys R Us is officially back, again. I covered the rise and fall of the iconic toy store, but the story wasn’t over. Toys R Us was bought by WHP Global, the same company that owns brands like Bonobos and Anne Klein. Right now there's just one store location in New Jersey and then a bunch of “shop-in-shops” at Macy’s around the country. That is a sad, sad place for any company to be in. It was tough to even write that sentence. New Jersey? This year WHP is launching 24 more stores, mostly at airports like Dallas Fort-Worth. Seems like travel retail is the revamped strategy. Stay tuned!

Welcome back to MoneyLemma! Today’s topic is probably the most commonly requested one by readers. People always want to talk about 401ks, credit card debt, and the lifetime earnings Calico Jack. Enjoy scallywags!

Let’s talk about booty. Pirates spend and expend their lives in its pursuit, shoulder parrots squawk about it ceaselessly, treasure maps point to it with big red arrows, and her majesty rues the day it graduated from her coffers. Few lives are more romanticized than the pirate’s life. Yet booty, for all its marvel, is a nebulous term. Was being a pirate actually a lucrative career? How much money would the Goonies have recovered from that sunken pirate ship? What would have actually been buried on Treasure Island? If you drop anchor on this post, you’ll find out. 

Why 17th century pirates?

As long as there have been boats, there have been pirates robbing them. Julius Caesar, Miguel de Cervantes, Christopher Colombus, Wendy Darling, and Tom Hanks have all been pirate captives for a time (for Tom Hanks, it was just two hours during Captain Phillips). The focus of this article, though, is 17th century Caribbean pirates. First, because this was (literally) a golden era: merchant ships laden with precious metals ferrying back to the old world were perfect targets. Second, there is real economic data available for this time period, largely in part to a 500 page work of nonfiction by Daniel Defoe, who would later write Robinson Crusoe (a story inspired by real-life pirate Alexander Selkirk).

Pirates of this generation were known as Buccaneers (named after a jerky they used to eat) and they came from all over. Many were former privateers (meaning they’re pirating was sponsored by a monarch) who just decided to go into business for themselves. Others were runaway slaves, British navy deserters, convicts dumped off on islands, and all sorts of misfits and fringe members. MoneyLemma’s post on LSD covered the countercultural movement of the 1960s, and in a way, pirates were counterculturalists. These were society's rejects, a group of people who chartered their own path, stole from the rich, and lived as free as anyone could. They also slaughtered innocent families, pillaged entire cities, and were truly disgusting, smelly, unbathed people. Still, like mobsters, gangsters, and the Kardashians, many people overlook any distasteful behavior to romanticize a life of hedonistic excess. 

Economics of the piracy business

Quick disclaimer: I am translating 17th century currency to modern day dollars. This is a tricky operation for reasons explained here. 

Today, you might call buccaneers libertarian-socialists. Libertarian because these pirates were the most rugged of individualists, beholden to no one and holding freedom above all else. Or, as a Bartholomew Roberts (also known as Black Bart, the pirate captain who took 400 ships) famously said:

"In an honest service there is thin commons, low wages, and hard labor; in this [piracy], plenty and satiety, pleasure and ease, liberty and power;. A merry life and a short one, shall be my motto." 

At the same time, these people were socialists. On and off the ship they shared everything. Early buccaneers lived in bands of six or eight that operated like deranged hippie communes. This strange philosophical mix transferred to the economics of the business. Pirates were entrepreneurs who banded together for a joint venture, that venture being to plunder a bunch of ships. The group (typically under 250 crewmates) would democratically elect a captain to make major decisions like which vessels to target. Being the unruly bunch they were, the captain’s authority was limited and he could be deposed at any time. When the plundering was finished or everyone was dead, the venture dissolved. At that point profits were split pretty much equally amongst the members (captains or quartermasters received double shares). In this way, pirate ships were employee-owned businesses.

A pirating operation had limited upfront expenses. Pirate ships were never bought. Usually they were stolen. Early buccaneers would often hollow out tree-trunks into canoes and row out to commandeer a real ship. Pirates would pack up a bunch of jerky and water and take to the sea. 

In terms of ongoing expenses, again not much. A modern ship might have to worry about fuel costs or port fees. 17th century ships used wind (occasionally rowers) as an energy source and pirates would just kill anyone who tried to charge them a docking fee. They stole all the supplies they needed and had the skills to do maintenance on their ships, hunt for food, and find fresh water. There were some expenses that a piracy venture might incur. For example, Pirate Law, which was a general code that evolved over time, stipulated that any crewmate who loses a limb, eye, ear or other body part gets paid a one-time stipend (ex. Loss of a right arm was worth 600 pieces of eight, or about $60,000 in today’s dollars). On occasions bribes might be paid for information or medicine or food might be bought. Overall, though, expenses were low. Because of this, ships were self-sustaining and pirate ventures could last years, and pirate fleets could be built up into small armadas of stolen ships, many manned by prisoners.

The revenue of a pirate ship was simply how much loot it could plunder. This was highly variable. Sometimes ships were kidnapped or sunk before taking any loot. Others made a fortune. In 1696 Captain William Kidd spent a year at sea with his pirates and had nothing to show for it. In other instances pirates could take a fleet of three ships in a single day. Even when a ship was captured, the payoff was unpredictable. Ideally pirates would capture a commercial vessel hauling gold back to Europe. In 1672 Captain Laurens de Graaf intercepted and robbed a merchant ship of 120,000 Spanish pesos ($12 million in today’s money). Most of the time though, the bounties were far smaller, and usually in the form of wheat or furs (not all ships carried gold). To get a sense for how rare that $12 million payday was, consider that de Graaf would pirate for another decade before he got another one that big.

Over the lifetime of a venture (which could last years), pirate ships tended to do well. One report in the late 16th century estimated that the average pirate venture yielded between $150,000 and $300,000 in booty ($10 million to $20 million in today’s dollars). Captain Henry Morgan once returned to port with 500,000 pieces of eight, which would be worth about $50 million today. This understates the total haul as the ship was also filled with stolen cargo like wheat and barrels of booze.

In this sense 17th century piracy was a fantastically profitable business. Huge pools of revenue with no upfront costs and basically no expenses. Buccaneering, as a business model, compares favorably to basically any other business in history, illicit or not. It’s a far better business than drug dealing (where you have to pay for your supplies) and a better business than the Crusades (huge upfront costs + proceeds went mostly to the Church). It’s certainly more profitable than Google’s search business or Coca Cola’s soft drink brands.

How much did these pirates make? 

Since they had no boss, pirates operated on a “no prey, no pay” policy. They had no salary and were guaranteed nothing. One of the Pirate Laws, though, explicitly states that no venture will disband until each crewmate's share exceeds $1,000 pounds (~$60,000 in today’s money). Considering that most fleets were under 250 members and loot was split almost perfectly evenly a pirate could easily come away with the modern-day equivalent of a six-figure payday at the end of a venture, seven-figures on a good venture. This loot would come in the form of gold and precious metals. 

On the low end, a venture by Captain Henry Morgan once yielded an average of about $20,000 per head in modern dollars, which is not much to show for a few years work. On the high end, The Cabo once paid out 4,000 british pounds ($760,000) to each crewmate in addition to 42 diamonds each. That means each pirate easily scored over $1 million.

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How did the pay of pirates compare to NFL athletes?

NFL players can help us better understand the economics of a pirate career because the two careers actually have a lot in common, putting aside the fact that pirates are murderous criminals and NFL players are, with a few notable exceptions, not. The overlaps: 

• Both careers are short. The average NFL player has a 3.3 year professional career according to Statista. Those figures aren’t available for pirates, but would probably be pretty similar. Pirates lived a nasty life filled with violence and disease, and few lasted more than a few years. 

• Significant skew in earnings: While 34 NFL players make upwards of $20 million per year, median pay is $860,000. Pirate pay distribution was similar: Black Bart was like Tom Brady, pirating for decades, looting 400 ships, and amassing what would today probably be a >$100 million fortune. Most pirates lasted a few years and walked away with far less.

• Small labor pool: There are just under 1,700 NFL players active right now. Similarly, there were about 5,000 pirates active during the golden age, according to the Royal Musuem in Greenwich. The NFL limits its labor pool based on skill, while the labor pool of pirate’s was limited by self-selection: not many people were crazy or desperate enough to live that life, even for the payoff.

• Dangerous jobs: The NFL is one of the most dangerous jobs around, especially as more information on the long-term effects of head injuries comes out. Still, the pirate’s life was way more dangerous. The aforementioned fortune seized by Captain de Graaf involved the death of 20% of his crew in battle - in a single day! 

All in all, from a compensation perspective, the job of a pirate is pretty comparable to an NFL athlete.

How do employees profit shares look across different businesses?

A pirate ship is owned by the pirates. NFL teams, on the other hand, are not owned by players. JoinColossus reports that the Dallas Cowboys reported $425 million in profit last year, while the players on the team received about $180 million. This means that the owner makes over twice as much as all of the players combined. Put another way, if the Dallas Cowboys operated like a pirate ship then players (and other employees) would triple their income. The Federal Reserve tracks this figure in national aggregate - it’s called the Labor Share of Income. It measures how much of the national income is collected by laborers (as compared to corporates and other non-individuals):

Over the last 75 years the labor share of income - the amount people are making - has trended down. Why is that? Let’s return to our two examples, the NFL and Pirates. The labor share of income in the NFL is about 33% (higher when you layer in non-player payrolls, but that data isn’t reported). Pirates labor share of income is 100%. The difference has to do with the industry structure in each case. For professional sports, there are actually laws that give owners significant leverage over players. For example, it’s illegal to create a professional baseball league competing with the MLB (which gives owners significant negotiating leverage over employees because there’s no other job in town). And many stadiums are owned by teams but heavily subsidized by cities (almost always a waste of taxpayer dollars). Since cities are unlikely to sponsor multiple stadiums, this creates a quasi-monoploy status for many sports teams. Pirates, on the other hand, operate outside any law. They can quit anytime, they can mutiny and kill the captain if they don’t like him, they can. Without basic institutions like property rights and the ability to enforce contracts, non-labor income isn’t really possible. Private Equity investors can’t buy stock in Blackbeard’s ships, and even if they could it’s hard to imagine Blackbeard honoring his contractual obligations and shipping his loot to a bunch of bros in Patagonia vests. Pirating and football operate under different market forces, industry structure, legal superstructures, and social institutions. The labor share of income is a downstream result of those conditions.

As a parting thought - we often view these deep economic forces as fixed, like the laws of nature like gravity. But the above chart shows that US labor share of income has been declining for decades. Under a different set of conditions (laws, governance, social structure), that trend could reverse. A lot of economic realities we think are fixed are actually malleable. This is one of the fun things about businesses: we don’t have to sit back, conform, and listen to the laws of nature the way we do in engineering or biology. In business, we create the natural laws.

The proposed India Middle-East Transport Corridor (IMEC) is the most underreported story of 2023. The blood of the global economy is trade goods: untested cosmetics, ineffectual weight-loss supplements, and single-use small kitchen appliances. That blood is pumped by the heart, the world’s manufacturing base. Those factories, and the countries in which they sit, get a lot of attention (see China trade war). Equally important, though, are the capillaries through which the world’s goods are transmitted. The world’s established trade routes are lattices upon which the global economic order is constructed. The introduction of a new trade route, IMEC, would therefore be the most important geopolitical development since Taylor Swift attended the Chiefs/Eagles game. 

Why trade routes are important.

The majority of the world’s GDP comes from trade. In other words, most of the wealth created in the world is a function of people in different countries selling goods & services (mainly goods). The majority of that trade flows through only a handful of routes:

There are so few routes because creating a new trade route is a massive undertaking. Every country along the trade route needs to agree to host the trade route, protect it, share economics, and invest in massive public infrastructure (ports, roads, railways, customs, power supply, etc). On top of that, private capital has to be incentivized to build the route. Trade routes need telecommunications, refueling stations, logistics support, and of course actual substance to ship. This level of investment and coordination on par with the International Space Station or hunting Bin Laden. It’s rare to see, which is why a major trade route is only created once a century or so. Plus, trade routes have a ton of capacity that comes with low marginal costs (so big-time economies of scale) and network effects (the more users at each port, the more utility for receivers at the other ports), which make building a new, alternative route even less financially appealing.

Trade routes are a quiet centers of power 

China accounts for ~40% of global manufacturing output and 14% of global trade. By no coincidence, major trade routes mostly originate in China and end up in Europe or the US. Much of that trade goes through the the Maritime Silk Road (blue route below):

The Maritime Silk Road connects to Europe through the Suez Canal - 12% of global trade goes through the Suez Canal. But even these figures understate the importance of the Maritime Silk Road. Basically anything that Europe exports to the US includes something previously imported from Asia. The statistics wouldn’t capture that. If the Maritime Silk Road were vaporized then global trade would come to a standstill because Asian inputs are in everything.

Countries along trade routes benefit massively because their effective cost to produce and trade any good is much lower. In a 2009 paper McKinsey estimated that half of supply chain costs are transportation. If you have a bunch of ports in your country linked to a global trade route, and the rest of the world has invested massive amounts of resources in that trade route, then your cost of transport will be lower. This is part of the reason why China’s share of global manufacturing is at all time high even though their labor costs haven’t been competitive in over a decade:

Why does the world need IMEC now?

Political goodwill for a new Asia-to-Europe trade route has materialized very quickly, and it’s the confluence of five main global developments:

First, the current Maritime Silk Route is a major asset for China. It goes without saying that the US would love to devalue that asset by creating an alternative route. This would be a huge win for the US in their burgeoning economic war with China. Second, as part of that trade war, the US and its allies are promoting a “China derisking,” which means rotating manufacturing outside of China and into other cheap-labor Asian markets like India, Thailand, Indonesia and Vietnam. That process will be easier if those countries are integrated into new trade routes. Third, China has been investing in its own alternative trade routes for over a decade (known as the Belt Road Initiative), but the sanctions on Russia have created a willing partner to double-down on the initiative. The US and its Allies need to respond fast. 

Fourth, Egypt’s political and economic destabilization continues, which creates a more urgent need for alternatives to the Suez Canal. Plus, the canal extracts ~$10 billion in fees per year at high rates, so competition could bring down the cost of trade. Fifth, and finally, the supply chain bottlenecks of 2021 revealed the need for updating and adding redundancy to the global logistics network. 

Where to put a new trade route?

Now more than ever, the US and their allies want an alternative trade route. The question though, is where would that route go? A northern route would mean going through Russia, that sure as shit isn’t happening. A southern route goes through Africa is longer and would cross unstable countries. The fastest route, actually a route that is purportedly 40% faster than any existing route, would be a rail line that cuts through the Middle East. That is what the IMEC plans to do:

If this is such a good idea, why doesn’t it exist already? If you notice, the trade route has to run through Saudi Arabia, and then it has to run through Israel. The problem is that Saudi Arabia and Israel have been mortal enemies for all of Israel’s existence. Up until very recently, there’s been absolutely no way they would cooperate on a trade route. That’s changing fast. Israel has been normalizing relationships with other Arab states. Saudi Arabia needs this trade route if it wants to accomplish its economic diversification away from oil. Recently, Mohammed bin Salman, ruler of Saudi Arabia, said in an interview that his country is “closer” to normalizing relations with Israel. This is mind-blowing stuff, it’s like if Taylor and Kanye teamed up to record an album with Joe Jonas as producer. Importantly, it’s the last condition needed for IMEC to really happen.

[Since I started writing this article, the Gaza conflict broke out, throwing a fat wrench into any ‘peace in the Middle East’ plans, and likely delaying IMEC discussions. But the timing is no coincidence. Part of Hamas motivation for its terrorist attack was to disrupt peace talks. Another interesting development has been Turkey partnering with Iraq to promote a competitor to the IMEC, since the IMEC would circumvent Turkey, thus disenfranchising its access to global trade. World events move fast!]

Progress on the IMEC

All these conditions led to a huge announcement at September’s G20 Meeting in Mumbai: a memorandum of understanding was signed by participating countries to develop the IMEC. There have also been some private sector investments, for instance India’s largest port owner, Adani Ports, purchased Israel’s largest port, Haifa, earlier this year, which would help grease some wheels (and also suggests that backdoor talks have been going on far before the G20). But really, limited resources have been committed so far, and there will be a lot required.

Implications of the IMEC

If IMEC happens, there’s two sets of implications: economic/political and cultural. On the economic front, interestingly the IMEC will start in India - a huge win for India and its southeast Asian neighbors. Saudi Arabia, Israel, and the UAE will also benefit from being linked up to global trade and having traffic through their territory. Europe and North America gain from cheaper and faster shipping, plus additional leverage over China. Then there are the losers. China and Egypt are obvious ones. Russia will be further isolated as some of the countries it is courting as potential allies (Saudi, India) will take a step closer to the US. Then there’s Iran, which will watch as its enemy Saudi Arabia partners with its other enemy in Israel to make a bunch of money in conjunction with its other enemy the US. If that doesn’t motivate them to finally build that nuke, nothing will.

More interestingly are the long-term cultural implications. Increased trade goes hand-in-hand with economic integration, which goes hand-in-hand with cultural influence. Countries trade stuff and then they trade culture. If Southeast Asia and the Middle East do become more important trade partners to the west, then the next generation of Americans will have a very different worldview than the current one. Today, some of Japan’s most important exports to the US are cultural: HelloKitty, Sushi, Pokemon, Super Mario, DragonBall Z, J-Pop, OnePiece, Ramen, that Netflix lady who loves cleaning, weird game shows, and treating the elderly with respect. Wait no, that last one never got adopted in the US. Japan has a huge influence on the US culture, the same way Italy or France does. But before Americans embraced Japanese culture, they embraced Japanese stuff: electronics & automobiles. 

A more recent version of this is South Korea. In the last few years K-pop music has topped the charts, Korean cinema has won Academy Awards, and Korean TV shows have taken over Netflix. But before we fell in love with Korean culture, we fell in love with the stuff they made: 

Along the new IMEC trade route are a dozen countries that Americans and Europeans either disapprove of (Saudi Arabia) or have no awareness of. What does the typical American think of Indonesia? As these countries develop economically, and if they continue to integrate and trade with the US & Europe, it’s possible that the next generation of Americans binge Bollywood movies instead of overrated French Cinema, and obsess over Vietnamese gin instead of overrated French wine. There was a time when people in Italy (or Romans) thought the people in France (Gauls) were barbarians and the people in America didn’t know who either Romans or Gauls were. Things change. The IMEC would be a big moment in economic history, but could be a moment in cultural history as well. 

For years I’ve been a huge fan of SpaceX. The company’s ingenuity, its adventurous spirit, its bold and uncompromising desire to expand the frontiers of knowledge, plus alien/space stuff. That ethos has always resonated with the core of who I am. It was only last week, though, that I actually bothered to learn about what the company does.  Here’s four things they are doing that you should be aware of.

1. private-sector space

SpaceX first made major headlines in 2008 when its rocket Falcon 1 reached space orbit, a pioneering moment for privately-funded rockets. Since then, it has landed a string of firsts for private-sector space: first mission to the International Space Station, first crewed mission to space, first to send a payload into solar orbit (it launched a Tesla Roadster into orbit). With these accomplishments SpaceX symbolizes a new stage of the space era. Think of the internet. For decades it existed but was accessible only to the military and academia. When public funding had advanced the technology enough, it was transitioned to the private sector and innovation took off. Right now private space companies are focused on satellite-based services, research support, and tourism, i.e., nothing amazingly mind-blowing like colonizing the moon. However, there are some really exciting projects (we’ll come back to this) that suggest innovation is about to accelerate exponentially - so the distant future may be closer than you think.

SpaceX’s 2008 Falcon 1 Launch

2. Starlink:

The last section mentioned satellite-based services as an early opportunity for private space. SpaceX’s Starlink is a great example. Starlink is a constellation of tens of thousands of satellites. These satellites communicate with terrestrial equipment to provide internet coverage. The advantage of a system like Starlink is that it can reach remote parts of the Earth with great reliability. Normal internet requires physical fiber-optic cables, which are difficult to build & maintain if you are, say, drilling for oil off the Alaskan North Shore or fighting a war (why you may have heard of Ukraine using Starlink over the last year). However, over 99% of the world’s internet still goes through fiber cables. Satellites are not a viable replacement for all that traffic. Even SpaceX admits that the goal of Starlink is to provide funds for cooler long-term projects. Satellite internet is a marginal innovation, not a disruptive one. That’s what I meant earlier when I said the current services being offered by private space companies aren’t that exciting. When we think of deep-space we think of interplanetary travel and aliens that evolved with lava lamps for heads. We don’t think of better Pornhub connections for people camping in the Adirondacks. But don’t worry, the cool stuff is coming next!

3. Reusable Rockets (Falcon 9 & Falcon Heavy):

This is a SpaceX rocket launching into space and then landing in one piece. 

Out of all the cool stuff SpaceX has done, this might be the coolest. It’s such a tricky engineering problem that in the 8 years since SpaceX first did it, no one else has figured it out on a consistent basis, despite tens of billions of dollars thrown at the problem. It's like in the 90s when the whole world went and bought yo-yos but only like 8 people actually figured out how to get them to come back up. From an economic angle this means SpaceX can sell space cargo for less than anyone, which is why SpaceX will deliver ~80% of the mass sent into space this year. SpaceX is bringing down the cost of entry for stellar activities. Hang on to that thought…

4. Starship

Starship is basically a really big spaceship that SpaceX built. So far, all it's done is blowup. The idea, though, is that bigger ships will be more cost-effective. A Greyhound bus ticket is cheaper than an Uber because a bus spreads the costs out. Same with Starship - assuming it doesn’t blow up. 

Far out but not far away

Today SpaceX charges $67 million for a Falcon 9 launch, or about $3,000 per kilogram. SpaceX has argued that as rockets become reusable and bigger, that cost per kilogram can come down to as little as $30, or reduction by a factor of 100. This seems like a lot, but it’s feasible: if you can reuse a rocket 10 times then the average cost could be 10 times cheaper. And if you can make a ship ten times bigger, then the average cost per kilogram can be ten times cheaper. Those improvements would be multiplicative, and therefore the total cost efficiency improvement would be about 100x. What happens if the cost to travel to space comes down by a factor of 100? It’s hard to say. But we can look at other similar breakthroughs and see what happened. In the fifty or so years after the lightbulb was invented, the cost of light came down by roughly a factor of 100:

Obviously homes, businesses, and streets got cheaper lights during this period. What else? Well, cheap lighting was a reason for people to build electricity in their homes. Once electricity was in the home, a wave of products (toasters, vacuums, dishwashers, etc) became more popular. Then there’s nightlife, which didn’t exist (as we know it) prior to the 19th century - how would restaurants or theater’s operate after dark? Similarly, shopping changed radically because cheap lighting meant you could go to big giant malls and department stores. Really, the second-order effects of cheaper lighting are infinite. Could Henry Ford run his Model T production process without cheap light? Does the Manhattan Project happen if scientists can’t work through the night under halogen lamps? 

Simply put, when the cost of foundational need, like energy or transport, comes down by a factor of 100, the world permanently changes. This is the case with light and other great disruptions: the Gutenberg Bible brought the cost of print down, the internet brought the cost of communication down, containerization brought the cost of sea-freight down, all by a factor of >100. In each case, the disruption was massive and the waves of innovation that followed were unpredictable. When the Gutenberg Bible was invented nobody thought “Oh shit, we’re definitely gonna have a Reformation” and when the automobile was invented nobody thought “Great, our cities can fund themselves on parking tickets.” It did happen though. 

The most apt comparison this time around might be the 15th century, when the invention of the caravel, modern cartography/sailing, and the magnetic compass conspired to connect Europe and America. In 1492 Columbus and his benefactors were thinking of a trade route to India. Nobody considered that corn and potatoes, indigenous to the Americas, could be brought back as staple crops and help fuel massive population growth. They didn’t consider the mass inflow of raw materials that partially triggered the industrial revolution. They certainly didn’t consider Benjamin Franklin descending from colonists and flying a kite in a storm. They couldn’t have imagined any of this because they didn’t know what they didn’t know. And today we don’t know what we don’t know about space. That’s why the world is right now at the cusp of another Gutenberg moment. The cost of space transport is about to drop by a factor of 100x. Consider how many projects NASA scientists have pitched in the last 50 years that were rejected because they just weren’t economically feasible. Space stations, experiments, planetary colonies, Magic School Bus field trips, zero-gravity theme parks, wormholes filled with literal worms (that’s my idea, don't steal it). This is why SpaceX is worth paying attention to. They are, right now, the leader of an industry getting close to a new space age. When exactly this happens I have no idea. Maybe in 3 months or maybe over the span of 50 years like it did with light. But it is happening, and it’s going to unlock innovation that, right now, we can’t even dream of. 

This article has been written by someone who knows next to nothing about the space industry or engineering or space. In fact I don’t really get gravity. Here’s two cool blogs of people who write about space, understand it, and haven’t had their minds warped by business school strategy lectures:

https://www.planet4589.org/space/jsr/latest.html

https://caseyhandmer.wordpress.com/

Here’s a really insightful podcast on the new space age: