← Invest Like the Best with Patrick O'Shaughnessy![John Arnold - China, Energy Markets and Fixing America's Systems - [Invest Like the Best, EP.461] — Invest Like the Best with Patrick O'Shaughnessy cover](https://megaphone.imgix.net/podcasts/8d466670-1755-11f1-baf2-dfb3d97a3978/image/4ec9ac82b5c7a937e9e90aa69d037805.jpg?ixlib=rails-4.3.1&max-w=3000&max-h=3000&fit=crop&auto=format,compress)
Invest Like the Best with Patrick O'Shaughnessy
John Arnold - China, Energy Markets and Fixing America's Systems - [Invest Like the Best, EP.461]
01:15:49
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- [00:00]
A
Most software companies try to maximize your time on their app to juice engagement. Ramp does the exact opposite. Ramp understands that no one wants to spend hours chasing receipts, reviewing expense reports and checking for policy violations. So they built their tools to give that time back, using AI to automate 85% of expense reviews with 99% accuracy. And since Ramp saves companies 5%, it's no wonder that Shopify runs on Ramp, Stripe runs on Ramp, and my business does too. To see what happens when you eliminate the busy work, check out ramp.com invest Every investor should know about Rogo, because Rogo AI's platform is not just another generic chatbot. Instead, it was designed to support how Wall street bankers and investors actually work, from sourcing diligence and modeling to turning analysis into deliverables. For me, three key things differentiate Rogo first, it connects directly to your system so it can work with your actual data. Second, it understands your workflows, how work really happens across a deal or an investment. And third, it runs end to end and produces real outputs the way the best people do auditable spreadsheets, investment memos, diligence materials, and slide decks that match your standards. This all comes from the fact that Rogo is built by finance professionals for finance professionals, and it's already being adopted by some of the most demanding institutions in the world. To learn more, visit rogo AI/invest, OpenAI cursor, anthropic, perplexity and Vercel all have something in common. They all use Work os and here's why. To achieve enterprise adoption at scale, you have to deliver on core capabilities like sso, scim, RBAC and audit logs. That's where Work OS comes in. Instead of spending months building these mission critical capabilities yourself, you can just use Work OS APIs to gain all of them on day zero. That's why so many of the top AI teams you hear about already run on WorkOS. Work OS is the fastest way to become enterprise ready and stay focused on what matters most, your product. Visit workos.com to get started. Hello and welcome everyone. I'm Patrick O' Shaughnessy and this is Invest. Like the Best, this show is an open ended exploration of markets, ideas, stories and strategies. Strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus, our quarterly publication with in depth profiles of the people shaping business and investing. You can find Colossus along with all of our podcasts@colossus.com Patrick O' Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit Psum VC My guest today is John Arnold. John is probably the most famous energy trader of all time, and certainly the most successful. One of the things John says was that he wanted to cultivate and build the best sellers seat in his industry. The seat with the best perspective, with the most information, with the best systems. What's most interesting about John is after being the most successful energy trader of all time, you could argue that he's gone on to be the most innovative philanthropist as well. John has applied this idea of philanthropy to all different sectors and what's so exciting about this conversation is it feels like you're talking to a talented entrepreneur or a talented operator in all of these different fields who's willing to share exactly what him and his team have learned about what makes certain problems manifest across our country. He has an incredible perspective, not just on the things he's worked on, but on his travels, on companies, on technology. This conversation is a reminder to me that cultivating the seat is such a powerful concept that we probably underinvest in. Please enjoy this wide ranging discussion with John Arnold. Everyone listening I think is somewhat interested in what's going on in China. Your lessons that you shared were so interesting and I'd love you to just share some of the highlights from that trip and what you learned traipsing around studying robotics, studying AI, everything else that you did. What were your major takeaways from that trip?
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The origination for the trip was this realization that China has gone through this transformation unlike any other that's happened in the world, both economic and cultural. In the course of 30 years, this is a country that has gone from trying to replicate the west to in many ways leapfrogging it. I was fortunate enough to spend a week running around and met with four or five companies a day that were all very open and got to tour factories. It was really striking and came away incredibly impressed and also with a lot of questions about what happens to the rest of the world as this rise of China is happening. The one big takeaway was just the speed and scale of which they can do things is unlike anything in the world. This highly educated population, it's a very entrepreneurial culture. They've figured out how to get capital to these companies. And they have this deep domestic market. And so it allows them to build up these supply chains and aglamation effects to create something that I don't think exists in the rest of the world, where we're talking to a battery company and asking them, are they looking at replicating factories elsewhere in the world? And one of their responses was, every one of my suppliers is within 200 miles of here, and I can call them and meet with them same day. And you can never get that. The scale of labor that they have and the flexibility. If you need a thousand workers tomorrow, you can get that. It is a skilled workforce that's still very hungry that's coming oftentimes from poverty. And so having this factory job, which in the west might not look very appealing for many people in China, it is highly appealing, just the first step up. So this combination of things has allowed them to create this competitive force that the world is suddenly reckoning with over the past decade. It's really interesting to think about what's the right response from Western countries that don't want to cede their markets to China, for obvious reasons, but there's a lot that China can offer. So what's the right symbiotic relationship that the west should be having with China? I think is this massive question that policymakers are grappling with. And I wanted to try to dig
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into which company visit was the most illustrative of these big lessons. What was the company visit that looking back on the trip, taught you the most?
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I've been fascinated with the EV market in China, which about 10 years ago was deemed to be a strategic market. And the way that the story is told is that China realized that they were behind on ice cars, and we're always going to be playing catch up. And that if they could leapfrog to the next technology, then they could have an advantage on the rest of the world. And so right now, there's apparently over a hundred different manufacturers of EVs in China. Now, many of these have a contract manufacturer, and so you can send in your design and do your branding independently of the manufacturing. But there's many manufacturers there who actually have their own plants. And we went to this one for Nio, which is kind of the upscale Chinese car in the $40 to $80,000 range, although they've recently released one that's below $10,000. Going to their factory and seeing, number one, how quickly that factory is built. So they went from first shovel in the ground to the first car coming off the line in 17 months, which was just phenomenal. And then second, the factory automation that they had. And there were certainly people on the assembly line, but much of the process was done via robotics. You start looking at what are the auto plants we have in the United States. We still have a plant that was originally built 100 years ago operating outside of Chicago. We had an average age of US plant. A little hard to get, but roughly 40 years now. They've been upgraded over time and there are certainly robotic and American car manufacturing, but I don't think they replicate what's happening with robotics in China. And so they have this combination of being able to do things really quickly with a skilled but low cost labor force. And then add on the robotics has just allowed China to create a quality product at a price that nobody in the rest of the world's really been able to figure out yet.
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A
Do you know anything about robotics or AI that surprised you?
- [08:46]
B
The number of robotics companies. There's over a hundred now in China. As I understand the process, each five year plan, China specifies certain industries that are deemed strategic. And then the head of the province gets evaluated on a number of factors. Head of the province is selected and not voted on. And so the evaluation is based on things like employment and GDP growth. But then also are the industries that are being created there aligned with the five year plan. There are also some subsidies coming down from top on those favored industries. And so robotics is certainly one of them. So then each province takes a couple companies that it favors and gives them subsidies and supports to try to get the winner or one of the winners to be in their province and then get the supply chain to develop around them and then all the associated jobs in gdp. So you get this massive competition that happens. One of the end results is that most of these companies aren't very profitable today because it's just intense competition and a lot of times over capacity because of the province level subsidies and supports. But it also creates this intense competition, which is the term evolution for it also creates better technology. If you're faced with that type of competition, to be one of the winners you have to be fantastic. Now I think the question that China has is what do you do with those who are not the winners? And do you have a process where the losers stay in the industry and keep everybody unprofitable with the overcapacity or they closed. So China has started this new process of anti involution, of trying to support the winners, make sure that they can build up to be healthy, strong companies and be global competitors and not just brought down by this overcapacity in the domestic market.
- [10:54]
A
Obviously there's tons of understanding about what the state of China wants and is trying to accomplish. But if you add up all your conversations with all the people that you met across the week, how would you sum up what the people that you met and interacted with wanted and what was their attitude towards us? It seems increasingly adversarial from our direction to them skeptical, worried about it, et cetera. But just adding up your conversation, what was your felt sense of what the people wanted and were trying to accomplish and felt about the US I was
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struck by just how much the two countries have separated since 2019. The number of flights between the two countries is down 70%. I talked to a couple expats in Shanghai who said that the number of Western expats was down 50 to 75%. The number of American students studying there was down 90%. And I started to push on this a little bit about what was happening. Part of it was when China was starting to develop and trying to copy the West. One of the ways to do that was to bring over Western expats, teach it Western business practices and all the aspects about how to run businesses and capital formation and allocation those roles. Those learnings have now been domesticated. So instead of firms paying multiples of the cost to bring over a Western professional to do it, those learnings are now domestic, domestic, it's cheaper and they have those skills and so they don't need the west anymore. And that was one of the big senses I got is this confidence that's building there of we used to try to just copy the West. Now world leaders and many of these things. We don't need the west coming to teach us things, we're going to teach the West.
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A
I'd love to rewind the clock a little bit. I mostly talk to investors on the show. I rarely have talked to some of the world's great traders through history. At a point in your career, you were probably the greatest actor, trader or one of them, certainly the best in your market. I'd love you to describe what it takes to be truly excellent at that specific discipline. If you think back on the time, I'm curious when you think it was that you were at the peak of your powers. I'd love you to just take us behind the scenes a little bit of what it took for you personally to get to that stage. Since I talked to so much fewer of people that have done this, I
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might step back and think about my kids and what I want my kids to do. One of the big components is do something that you're really passionate about, that you want to do that. It's not a job that you do for income, but if you can have a profession that you love, that you have this real deep passion for. And that's what I found with trading. I just loved the battle, the puzzle, the game of it. I would sit there from six in the morning to six at night at the desk and you're either staring at the computer screen or doing some analysis and then go out with people from the industry that night and then dream about the industry in the shower. In the morning, I'd be thinking about it and just being so locked in there were negatives associated with it. Not sure I was a great person, a great friend, a great partner for those times. But I think just dedicating your life to this craft for a time period was one of the things that I think separated me. I think there's also some downside, there's consequences to doing so. It's not the healthiest lifestyle. It's not healthy from a relationship standpoint, not healthy from a physical standpoint. And I think it can be mentally exhausting. After doing that for 17 years, this one thing, and being so deeply intertwined with it, at some point I just had to step back.
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A
If you think about the second or third best natural gas trader that was active when you were active, I'm so curious about the difference between you and them. Another way of asking if you turn it into advice for your kids, which I like that frame on it. What does it take to be number one in something versus number two and three?
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I don't know if I thought I was the best. I felt I was among the best. I had also managed to create probably the best seat in the industry.
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A
Say more about that.
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B
So my first job out of college was at Enron. I started there when I was 21 years old in 1995. It went bankrupt in late 2001. So then I'm coming out and I'm trying to figure out what to do and I've had a bunch of options. One is I could have stayed with the Enron trading floor, which ended up getting moved to ubs. I decided I wanted to do something that was a little bit more entrepreneurial and ended up deciding to start my own hedge fund. I had the classic hedge fund two and 20 structure. There wasn't an intermediary between me and the 20%. Right. I was getting the 20%. So I had the best or as good economics as almost anybody in the business. And then we had very good financial returns early on. So that did two things. Number one, there was a lot of retained earnings and new investors came in and so we had a lot of risk capital. And second was we had a very good investor base that trusted the team I had built. Whenever we had a down month or a downtime period, which we had, they weren't calling to redeem, but they would call up and say, do you need more capital? Because we had earned their trust and we had done forced distributions along the way. So I'd set up this really powerful seat where had good economics so I could hire the best people in the business that I knew of. We had a lot of risk capital and had a very solid and stable investor base.
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A
I like this concept of developing the best seat in your industry. Are there any other interesting or useful components to that? If someone is listening and they're an investor or even just a normal founder business person about setting up the best structural advantage in a seat? Is it information flow? Is it other stuff? I love this concept.
- [17:12]
B
We started at 2 and 20, we did very well and had more demand to invest than we had capacity. We raised the fees over time and ended up at 3 and 35 by the end. And that allows investment in the business. So you can build up a fundamentals team that's best in the business because you can just pay them more. You can go do side projects like trying to get proprietary data sources that give an advantage and you can pay the trading team and the mid and back office more money. And so everything in the business starts to work and you have the sense of excellence around the firm that makes everybody better. We're able to develop a proprietary trade entry system and position management system. So things that you don't necessarily think about but are extraordinarily useful. Being able to buy any and all data, come up with proprietary data sources, have the best people trying to translate that raw data into something useful and build the best fundamental models in the business. I think all becomes part of the flywheel.
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So really scale, it's the redeployment of your scale that let you get into all these fine grain ways that you could be better than your competitors.
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Yep, I think that's right.
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A
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B
So I was always entrepreneurial. I always wanted to make a dollar as a 13, 14, 15 year old kid, have limited options and didn't really want to work retail because you weren't going to make very much money doing that. I was in high school in the late 80s, early 90s and this baseball card boom was happening and I remember even in middle school first getting started introduced into baseball cards. It was when it was really starting to take off around 87 it became clear to me that I guess in retrospect that this is this really interesting financial instrument that's very volatile, that information on pricing is not very uniform across the market, that there was a lot of geographic price differences that were happening. I managed to talk myself onto this bulletin board of baseball card dealers back in the late 80s and you had to get some references and I'm like 14, 15 years old and I somehow finagle myself to be on this bulletin board which is when Internet commerce is just getting going and they just had this wholesale system that was kind of real time pricing. In effect you'd have people in New York were trying to buy hockey cards and people in Texas were trying to sell their hockey cards because there wasn't much demand for them. And there was these arbitrage opportunities that got created. And I'm like, I know this from this bulletin board. People in Montreal or New York or Buffalo are willing to pay X and I can buy these at why? And makes that money. And so he started doing that. The sports card business started to boom. And so there was more and more money coming into it, more and more cards. A lot of the dealers in and around Texas weren't caught up on day to day, week to week price changes. Oftentimes they had cards that were more valuable on the west coast or east coast or in the North. So I would just run around every weekend to a bunch of card shows. I was living in Dallas at the time, but would travel to Houston in Louisiana, Oklahoma. Started getting on planes when I was 16 and going to big card shows around the nation. And I just always had this sense of value of what something was worth at the time. Turns out there were a lot of similarities between doing that and trading. I was in a way doing market making than sports cards. And I was taking advantage of arbitrage opportunities and sports cards. Knowing what every product is worth at every moment stuck with me. And that was my mantra when I was trading gas, is that I knew what every month was worth better than I think anybody else did. And I would do that. And I knew that every moment of the day to do that and just sitting there and just staring at the screen and listening to every trade that happens in the market all day long, every day. It takes that work and intensity.
- [23:03]
A
Can you describe the actual instruments that you were trading when you were trying to put positions on and take them off? What were those positions? What were they in on average? And I want to get into some of the nitty gritty details just to give people a sense of how far you had to go to get an edge in this world. As an analogy for how far you have to go to get an edge in anything, this was the thing you enjoyed. And I want to come back to why you were so passionate about it in the first place. But what were you literally trading in those days?
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It was primarily futures and swaps that were lookalike to the future. I traded natural gas. The hub for natural gas trading was Henry Hub in Louisiana. And then there would be price differentials between what gas was worth in Louisiana versus gas in Pennsylvania or in West Texas or Colorado, for instance. That's basis. I did that for a small part of my career. Those price differentials between one point and the hub in Louisiana. But most of my career in trading was trading what we call the fixed price of natural gas. And so this is if you're watching CNBC and on the ticker it has a gas price. That's what I was trading.
- [24:14]
A
So in a given day, how much volume and activity would there be? How many key decisions would you make in a given day?
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So it changed over time. I was for a long time the largest market maker in the business, which I did both because I was profitable as well as maybe more importantly, it allowed ability to put on and off positions with lower slippage and with fewer people knowing what my position was. And then also gave me insight into who was doing what in the market. And so I could start to build the psychology of the market. I could see certain traders positioning certain ways and try to reverse engineer what their thinking was, which helped me in trying to figure out how I wanted to be positioned.
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A
Maybe for those that are less initiated in the act of market making, just describe what it does, how you're provisioning liquidity for the market, also why you were able to cover some of your tracks by being that player in the market.
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B
So a healthy financial market exists for a reason. And that reason is that there are commercial players, in this case producers or end users who have exposure to the commodity that are willing to pay something to have somebody else reduce their risk to the commodity price. And they will pay something to the market for that risk management. And if that exists. So if you think about a producer of natural gas whose revenue is almost entirely based upon what the price of natural gas is for a given month or even day by day, there is these huge boom busts that can happen because commodities are naturally have this boom bust cycle. And so businesses than if you're exposed just to the spot price or today's price, those businesses also go through a boom bust cycle. And so many businesses will choose to hedge out or fix some of their forward revenue and reduce their exposure to short term swings in the market. So that's the demand for hedging. And if there's demand, there has to be a supply. There has to be somebody who's willing to take the other side of that trade. Somebody has to warehouse that risk, price the risk and manage the risk in aggregate. That's what the traders as a whole have to do. And then there's also speculators that come in. The people who are warehousing that risk often have to price that risk. And so they become experts in the pricing and how to hedge it. So there's often speculation that happens on top of that as well as there can be speculators who are not actively market making, but just have a view on natural gas or oil or gold or anything and come in and want to put on a position. And again, they need liquidity and so somebody gets paid to provide that liquidity.
- [27:11]
A
It strikes me as someone that looks at a lot of young companies that it is exciting, energy is exciting. Again, maybe it's just because of data centers and AI and the new demand that's coming on stream for power. Does it feel that way to you? I mean, I know you've looked at tons of companies. I'm sure you're incredibly on top of energy markets today. Do you feel like it's a good time, if you're interested in this field like you were to go into it relative to 10 years ago when it seemed a little bit quieter?
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I think it's more on the asset side today. But I think there's enormous amount of innovation that's happening in energy assets. So whether that is on new technologies like in batteries or geothermal or advanced nuclear, I think also all the data center development and the amount of money and capital that's in those fields and so the need for innovation that if you can make things even a little bit more efficient, there's enormous value that's created that a new company or a new individual can take advantage of. And one of the characteristics of the energy industry broadly is that it is enormous. So if you can have a little edge in niche of the energy industry, there can be tremendous gains to be had. Certainly this mad scramble to build data centers and to power those data centers is creating enormous opportunities for new entrants to the market.
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A
If you were describing the industry today to someone that knew nothing about how the US energy system works, what would be the high level way that you would approach that problem of explaining it to somebody new? Here's the state of things today.
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Maybe stepping back about what are the goals of the energy system? I think about systems a lot these days and what the incentives are, what the rules are, what the goals of a system are. In energy, you can think about having a product that's affordable to the consumer, that's reliable, that whenever you want it, you can access it. And you can think about times, whether gas lines in the 1970s or blackouts, when reliability hasn't been there, having reduced emissions, a cleaner system, and then energy security. And then maybe fifth, I'd say that it creates good jobs for whatever country or whatever locale you're in. And then if you have lows as goals, then how do you meet those? You were saying America's blessed with tremendous energy resources, has a lot of oil, gas, coal, has a lot of wind and solar resource. We're a very innovative country, ability to deploy solar and wind, and thinking about both traditional nuclear as well as advanced nuclear. So we have all these inputs and we're trying to get to the system that meets those goals. And then the challenge is and how do you devise policy and rules of the system to do so? It gets tricky because the priority or the ranking of those goals changes from administration to administration. And it's an industry that is slow, it takes a long time to build the infrastructure and you need stable supply chains in order to be able to meet the needs. And you have these changing goals of it. And so the industry gets sent every four or eight years a different set of priorities or price signals about what we want as a society. And then the industry has to scramble and then you throw data centers in here, which is just a load growth and being less concerned about price and more concerned about speed than any consumer of energy that we've seen in this country maybe ever. Put it all in the mixing bowl and try to get a system that works.
- [31:14]
A
If you could imagine a US energy future, I'd love to paint the poles and have you imagine the best possible scenario you can imagine for us 10 years from now, and what the components of that system would be that are different than how it is today, and maybe the worst possible version of the system that you could imagine in 10 years just to get a sense of having studied the system so carefully. I love your way of thinking about the competing goals and this weird data center variable as well. Well, let's start bad. What would be the worst scenario that you can imagine that would get you concerned about the state of the US energy system in 10 years time?
- [31:47]
B
The worst scenario is that the energy system becomes the bottleneck for both of us Innovation as well as individual flourishing in this country. On US innovation, especially on technology and AI data centers, it's largely around can we build, can we create the supply that industry is demanding? And on individual flourishment, it's can we do so and maintain the affordability and reliability components that Americans have come to not only desire, but demand. And there's this politics around energy and food and housing because we need all of Lowe's. Those aren't optional for people. But there's politics around it that if you start to Lose affordability of any of those, then there is real tremendous political ramifications of it. And so you can start to see if an energy system goes bad will have a huge impact on politics of this country.
- [32:53]
A
If you think about that bad case scenario, both supply and demand wise. I'm curious, starting with demand, how certain you feel that this big increase in demand for really the first time in decades in the US how lasting it feels to you, does it feel pretty certain that we're just going to get a ton more data centers almost no matter what or demand for them anyway? And then on the supply side, what the reasons would be that we just failed to meet that demand, why we would stumble and not succeed.
- [33:22]
B
Visibility through kind of 2030 feels pretty clear. The investments are being made. The actors that are making these investments are the largest, most profitable companies that have ever existed on this planet. Many of them are growing at very healthy clips and so their free cash flow is increasing. They have the financial capability to execute on these plans and they're making the investments today. I think the 2000 and 30s on is who knows the assumptions that you have to go into any model on this, have such wide air bars and you extrapolate out that many years and you just create a garbage in, garbage out model.
- [34:08]
A
And what about our ability to meet that demand? What would screw us up on the supply side the most?
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B
I think it's policy. It's gotten harder and harder to build in this country over the years and there's always this tension between what the needs of society are and what the preferences of a local community are. So everybody realizes we need transportation and housing and energy. People also want it not in their neighborhood. This is a whole NIMBY movement is we need affordable housing, workforce housing, we need transportation, we need energy assets, but don't put them by me. And if you try to, I'm going to go fight you in the courts. For developers, time is money. The opponents to projects have gotten very clever about how to use the existing regulatory laws to delay and delay projects and in doing so can often kill them. I've been very focused through our foundation at how do you do permitting reform to make sure that the projects that are good for society aren't unnecessarily painful to any community will get built while maintaining the parameters that the bad projects don't get built. This NIMBYism and this difficulty in building is what would lead to the problem of not being able to supply or energy becoming the choke point for development of the United States and particularly Bringing it back to the first part of the conversation of China and just the speed and scale that they can build, they don't have this problem. I'm confident of that. It is one of the biggest differences between the two countries I really worry about. If energy becomes a choke point in the us it has real ramifications for strategic ranking of this country.
- [36:05]
A
If you were a politician, would you use the China story as fuel to the fire to try to communicate and market this concept that we're sort of getting lapped by someone that's our, if not adversary, our competitor, 100%.
- [36:20]
B
Not only is it a good narrative, but it's true. If energy becomes the constraint, we will become less competitive vis a vis China.
- [36:29]
A
You mentioned the asset side being so exciting on the energy side. If I was a energy asset investor and I really wanted to fund stuff that would help us solve this problem where you got the joint growth in demand and this rise of NIMBYism, where does this whole thing break down? Is it in transmission? Is that the problem? Because presumably if we could just produce lots of energy in remote places that nobody lived or cared and transported efficiently, the problem would be solved. Is that the right way to think about it? You think about it differently. I want to get towards the best version of things you could imagine in 5, 10 years time that would solve this problem and make us energy abundant and not slow.
- [37:06]
B
Transmission is certainly a component of it. It's not the only component. You can talk about supply chains, can talk about land use, but transmission is a huge component of it. I actually started a company about five years ago trying to build interregional transmission lines because it was an industry that had become so difficult to permit and build that private capital had largely given up trying to do new projects. And it's one of the solutions that can be a win, win, win for everybody. We weren't talking about the goals of the system, right? It can reduce costs, it can increase reliability, it can reduce emissions, it can make the country more secure, it can create more jobs. But yet it had gotten so hard to build these lines. It is still very hard to build these lines that most of the developers who had gotten started with projects in the 2000s gave up. They started things thinking these were going to be five year projects and they were 10 plus years in and many of them hadn't broken ground yet. Again, this is part of the challenge of America. It just takes so long. And part of this is there's nothing one entity that can just say, okay, do it. There are multiple veto Points along the way. And you have to convince a lot of different actors of this project. I talk to a lot of federal politicians on both sides of the aisle. One of the things I hear from almost all of them is this need to figure out how to permit and build faster and more efficiently in the United States. So there's very broad agreement at the top level, but you can get disagreements about the details about how to go about that. I remain reasonably optimistic that we can get federal permitting reform done this year. It'll be the only bipartisan legislation that happens besides maybe a budget. But there is this will that I sense that is unlike any other issue in D.C. right now. Is that there is this realization that. But this can set the country back. And people would look at it for different reasons. Again, people have prioritized those goals in different ways. So how can you do a bill that helps all of those goals? And that's what we're shooting for.
- [39:29]
A
What do you think about nuclear? Both new forms of fission, but also the panacea potential of fusion.
- [39:36]
B
Promising, but very, very difficult. The innovation hasn't been proven. We can build the AP1000. The AP1000 is the latest of the traditional nuclear power plant. We know it's a very, very costly electron. It was the last nuclear plant to be built in the United States, Finished, I think, in 2024. Vogel units, 3 and 4 AP1000. And have a very advanced safety design for a nuclear power plant. The Vogel plants were enormously expensive. And if anything, they've gotten harder to build since then because they require a very significant amount of labor in generally rural parts of this country. At its peak, Vogel had 9,000 laborers on site, many of which were highly skilled craftsmen. And trying to do that today in the United States is very difficult. But we've proven we can build that. We know it's kind of a high cost. And so there's a lot of effort to do advanced nuclear. And that's either the SMR small modular reactor, that's fission, or through fusion. I think the question is we don't know what the economics of either of those are. Or one, we don't know whether we can build a commercial fusion unit. There's a lot of optimism in the industry. Remains to be seen whether we can get there or not. The greater question is what are the all in economics of that? And that's a big unknown, because at the end of the day, you're competing in a commodity market. And we've seen that. We're willing to pay a little bit more for a cleaner electron, but we're not willing to pay a lot more for a cleaner electron, so it has to be cost competitive. Optimally, it is. The cheapest electron is one that minimizes emissions. So I think that's the promise of nuclear. But these aren't coming anytime soon even. There are some pilot plants that are being drawn up today. They may or may not have started construction on some of this. I think most of these announcements are for the pr. By the end of this decade I think we'll have taken some small steps there, but we're probably looking 10, 15 years to really have advanced nuclear be at any scale in the United States. And that's best case.
- [42:05]
A
What do you think about the basket of startups that have been launched and raised in some cases a lot of money, about the prospects of good returns for those dollars that are going into these companies and projects either today or the historical dollars that have gone in in the last five years?
- [42:22]
B
It surprised me in some ways. I thought that some of these technologies were almost uninvestable from the VC side because it's such a long duration to get to free cash flow business. I'm surprised at how much money. I think it's fantastic. This has to be a public private partnership where the government is putting in real capital into these, because I don't think they make sense as a standalone investment without public support. The timeframe to commercial deployment, the amount of money that has to be raised for it, the fact that you don't really know early on whether you're making progress or not. There's a bunch of benchmarks to be overcome, but until you actually build one, you don't really know what your economics are going to be, what your efficiency of the unit's going to be. I worry that there's going to be a falling out in the industry. There's probably too many SMR companies and it would be better if the industry can coalesce around three or four different technologies and focus the resources there.
- [43:36]
A
It's a scary circumstance to imagine as an investor when funding dries up and free cash flow is still over the horizon, not even within the visible horizon. I'm curious if there are other areas that you think that's less true, like solar and battery. Seems like a really interesting way of solving some of the problems in the energy markets. The cost curves for both look really cool and interesting. I'm curious what you've learned about those two and just generally what you think about that style of energy generation and storage.
- [44:04]
B
Solar has two Trends. One is technology and manufacturing costs keep going down. Technology is improving, manufacturing costs are going down. So the end product of a solar panel, mostly in China, keeps getting cheaper, mostly in China. And so the cost to develop a solar panel keeps falling. Now, a solar panel doesn't get you what you want. You want electrons at the location that load is at. And so there's a lot of steps to go from a solar panel to electrons in the right location. Some of those are inflationary. The panel itself is deflationary. But it requires land, it requires labor, it requires access to transmission, it requires access to capital. And the cost of capital, which was falling for a long time and has now been increasing over the past five years. People love to talk about the cost of a solar panel. And usually whenever you see these graphs, it's what's the cost of the panel? And it's just kind of from top left to bottom right. Meanwhile, the cost of a ppa, a power purchase agreement for solar, is well off the lows. Lows happened around 2020. The cost again of delivered electrons from Solar is probably 50% plus more expensive than they were at the cheapest point in 2020. And it's because the panel itself again becomes a smaller and smaller percentage of the total cost of the system. Any advantage, continued technological improvements or manufacturing improvements are just getting at a smaller and smaller percentage of the total cost. And meanwhile, the inflationary aspects of the system become a bigger and bigger percentage of total cost. Now, that being said, there's a lot of ideas about how to bring load closer to where the solar is being generated. And can you use some type of automation, factory automation, or robotics to build the plant better, the solar field better in a cheaper way that requires less labor? And so there are advancements being done. It's good to see that a lot of the data centers that the developers or the end users are signing new PPAs with solar developers. And so we've seen a tremendous amount of solar come onto the system. I think it's also true that but generally, in a stable demand environment, each megawatt of solar that comes on is worth a little bit less. The most valuable solar that came on was the first megawatt. And then you get to a point where the supply of solar has exhausted the demand during the sunny parts of the day in a certain region. And so as you bring on more solar, either you have to also bring on batteries, or you have to bring on transmission to move it to a different place. And so that has a cost. Battery costs have been declining as well. I wonder if some of the same dynamics that happen with solar will start happening with batteries. Soon as the technology is getting better, the manufacturing gets optimized, you start running out of the advancements that have significant cost ramifications for the battery system. It becomes more and more on what the input costs are. And so we've seen lithium prices, for instance, just in the past few months be up more than 50% and that's going to translate into higher battery costs. All things being equal, it's fascinating that
- [47:39]
A
it all goes back to the same problem of labor. Can we build these things? Can we build them quickly? Permits a lot of our attention as a country, maybe should just be there. We could take for granted these falling cost curves, which are great, but it's great but not sufficient to have the end system that we want. If I was forcing you to invest in something related to the proliferation of data centers today, I'm curious how you would attack that problem. There's so much excitement around these things. Lots of companies that are predicated on the rise of data centers and the build out of data centers. What would it take for you to get excited about investing in something that was tied to that trend?
- [48:18]
B
Yeah, there's a number of companies that are trying to make the build out of the data center a less labor intensive through robotics. That's an interesting source. It could be a very crowded space though. So it remains to be seen how good an investment that robotics companies will be from an energy standpoint. I think advanced geothermal is one of the most interesting components of the system today. It is a baseload energy source that is friendly to the environment. It is coming down the cost curve. It's still very early in this industry. So still it's unclear what costs are going to look like in a few years. But there is the skilled labor force that exists in this country already that comes largely from the oil and gas sector. The technology has now been proven out. There's a lot of work to do to scale this. It's early on in the Shell Gas or Shell Oil revolutions that it just starts out small because these companies have had to prove out the geology, have to prove out the techniques, have to prove out the management team and you have to get to the project finance market in order to get a very low cost of capital to make these things really work. So it takes time to get from startup of the industry and even getting all these steps proven to getting to where banks are willing to loan you money because they know it's going to work and they know that it will get repaid. But I can see in five years that the geothermal industry could be the most exciting in the United States.
- [49:58]
A
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- [51:07]
B
The housing discussions that are happening across the nation are really fascinating. And a lot of the yimbyism or yes in my backyard as A combatant to NIMBYism originated in California, largely because California had some of the highest housing costs and the fastest growing housing costs and some of the most stringent restrictions on trying to build new housing and had gotten so bad that there started to be this pushback against all of that. And what you've seen is similar to permitting reform. This has become a very bipartisan issue of make it easier to build housing. And we see it from not only California, but you see it in Montana, you see it in places like Austin and in the Northeast. And so it has kind of superseded politics. I think politicians are now realizing that this affordability issue is front and center for voters and that's driving this renewed focus on costs of electricity, renewed focus on cost of groceries and on housing. People are asking, they're mayors, governors, federal government. What about housing? What are you doing to reduce the cost of housing and make it easier for people to buy that first house? And if you don't have a response as a politician you're just not going to win a race. These days, President Trump came out and made this comment about I want housing prices for those who have a house to go up. He also talks about making it more affordable to buy a house. And so you can't do both unless there's just a massive government subsidy. And I think that's one of the risks of this affordability push, is that it's been decades in the making from all these regulations, all these restrictions on building things in this country. There aren't easy solutions to overcome this besides just big subsidies, that the real solutions take time. And the problem is that that window is longer than the political cycle. And so if you're a politician and you're facing reelection every two or four years, you have to have an answer today about what am I doing that you can actually see during my term. One of the easiest thing to do there is if you have access to the budget, which federal politicians do, you just start subsidizing things, which makes the problem worse in the long term, but the electorate likes it in the short term.
- [53:43]
A
I'd love to apply your system thinking to some other areas that you've studied carefully and been really involved with with the foundation. But before we do that, maybe to have you describe your goal for the foundation overall. One of the things I've heard you say that's so interesting is that foundations should get less powerful over time. Individual foundations, that is. And as someone that's running a big one, that's an interesting thought. I'm curious why you think that. So, yeah, maybe before getting to some of the things that you focus on, just frame, why have a foundation if you just wanted to get weaker over time?
- [54:12]
B
Any institution gets less effective over time. I think it's true of companies, I think it's true of countries or governments. I think it's true of foundations. You have your best, most innovative times when you're still relatively young as any organization. So I'm very cognizant of some of the downsides of having perpetual foundations. One of the roles of a foundation is to take risks that the private sector and governments are, aren't incentivized to take. There might be political risks, it might be economic risks, because there's less accountability on foundations. They can provide that capital and resources to try things that others aren't willing to do, but those are risky. Oftentimes those will fail. And I think organizations become more bureaucratic, more risk averse over time, and so they're not able to do one of the Main functions of a foundation, there's this difference between charity and philanthropy. Charity is often designed to meet short term needs and philanthropy is more on trying to create long term solutions. We do both of those. We're mostly on the long term solution side, but we also give money to our local food bank, give money to help the local hospital. It's harder work. It requires having bigger staff, it requires having a longer timeframe and being willing to live with ambiguity and likelihood of failure on many of the things that we're doing. I talked about the easiest money to raise is a university that's going to build a new building because a donor has trust in that institution and they know that if I give a dollar that I can point at the brick that my dollar went to. And sometimes you even have your name on that brick and so you see directly where your money's going. A lot of the work that we do, which is based on trying to improve these big systems in America, whether that is the healthcare system or the criminal justice system, or infrastructure or public finance system education, it is long term work and progress is slow. But we really act as this conduit between researchers and policymakers and trying to do this experimentation and do evaluations and research about what works and what doesn't in these systems and help people think about new ideas and how would you test them and how can we translate into something that's useful for policymakers to improve the outcomes of these systems?
- [57:03]
A
What about criminal justice? Describe your work in that part of the world. What progress have you made? What progress do you think needs to be made to that system?
- [57:11]
B
We first got involved in this, we just started passively funding the Innocence Project. And the Innocence Project tries to go look at cases of people that have been convicted of a crime and do new DNA testing on some of the evidence and see whether that evidence that was used as part of the conviction actually points to them as the perpetrator of the crime or not. And the Innocence Project has been able to overturn many, many, many convictions. And there's a lot of very sad individual stories there. But I think most important from the Innocence Project is they're really looking at what was the process that led to this wrong conviction and how do we improve the system to lead to fewer incorrect prosecutions and convictions. And so they were using the individual to try to improve the system. With that entry, we started looking more and more into criminal justice system and we heard a lot of anecdotes about some of the inefficiencies or failures of the system. And so we took a step back and say, okay, where can we try to help in this system? And there was a lot of the criminal justice principles came from the great crime spike that happened in the 60s, 70s, 80s in this country, culminated with a bipartisan crime bill under Bill Clinton in the early 90s that was really about getting tough on crime and it was about increasing the penalty for if you're caught doing things. And meanwhile, the researchers have known for years that what's more important than the penalty if and when you're caught is probability you get.
- [58:53]
A
You're getting caught.
- [58:54]
B
Yeah, that a lot of people who are committing crime don't have the ability to process. If I get caught, will I have a five year sentence or a ten year sentence? And that's going to change my behavior. A lot of it more is am I going to get caught or not? And then there was lots of questions about things like how do you do pretrial detention this time between when you're arrested for a crime and this time when you're convicted in courts of a crime and what should happened to you in that timeframe. We got asked to come into New Jersey to help them think about that. And Kentucky Republican state was one of the first to really try to redesign the system when their existing system was deemed unconstitutional. And so thinking about what's important in that decision process and what many states have decided is what's important is are you a threat to others and what's the likelihood that you're going to come back for your trial and that should decide do you need to be detained before you're convicted of the crime or can you be released back into the community? Meanwhile, we have this cash bail system that's largely based upon do you have money to post to get out or not. We've worked with a number of states, both Republican and Democratic states over the years trying to think about how do you align the process with what the goals of society are. This criminal justice reform movement has had its ups and downs. We were one of the very few philanthropies that was looking at it when we got started close to 15 years ago, particularly on the adult side. And then it became a very popular movement. A lot of the people that were coming into it were coming in from a social justice and racial equity perspective. I think one of the things that distinguishes us is we always try to think about what are all the goals of the system. There's the goals of the criminal justice system first and foremost. You can never lose public safety on It. So any reform you do can't have a trade off of public safety. But social justice and racial equity are certainly goals in that system. We look at a lot of ideas about how to improve it and we try to figure out what are the trade offs that exist, try to quantify them to the extent that we can try to figure out are there trade offs? If you do one thing, it could improve social justice or racial equity, but there could be a trade off on costs or trade off of public safety.
- [61:20]
A
Do you think that the best place to improve things is just that subjective probability that you'll get caught using technology especially? Is that where we should invest the outsized amount of our time and attention? Because it seems all it takes is one case of some guy's probability is low, so you let him go and he commits another really bad violent crime or something and everyone freaks out and says, shut this down. It's like nuclear Three Mile island happens and then you get a nuclear forever. Does that mean that we should focus our attention on making people more scared that they'll get caught as the number one lever in this system?
- [61:53]
B
I think so. And that's the way you do that in a society where number one, there's not the public funds at the city level to really significantly increase the number of police. Second is that communities are hesitant to have a lot more police in their neighborhood. It's weird in that communities don't want to lose the police they have.
- [62:14]
A
Right.
- [62:14]
B
But you also ask them, they don't want a lot more police coming in and the status quo bias associated with it. And so kind of the question is if you don't have a lot more money and communities don't want a lot more officers just walking around, then what's the solution? And I think there's a lot of interesting technologies that are being developed and there's always this trade off about security versus surveillance or security versus privacy. And I think this is one where each community has to figure out where they want to be on that spectrum. And different communities are going to choose different equilibriums. There you walk down Midtown Manhattan might be the most surveyed place in the United States and it's also one of the wealthiest. I've been in the Real Time Crime center in Beverly Hills and cameras everywhere and they have drones. Everything's being filmed. The wealthy communities have decided we want this and we're willing to trade some of our privacy for security. Meanwhile, a lot of the debate happens, the assumption is that low income people don't want that and that they want More privacy at the expense of security. I think there's real questions about that. You see the positive response that people have whenever crime goes down and the privacy that we're willing as individuals to give up on the Internet in order to get something. We like the rewards of the Internet. We're willing to give a lot of our privacy. And so I think there is this broad rethink now about this trade off and what tools are available and how to use the tools that don't lose the trust of the public and that minimize the chances that people are going to misuse any of these tools.
- [63:52]
A
What about education as something upstream of crime? Have you observed or discovered in your work useful or interesting relationship between those two things? And how do you think about the system of education as well?
- [64:05]
B
The first issue we got involved in was K12ed because the outcomes there are associated with almost any outcome you could think about that matters, whether it's drug dependency or economic outcomes or criminal outcomes.
- [64:19]
A
So the relationship is strong. Better K through 12 equals better outcomes.
- [64:23]
B
Yes, they're strong correlation. And then you try to like, okay, is there causation here? If I can improve the education outcomes, does that change? I think the answer is generally yes. I think the hard part is how do we improve educational outcomes? And that's a question United States has been struggling with for decades. And we've been able to do it a little bit as society, but we haven't cracked that nut. What's maybe surprising is this is true globally as well. We've worked with a number of charter schools, worked with Teach for America over the years, almost every country around the world that has a significant K12 system has come to America to try to figure out what we're doing because they're facing the same challenges on education that we are.
- [65:11]
A
What makes you most hopeful in that area? I had Joe Liman on the show talking about Alpha school last year. That seems young but extremely promising in some of the early results. I always try to catch myself to be not too overly optimistic about technology solving all of our problems. But it sure does seem like AI could solve a lot of the problems in education. Maybe. I'm curious what you think.
- [65:32]
B
I think there's a lot of promise. I think there's promise in office school. What my hesitancy to get too excited about is we've been hearing this promise from the edtech industry for 20 years now. We've adopted more and more technology in the classroom over that 20 years and outcomes have gone down. You talk to any of these providers of an ed tech platform. They have all this data, they're going to show you about the remarkable results that they get from their students and then you step back and you just never see it in the actual data applied in the real world.
- [66:08]
A
Is that like the solar thing where the AI system is the equivalent of the solar panel? It's getting better and better and cheaper and cheaper, but that's not actually the thing that matters. It's more like the rest of the stuff in the system.
- [66:19]
B
I think there's a question of how do you engage with kids? Oftentimes kids have short attention spans. It's probably more true today than has ever been. We can all probably think back about some remarkable teacher that we had that just captivated us and kept our attention for the full 60 minutes of a class. And we can also think about teachers that were just terrible and you wouldn't pay attention at all. And I think part of the challenge has been that sitting there staring at a screen oftentimes just has not been an engaging format for people. And the question is, can some combination of AI plus AR or VR try to create some type of more engaging both content as well as the delivery of the content that we haven't seen before? I think there's promise there. I want to be optimistic, but again, I'm so frustrated with the lack of results that we've seen from this field for decades with a lot of promise, being there for a long time and just seeing nothing.
- [67:23]
A
I feel greedy asking you about all these different systems. But there's two more that I really want to hear about, those being healthcare and journalism, which is one that I'm personally interested in. Of course, maybe starting with healthcare. Everyone knows the headline stats, the percent of GDP that healthcare represents has ticked up steadily over time. Outcomes in many cases haven't gotten better. There's some countervailing things like GLP1 seem to be a modern medical miracle of sorts that can address some of these problems and costs in the healthcare system. When you assess that overall system, where does your attention get drawn? What are the things you've discovered are most interesting and important?
- [67:56]
B
We've had this multi decade financialization of the healthcare system that's really driven up costs as people have figured out ways to get in, start businesses or consolidate businesses and take advantage of some of the regulations that exist in the field to maximize firm profits. And the healthcare violates every principle of a competitive market from econ textbooks. Thinking about even what information does the patient have? What information does the payer have versus what are the incentives of the provider who has this asymmetric information advantage and also gets to decide what treatments you need. So you load up all these market failures onto the system and that requires this huge system of regulations to try to overcome that. And so if there were no market failures, then you could just say, okay, no need for government policy here, government regulation, we step back. But with all the market failures, you need books and books and books and tens of thousands of pages of regs about how to deal with every certain thing. And you have a third party payer, whether the government or a private insurance company for the vast majority of the system. So it creates all these rules that then private industry will naturally try to seek and find out where's the gap in the rules. And this happens in every industry right now. One of the big things is skin substitutes. So if you get a burn, you need some type of new skin on. There's regs about how those get reimbursed. And the first six months, whenever a product is released, there's not history of Tohalo's that product's been priced before. So the federal government gives a lot more latitude on how a manufacturer of that product can price it for the first six months. And then as the market starts to react after six months, the government puts more regulation on price. So what manufacturers have done is introduce a new product, let it be out there for six months, take that off the market, introduce a new one that's slightly different and the prices keep going up and there's some quote unquote kickbacks that. And so it's just an example of this cat and mouse game that constantly happens on government or private industry rights or regulation. And then everybody tries to figure out how to beat that. And so a lot of our work is trying to identify these and trying to correct and make the rules and incentives of the system be more aligned with the outcomes we care about as a country.
- [70:43]
A
As a general matter, not just in healthcare, but in all of these systems that you've studied, is a conclusion that fewer rules are better. Do you find yourself pro deregulation as a general matter?
- [70:55]
B
Not necessarily. This is one of the reasons why I don't feel at home necessarily with either political party because I think different problems need different solutions. And we are going to have a healthcare system that has third party payers forever and the need for very tight regulation. If you look at K12, for instance, it's a very different system, very different actors in the system and fewer market failures. And you can have maybe less regulation and you can regulate different things. You can regulate outputs rather than inputs in the system. And so I've been very favorable to having the government try to get out of being the service provider in K12, that the government doesn't do a great job of being both the regulator and the service provider that the traditional district is and that the government needs to choose one of those. And so is regulation good or bad? It's different systems need different types of regulation. And there's always going to be this cat and mouse game between regulators and the private actors. And we need to make sure that the regulators both do a good job of devising the rules of the system up front and then are actively fixing it as they fail.
- [72:12]
A
Finally, what have you learned about journalism that's one that stands out in contrast to some of these other massive countrywide systems that you've studied and explored and done things in and around. What about journalism have you learned and what does it need?
- [72:25]
B
We got drawn to journalism because view it, it's called the fourth Estate. That it's check on both government and on private actors. That there is a public good of both the dissemination of information as well as the investigative journalism that many outlets do trying to find the frauds and abuses and wastes that are happening. For a long time you had this package product of the daily City Paper and that has fallen apart. And so that role of both coverage of local and state politics as well as a lot of that investigative work we feel is being underinvested in and the commercial revenue potential of that is limited. Our view is that there is a need for philanthropy to fund some of this. The same way that philanthropy funds the opera house and museums parks. That having a vibrant journalistic outlet to oversee a lot of these things is that's necessary for a vibrant community.
- [73:36]
A
You get to see so many parts of the system, probably more than almost anyone I've ever talked to. What has you the most excited about the world?
- [73:44]
B
Innovation. It's very easy to get pessimistic. It's very easy to talk about the problems, to talk about the debt and deficit and all our political dysfunction. And then you step back and look at what this country's gone through since its formation and the number of challenges it's faced and that it's been so robust in being able to overcome those challenges historically and the innovation that many have provided and created over the years and how that's improved quality of life for us. And I think that's what we have to trust and have faith in. We'll continue to do so in the future.
- [74:20]
A
When I do these interviews, I always ask everyone the same traditional closing question, what is the kindest thing that anyone's ever done for you?
- [74:27]
B
When I was really deep into trading and about how it created some unhealthy habits and started to change me, at one point my brother pulled me aside and just said, you've changed and not for the better. Took courage on his part to do. And I think it caused me to step back and try to think about did I agree with it or not. And of course the first instinct is to say no, you're wrong. And then that thought lingers and start trying to see yourself as a third person would. And I started to think maybe he's right and what do I need to change in my life? And I try to make these other parts of my life besides the business high performing as well.
- [75:06]
A
I love the closing idea that saying something hard to someone you care about can be a great kindness. A cool and unique answer. John, thank you so much for your time.
- [75:14]
B
Great to be here. Thanks.
- [75:17]
A
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