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The Disappearing Edition
00:48:07
Slate Money on the mortgage interest deduction, the volatility index, and Snap’s first earnings report after going public
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- [00:00]
Jordan
The following podcast contains explicit language.
- [00:11]
Felix Hammond
Hello, and welcome to the Disappearing edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Hammond of Fusion. I'm joined by Anna Shymansky.
- [00:26]
Anna Shymansky
Hello.
- [00:27]
Felix Hammond
And Jordan Wastewatersleep.
- [00:29]
Jordan
Hello.
- [00:29]
Felix Hammond
And we are gonna be talking about things that disappear, like Snap share price and yeah, Snapchat is part of a company called Snap. It had its first earnings report this week and its earnings were not good. We're gonna talk about that later. We are also going to be talking about another thing which has disappeared, which is volatility hitting pretty much all time lows. Stocks disappoint, aren't moving with the exception of Snapchat. And we're gonna talk about why. I have a theory about this one, but I'm sure Anna's gonna have a better theory. But first, Jordan and I have been fighting for about a year or more on and off on Twitter about the mortgage interest deduction, which I think is the most ridiculous thing and most unjustifiable thing in the tax code. And Jordan, ever since he became a homeowner has decided that he loves it.
- [01:24]
Jordan
This is. Okay, this is a horrible. I like my horrible distortion of our argument, but I will clarify what we've actually been arguing about.
- [01:32]
Felix Hammond
So. But in any case, we have a news hook now.
- [01:35]
Jordan
Yes, finally.
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Felix Hammond
So if you pick up the New York Times magazine this weekend or else just go to the Internet where most people read these things. Matthew Desmond, who wrote this great book called Evicted, has pretty much written the definitive article about the mortgage interest deduction.
- [01:52]
Jordan
I don't know if I'd call it the definitive article, but he's making two very important points, which is that one, we subsidize rich people's housing through the mortgage interest deduction. And this has been known for a long time. You can go back to the 80s and find articles about that. And the second point is that we do a really, really, really horrible job supporting low income families with housing and helping them. Our housing policy for the rich is done through the tax code. Our housing policy for the poor is done through Section 8 vouchers essentially. And you know, you, if you are in a major American city and you want to get rent, basically going to be on a years long waiting list. He points out that about one in four Americans who qualify for rental assistance actually get it in D.C. you just like can't even get on the list. There's not taking new applicants.
- [02:41]
Felix Hammond
And yet the amount of money that would make a life changing difference to these people is Money that we throw willy nilly at rich people without even thinking about it.
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Jordan
Yes. One of the more frustrating and heartbreaking things he mentions is that it would take about a billion a year to end homelessness. And you know, you think about the tens of billions of dollars a year. Yeah.
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Anna Shymansky
Do we wonder. I actually kind of had a question about whether that number was accurate. That I just, I know a lot of people work in housing policy and that number seems really low.
- [03:13]
Jordan
It might be. I didn't sit down and interrogate that stat, But I think 1 billion number might be low.
- [03:19]
Felix Hammond
The 134 billion number is. Is accurate. That is the amount of money that we are spending on, on homeowner subsidies every year, which is, you know, the GDP of Portugal. And that's not a stock versus floating. That is a genuine comparison.
- [03:35]
Anna Shymansky
Yeah. And there's no, I don't see how there is essentially any argument for the mortgage interest deduction.
- [03:40]
Jordan
Well, so here comes Jordan. Okay, so bring it on. Here is the issue is that, and I've written this, this is not the first time I'll say it. I'm on record. It is an objectively bad piece of policy that should have never come into existence. It is a historical accident. The reason it exists is essentially that back when they created the income tax, Congress made a exemption for all interest on personal debt. No one even fully understands why they did that. But as a result, people were able to deduct their mortgage interest. This was at a time when home ownership was not really that major a.
- [04:16]
Anna Shymansky
Thing in the US or tax payments.
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Jordan
Yeah, for that matter. Yeah. Right. This was a tax forward.
- [04:20]
Felix Hammond
Yeah, this was back when almost no one paid the income tax.
- [04:23]
Jordan
And so then in the post war period when the income tax was democratized in a way and homeownership became democratized, it suddenly became much more important. And then it became sort of sacrosanct in the scope of American politics. And when, you know, Washington realized it had made this horrible mistake, it was too late to fix it. And there have been attempts to kind of tweak it around the edges. The big example is the 1986 tax reform where they essentially limited the amount of debt that you could deduct, but at the same time also did some other things that we'll discuss later in the show, I think. So this is a horrible policy. It shouldn't be around. However, it is also baked into the savings of basically all, like the vast majority of Americans who do have savings. Homeownership is our vehicle for savings in this country.
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Felix Hammond
Okay. Okay, so let's stop there and unpack that a little bit. The vast majority of Americans. Are you saying homeowners?
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Jordan
Homeowners, yeah. 69%. Like I forget, homeownership rate is above 60%.
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Felix Hammond
Okay, so that's what you mean by vast majority, like mid-60s somewhere.
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Jordan
Yes.
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Felix Hammond
Okay, so it's a majority, but it's not what I call the vast majority of the.
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Jordan
Well, of savers. Because in this kind, I mean, you gotta talk, you're thinking about people who actually have savings. Insofar as there are people with savings in this country, it's basically home ownership. Right, but, and like 401ks, but there.
- [05:39]
Anna Shymansky
Aren'T any arguments that would suggest that if we did away with the mortgage interest deduction, people would buy homes at a lower rate. If you look overall as the value of the MID has shifted, the rate of homeownership has had no correlation.
- [05:54]
Felix Hammond
So when you say mid, you mean the mortgage interest deduction. And, and this is absolutely true. Homeownership is a really effective forced savings vehicle. It basically forces you to save money over a period of 30 years or something and it would remain a forced savings vehicle even if the mortgage interest deduction did not exist.
- [06:14]
Jordan
So. Yeah, well, so number one, yes, it would remain a forced savings vehicle, but the issue is not whether or not homeownership declines, you know. Absolutely. The issue is that almost every economist who looks at this thinks there would be some decline in housing prices and possibly a significant decline in housing.
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Anna Shymansky
Where would that decline be? Because I would argue it would only be at the very top.
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Jordan
It vary? Well, no, it's, it varies geographically. And I mean the last paper I've been able to find that actually looked at this in a, in something of a rigorous way looked at, said basically an average of 7% around the country would be the drop in home prices. So that's, you know, that's one model of it. It's hard to say exactly what it. You are talking about shaving down home equity across the country.
- [06:51]
Felix Hammond
No, you're not, you're not talking about shaving home equity from a standard middle class home in the Midwest which belongs to a family which doesn't itemize its deductions. And this is a very important point that only basically upper middle class people on the coast even itemize their deductions to begin with. So anywhere in the country where people aren't itemizing their deductions, there would be effectively no change in housing. Housing preference.
- [07:19]
Anna Shymansky
Right. If you look at the value of the MiG for like an average middle class family. It's really low per month.
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Felix Hammond
It's a very, it's much lower than the standard deduction.
- [07:27]
Anna Shymansky
Very much so. I think that even when you look at those kind of overall how this would potentially lower housing, I still think that is because you're taking it off from the top more than actually affecting.
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Felix Hammond
And remember that if you're a normal middle class person who does itemize, even let's say that you are one of those people who's rich enough and living in a high tax enough state to, to itemize, even then the only real marginal benefit you get is the difference between your deductions and the standard deduction. It's a, it's the difference between two numbers. It's not that big of a deal.
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Jordan
I, first off, I think you're, you're downplaying the percentage of Americans who itemize. It's 30% of the country. That's, that's number one. So I mean you're talking one third of Americans and then you have, I don't know off the top of my head what percentage of homeowners itemize, but I'm assuming a lot of the people itemizing are those homeowners. So it is a, I am guessing this will affect a significant chunk of, even, even if it's just marginally a little bit, a significant chunk of owner occupied real estate. And again, you know, I haven't, I have not run the miles. I have never seen someone who has said that, you know, I've never seen an analysis of this, of this that has said Ohio will not be affected by getting rid of the mortgage interest deduction. Again, you do a variation across the country depending on, you know, how much housing supply there is, depending on the overall cost and who, you know, how expensive those homes. But I think just trying to kind of play it off as like, oh, there won't really be any effect. No, you have to assume there will be some effects.
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Felix Hammond
Okay, so let's assume, let's give you that, let's assume that house prices go down rather than up. I mean, they've been going up for a while and they went down for a while and they started going up again. We do this thing, it makes them go down again. Like, how is that the end of the world?
- [09:11]
Jordan
I don't think it's the end of the world. I think it matters what you use those savings for. Right.
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Felix Hammond
Which savings?
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Jordan
The government's savings. The government is spending money essentially by giving this tax break. So you know what? Okay. The government gets Rid of the tax break. What is it going to use those savings for? Yeah, what are you going to do? That money. Are you going to. So in this article that Matthew Desmond writes, he says we should take the money we spend on the mortgage interest deduction and maybe use some of that on affordable housing for the poor. Which is a fine thing to suggest. It's kind of politically naive. That's not how you win these fights typically. But it is a, you know, as a, you know, mental experiment or as a, is a theory. Yeah, sure, it's fine.
- [09:43]
Anna Shymansky
Right.
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Felix Hammond
But wait, hang on a sec. Let's say that house prices go down. You seem to be very worried about this and think that it's a bad thing. So can you explain to us why it's a bad thing for house prices to go down? Because, because this is your main argument against repeating the mid is that it would cause house prices because it's a.
- [09:59]
Anna Shymansky
Large portion of people's overall wealth.
- [10:01]
Jordan
Yeah, yeah. I mean wealth. I mean if you think wealth is important, it's like if you think savings are important, like not. And when I say middle class, I'm saying from actual like, you know, working class up to, you know, families that make like small, like low six figures. If you think their savings are important, you don't want house prices to fall. And plus then there are things like wealth effects. We do know that when house prices fall, people tend to spend less. You are, if you are just going to do this in one fell swoop, you're risking, you know, a slight downturn in the economy. It's not, this is, I don't, I.
- [10:32]
Anna Shymansky
Just don't think it's quite that simple. Again, although I do think that yes, you potentially could see a decline, I still would argue that that is going to disproportionately impact the highest end of the housing market. And I also, because at the end of the day, when you talk about what increases housing prices, low rates, access to credit, reasonably robust employment. So we are in a period of very low rates, historically low rates. So I think the idea that if we got rid of the mortgage interest deduction, that that would somehow offset having years and years of essentially zero rate environment. I don't think that argument makes sense. I think you could maintain housing prices by keeping rates reasonably low and that's going to have a much big impact.
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Felix Hammond
Okay. And then I have two things to add. Number one, every country which has done this, like including my country, the UK repealed the mortgage interest deduction and everyone thought house prices would go down. And they went up, number two, which is more to the point, I want the house prices to come down. The house prices are too high. And if you consider housing wealth to be a form of savings, then, which we can quibble about that, but if you consider housing wealth to be a form of savings, then, well, yes, sometimes your savings go down in value. Sometimes your savings go up in value. So long as they're generally on an upward trajectory. I don't think it makes that much difference if there's a step down at some point.
- [11:55]
Anna Shymansky
And one could make the argument that if we kind of somewhat reduced the increase in asset price inflation in terms of housing, that that would encourage more people to take that money that they would spend on a down payment and instead invest that in the market or other areas that they actually may overall make a better rate of return.
- [12:15]
Felix Hammond
So, I mean, yes, Jordan, you're in favor of inflation, which is, which is also a tax on savings.
- [12:20]
Jordan
No, I, so I think we should, we should now step back and talk about why you and I have been arguing specifically about this for a year. I should say also, though, just to, before I forget this point, you bring up Britain. Yes, they did phase out their mortgage interest deduction. They did it also over 20 years, which is not what we're talking about in the US they gradually eliminated it.
- [12:39]
Anna Shymansky
Which I would probably argue for.
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Jordan
Yes, which is here in general. So why Felix and I have been arguing is that if you look at the Republican tax plan as it exists. Right. Or what vague outlines the Republicans have of a tax plan, it actually would make the mortgage interest deduction effectively useless for people with, with less than $500,000 worth of mortgage debt, or I think less than a 500,000 double the, and the reason for that is because they would double the standard deduction. And so if you, the only time you itemize your taxes, as Felix said, is if you get more of a benefit from that than you would from just taking the standard deduction. Now if this were to happen, the, you know, your taxes would, might go down a little bit, like a tiny bit for most people in, in this kind of demographic we're talking about. But your house would be less valuable as an asset because it would not offer the tax benefits. And that's kind of where my concern is. So the perverse thing about this is it essentially eliminates the mortgage interest deduction for what few middle, actual middle class families benefit from it, but preserves it for wealthier families that have a house that's sort of, in that, you know, a mortgage in that 500,000 to $1,000,000 range. And to me this is just so fucking perverse that this is how you would go about it.
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Felix Hammond
This is. But this is.
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Anna Shymansky
Everything about that tax plan is perverse, right?
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Felix Hammond
Yes. Number one, you know, we will agree that the tax plan is perverse. But number two, as Matthew Desmond compellingly points out in his piece, the mortgage interest deduction is seemingly inviolable. Like it's this weird third rail of fiscal policy which no one can touch. And the only way that you can effectively render it pointless is by doing things like raising the standard deduction so that people don't bother using it anymore.
- [14:28]
Jordan
Well, so this is. So it turns out something like this has happened before. And I've become a little bit less worried about the economic effects because I've been doing some reading about the 80s. They did raise the standard deduction significantly in the 1986 tax reform plan. And that was the same time when they capped the overall value of it.
- [14:48]
Felix Hammond
$1 million.
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Jordan
Yeah, $1 million of debt. Exactly. And the housing market didn't do like super great in the years afterwards. There was a lot of. Right. And it's hard to say exactly what caused that because there are a lot.
- [14:57]
Anna Shymansky
Of other things going on.
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Felix Hammond
There were savings and loan crisis. Exactly.
- [15:01]
Jordan
So it's kind of hard to disentangle the effects. Do seem to think that that tax reform plan had some negative effects. However, it didn't really undercut the mortgage introduction interest deduction politically. Instead it made it stronger than ever. Like after that happened, it became almost even more inviable. So this theory that if we eliminate it for middle class people and just leave it for, you know, people who make high six figures, everything eventually will see this thing disappear entirely. Doesn't ring true to me.
- [15:31]
Anna Shymansky
Oh, I completely agree. I think if you look at tax policy it's weird, but if you want to help often low income people, you often have to structure a subsidy inefficiently to also help people who have more political power because that does ultimately make the tax much stickier. That's entitlements in general when it affects everybody. Once it's in, it's so much more popular and harder to get rid of.
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Felix Hammond
So I just, I want to finish with a quick like yes, no question for the three of us. Is there a public policy interest in house prices going up? Jordan?
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Jordan
Yeah, I think so, at least.
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Felix Hammond
Anna?
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Anna Shymansky
Yes.
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Felix Hammond
I'm gonna take the no on this one. I just don't see it. I don't understand it. I think the Public policy interest is not that houses should continue to become even more unaffordable, but that is, I guess I'm outvoted and we are gonna move on. So.
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Anna Shymansky
Yes, so this past week, well, in general, but especially this past week, there has been concern within the investment community about the lack of concern in the markets in General because the Vix, which is the volatility index, went below 10 for the first time since the 90s. And just for a point of comparison, In November of 2008 it was at 86. And if you want to understand the VIX a little bit, you kind of have to think of it. If it's at 10, that means that investors think that the S and P isn't going to increase or decrease by more than 10% in a 30 day period.
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Felix Hammond
The Vix is not traded security. It's basically a measure of how volatile the stock market is.
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Anna Shymansky
Yes, it's literally a measurement of options on the S and P and the. So it's essentially a weighted average of puts and calls on the S and P. So it's a little complicated.
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Felix Hammond
I mean the question, the question of whether it's forward looking or backward looking is a little bit complicated. But to a first approximation, what we can do is we can look at the VIX and say this basically shows how much stocks in general are moving around on a day to day basis. And as anyone who's been looking at the stock market in recent months will see, you know, it just doesn't move that much on a day to day basis.
- [17:52]
Jordan
So this is the thing that people call the fear index. Like if you go on cnbc, that's like Jim Cramer recall while he's yapping about it or say while yapping about it. So is this like the kind of thing where we're in a horror movie and it's just like a little too quiet? Like what is like why are we so worried about what this signifies?
- [18:10]
Anna Shymansky
I agree and I think that's the concern that people have. It's this idea and I actually think that this is more people just wanting something to write about because nothing is actually happening. So there's this idea that, okay, you know, if things are this calm, if things are this quiet, that means that a monster is going to jump out of the closet. But actually we don't have a tremendous amount of evidence to support that because even if you look at the Vix, I mean this indicator has only existed since the 90s.
- [18:33]
Jordan
So people will say, oh, why do people think it means a monster is going to jump out of the closet. Like is there any empirical evidence?
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Felix Hammond
No, no. This is entirely just a sort of gut mean reversion feeling Also. It's also related though to the fact that the absolute level of the stock market is very high. Which means that if stocks fall they could fall quite a lot. There's just a long way down. And so, and if stocks fall quite a lot then the VIX would spike, but that's about it.
- [19:02]
Jordan
Yeah, so because I started looking this stuff up and then I decided I'd just be better off talking to you guys about it because it would be more intelligent than anything I'm going to find on most websites. But so there seems to be like some people treat the VIX as like a predictor of like future returns. Like if you invest when the VIX is super low, you're not going to make any money. And like is that, is that also just like old wives tales? Like yeah, I mean obviously like you.
- [19:29]
Anna Shymansky
Need there to be capital appreciation to make money. So if you don't think stocks are going to move much, there's going. I also think it's very important to remember that the way that the VIX can also be used when. Because there are a lot of options that are actually connected to the VIX and so there's sometimes this is idea that like oh, if people are investing in those it means that they think the market's going to fall and it's like well no, it becomes just a risk hedging tool.
- [19:55]
Felix Hammond
The VIX VIX is options. There are options on options, all options. A zero sum game. So you can't really tell what direction the bets are in just by looking at the vix. What I can tell you is that if you look back over the past six months when the VIX has been at all time lows, stocks have gone up a lot. So that would prima facie disprove your thesis that stocks don't go up when the VIX is low.
- [20:18]
Jordan
It's not my thesis. I'm just trying to figure out what the hell this thing is.
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Felix Hammond
There is this thing. So wait just. There is a news hook here.
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Jordan
Okay. Yes.
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Felix Hammond
Oh yeah, the other 50 Cent.
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Anna Shymansky
The mystery of 50 Cent. Which has nothing to do sadly with the wrapper. It instead has to do with just some old white guys at a British investment firm who are buying all of these VIX related derivatives for 50 cents. And so essentially the market was like who is buying all of these VIX related derivatives for 50 cents? Because option pricing is really complicated and so that's why they knew it was one person, because of the fact that it was all at the same price. And so it was revealed through a number of leaks that it's this British firm, Ruffer, that's actually. But the way it was kind of in the media reported it was as though this firm is betting against the market or they're essentially stockpiling insurance, spending.
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Felix Hammond
Like $100 million on hedges, basically, which takes the form of a long tail bet that stocks are going to plunge.
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Anna Shymansky
Actually though, they're short term instruments and.
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Felix Hammond
They'Re using short term instruments to do it. So this is the classic like Nasim Taleb thing of like, I keep on losing nickels and it's very painful to lose nickels day after day after day. But eventually one day I'm going to make a windfall.
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Anna Shymansky
Well, it's also just, I mean, how most hedging tools work. It's just an insurance premium. So Rougher has a big equity portfolio. So if that goes down, they're going to buy something that will increase in value when that goes down and then they've hedged their risk, essentially. So but it's also interesting because they keep essentially losing money actually on this position because these options are expiring. So you're spending money on the premium and then you're not getting paid out.
- [21:59]
Felix Hammond
So that's what you do. That's how insurance is meant to work. Of course, that if you don't have an insurable event, which in this case would be a stock market plunge, then you never claim on your insurance.
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Anna Shymansky
Right. Which is the other thing to just remember about the vix, that at the end of the day this is a measurement of what investors are essentially willing to pay for risk protection. It's not as simple as a fear measurement that people make it out to be.
- [22:26]
Felix Hammond
So the bigger question though, like getting a little bit away from the VIX and how it works and looking at volatility is why is volatility so low? Given that we have a chaos monkey in the White House, given that international geopolitics is insane, given that the news cycle is insane, and given that the received wisdom about the stock market is that it reacts to the news. I understand exactly that there are lots of reasons why stocks should be expensive right now and why people are willing to pay money for them. The question is, what changed? The news used to move the market and now it doesn't move the market.
- [23:07]
Anna Shymansky
The news still moves the market. It's just not moving the market because it's not directly related to economic change that would impact growth.
- [23:16]
Felix Hammond
And you're saying that like five years ago it was related to economic change.
- [23:20]
Anna Shymansky
That would, it depended on what you're talking about. I mean, like, again, I really think it more boils down to the fact that there are underlying factors that relate to volatility. Again, talking about. I think monetary policy is the biggest one. The other thing that's important to remember.
- [23:35]
Felix Hammond
We'Ve had zero interest rates for much longer than we've had low volatility.
- [23:39]
Anna Shymansky
Yes. But the other thing we're seeing right now is we're seeing a lower correlation between different sectors. That's, that's another big thing is that you're having certain sectors that are used to often be that kind of. A lot of sectors would rise and fall at the same time. Obviously you have some difference in that, but now you're actually seeing record low correlation between sectors. So if you have some going up and some going down, that is going to decrease volatility.
- [24:00]
Felix Hammond
That's. This is the. One of the more interesting things is that the fact that correlation has been falling as volatility has been falling. It's an interesting relationship, which I think is about as much as we can nerd out on that one. But it does fascinate me. There is one other theory here though, which I found on.
- [24:21]
Anna Shymansky
Is this the tail wagging the dog theory?
- [24:23]
Felix Hammond
No, it's a combination of passive investing and quant funds. The vast majority of human beings who invest in the stock market have pretty much started to believe in the passive gospel of we are not going to be able to outperform the market, so we'll just buy index funds. And what that means is that the marginal price setters, the people actually determining the price of individual stocks and sectors, are increasingly a bunch of robots. And it turns out that the robots are much less attuned to headlines about Donald Trump's tweets than humans are. And that if you have robots buying and selling stocks and setting prices and discovering prices that it. What you wind up with is a much more sensible way of setting and discovering prices and you lose a bunch of the crazy sort of emotional highs and lows and risk on and risk off that we had when it was humans doing it.
- [25:28]
Anna Shymansky
I think there's probably some truth to that. I would still look at the overall percentage of money that's being managed actively versus the money that's being managed passively and by quant funds to if you can, if you can use that as an argument for right now. But, but I Do think on the margins this could have an impact. And I think moving forward, this probably will have more and more of an impact, because I do agree, because ultimately people talk about, oh my God, there's so much risk in politics. How can this not be like, factored into the market? But I would argue what that's going on in politics right now is going to have a market impact on asset prices.
- [26:03]
Felix Hammond
Oh, thermonuclear war.
- [26:05]
Anna Shymansky
Okay, yes, thermonuclear war. But what is actually the risk that we're going to go to war with North Korea? I mean, I think that. But in the realm of risks right now, that's still relatively low. If you look at what have been the type of crises over the past 50 to 100 years that have really moved markets, you're really talking about banking crises. You're talking about certain sectors that have dramatic sell off. So right now having a, you know, an idiot in the White House is horrible for a lot of reasons. Do I really think that that is going to, like any of his policies that he's so far put forward are going to dramatically cause sell offs in the market.
- [26:39]
Jordan
And I think just to kind of piggyback on that, it seems like some of the narratives that you see from traders or from people who write about the markets have kind of switched from Donald Trump's gonna be fantastic and do all these great things for the market and to companies to just like, he's not gonna mess with us, he'll be nut. Like, it's like we'll be left alone, essentially. I think that is almost. There's like a sense, at least as far as political news goes, there's a sense of calm that has come from that. The knowledge that the Gary cone wing of the White House is not going to allow anything too horrible to happen.
- [27:08]
Anna Shymansky
Yeah, I agree. I mean, I think like before Trump, before the election, if you read all the market research, there was a lot of fear that if Trump were elected, that this protectionist policies that he would put through could reduce global trade and that actually would be huge for the overall global economy and would have a very negative impact. But then once he was elected, all of a sudden the narrative changed and then the focus shifted to lower regulation, corporate earnings, infrastructure spending.
- [27:35]
Felix Hammond
Okay, but talking about the news cycle, do you remember for about two hours everyone was convinced that Donald Trump was going to repeal nafta, Right?
- [27:45]
Jordan
Yes.
- [27:45]
Felix Hammond
And then, and then we woke up and he didn't. And you know, we, as you are. But what did the stock market do for Those two hours, nothing.
- [27:55]
Anna Shymansky
Because that's because I think at the end of the day, at this point, do we really believe 99.9% of what Donald Trump says? And do investors really believe. No.
- [28:02]
Jordan
I mean, I think people have realized that his tweets are not actually tradable information.
- [28:07]
Anna Shymansky
There was a brief period of time where everybody got so freaked out every time he mentioned a company in a tweet, but now I think it's just like, yeah, okay, he's saying something else ridiculous.
- [28:15]
Jordan
It's your old. It's your grandfather shouting at Fox News. Like, what are you. Like, there's nothing you can't trade on Grandpa Bob or Grandpa Donald.
- [28:25]
Anna Shymansky
Yeah, no, entirely. Entirely.
- [28:28]
Felix Hammond
Okay. So talking of things you can trade on. Yes, that's my segue. Snapchat.
- [28:35]
Anna Shymansky
I would just like to point out that when Snap went public and I was still working at Oaktree, I was like, you know, first quarter, all the jokes about disappearing value, like they're writing themselves.
- [28:45]
Felix Hammond
Okay.
- [28:46]
Anna Shymansky
Just like.
- [28:47]
Jordan
And it was Snap to make them say, I'm sorry, sorry. Felix is looking at me like I just killed his dog. Like, that's the. That is this.
- [28:58]
Felix Hammond
I'm just going to move blithely on and talk about everyone's favorite pseudonymous, pseudonymous Twitter account at the epicurean D Omega, who said that the one thing you do when you go public is you make sure you hit your earnings targets for your very first earnings report. And oh my God, did Snap miss those earnings? The revenues were way off, the user growth was way off, the profits were not only non existent, they managed to lose $2.2 billion in one quarter. Now there was, there was a footnote there.
- [29:40]
Anna Shymansky
Yeah, that's a pretty significant footnote.
- [29:42]
Felix Hammond
But they still managed to lose $2.2 billion in one quarter, which yet works out to about $13 per user.
- [29:50]
Anna Shymansky
So because apparently investors didn't think they were going to pay out their equity compensation, they were required to pay out.
- [29:56]
Felix Hammond
Well, no, but people didn't realize. People knew that Evan Spiegel, the CEO was getting $750 million of pointless bonus just for taking his company public. But apparently there was another $1.25 billion of other thing of other random equity awards. There are, yeah, restricted shares that upon the ipo. But basically what happened is that this was a big fuck you to the markets from Snapchat. Because hey, none of you shareholders have any votes and there's nothing you can do about it.
- [30:29]
Anna Shymansky
Right?
- [30:30]
Felix Hammond
There are two companies basically which have non voting shares. I think it's Snapchat and like Under Armour. And Snapchat is just saying, well we'll sell you stock and if you don't like it, you can sell it. Which is exactly what people did. The Stock went down 20% although it.
- [30:47]
Anna Shymansky
Essentially went down to where it was originally valued.
- [30:49]
Felix Hammond
It went down to the IPO price but it was never trading at this value. This is an all time low in terms of where it has been trading, although it hasn't been trading that long. I think the interesting question here is like, has the world changed in the few weeks since Snap went public to make the company worth less? And I think the interesting answer is well, possibly yes. And the way that the world has changed to make Snap worth less is Instagram Stories. Instagram Stories barely existed when Snap went public. It has now overtaken Snap Snapchat in terms of popularity. And what we are seeing is the very real possibility that Snapchat is going to be this flash in the pan while Facebook just sails blithely on as this supertanker which just eats everything which isn't part of it.
- [31:51]
Jordan
That seems highly probable. Yes. And this brings up a lot of troubling questions, but for me it's is there any good way to stop a company like Facebook from doing that where essentially they're just ripping off its competitors features and then demolishing them and eliminating competition from the market and kind of maintaining their monopoly? And this is not what they did here isn't really something that antitrust law is designed to deal with. It is sort of something that IP law was designed to deal with. I mean that is why theoretically we have things like software patents. It was supposed to stop this specific nightmare scenario where a giant hegemonic company rips off smaller competitors features and renders them unviable. But it is not obviously working in this scenario. And so you do have a hegemon in the market and it's not clear how anyone can compete with them because the second they debut a feature like, I mean I use Instagram stories, you know, even I feel a little guilty about the fact that Snap is probably, I am one of the reasons a company like Snap is, you know, may not survive but you know, it's convenient to me. I was already on Instagram and they can, you know, they can parlay this, this huge user base they already have right into stamping out the competition.
- [33:10]
Anna Shymansky
Although I would, I would agree that in terms of I think we need to modernize kind of IP law in general, I agree with you. I do think there's a question to be made that like, look, a company came, they created one thing that then a better, bigger company took. Now consumers still have access to this feature. Will this company potentially go out of business? Maybe it will, but is that actually. My question is, is that actually harmful for the overall marketplace?
- [33:42]
Felix Hammond
And the answer to that one, I think you're right. It's not that there's no, there's very little consumer interest in having competing stories platforms. If anything, the consumer interest is in having Facebook be like the global one stop shop for this is the only place I need to go to get updated on stuff. And it's weird that it's one of these situations where you can make a case that competition is actually bad for consumers.
- [34:10]
Jordan
Well, and so this brings us back to kind of what we've talked about before on the show about how we think about competition law. Who is it designed to protect? If we think about it only in terms of consumer efficiency, it is kind of hard to think of what's happening to Snapchat as a bad. Like Snapchat getting stamped out because Facebook creates stories is a bad thing. But if you try to think a, if you, if you don't just think about in terms of feature by feature, you're like, yeah, okay, we're happy that Facebook could have this feature. But if you think about it in terms of just as a repeated practice that allows one company to stamp out all of the comp. To eliminate the competition, then it does become a little bit more worrisome. And then also when you realize that kind of allows a company to dominate a space like, you know, online advertising, essentially be able to eat up the entire digital ecosystem and kind of, in Facebook's case, remake the Internet around itself, it becomes more worrisome even. And so you have to think about how, what is competition law for? And what are we, you know, going forward is the paradigm where it's all about, you know, consumer, you know, lowest possible prices for consumer and best possible convenience. Is that the only thing we want it to be geared towards protecting?
- [35:20]
Anna Shymansky
Right. And if we start to see that we're not seeing innovation in the market because people don't have an incentive if they think that, oh, I'm going to invent this thing and then Facebook's just going to Sherlock it, and then all of a sudden I'm, you know, I'm out of business, then yes, then I think you can make a larger argument. But we aren't seeing that yet.
- [35:36]
Felix Hammond
And certainly if you look at Amazon, which is the 800 pound gorilla of the online e commerce space. It has crushed various competitors, most famously in diapers. But that doesn't seem to have stopped a million people cropping up selling things online and as we discussed in a recent episode, selling those companies for enormous amounts of money. Companies like what was that razor company which sold for a billion dollars?
- [36:06]
Jordan
Terry's or.
- [36:08]
Anna Shymansky
No, it was the other one. Dollar Shape Dollar Shave Club.
- [36:10]
Jordan
Yeah, yeah. I mean again, we're only just beginning. I think we're still early in this period. Right. Like the we we feels like these companies have been around a long time, but this is sort of just the birth of this era.
- [36:26]
Anna Shymansky
Well, isn't this also how like Apple became Apple is that they stole other people's. I mean partly especially, I mean there's always the famous story Xerox and like Xerox Puck, you know, and I realize it's not, I mean obviously Xerox was not a small company at that point. In fact they were obviously the behemoth. But this is part of the overall. Again, I'm not saying that we don't potentially need changes in intellectual property law, but I don't know. This, this is something we're seeing in tech and it's certainly not hurting consumers or innovation.
- [36:52]
Felix Hammond
I think that it's very easy to look at the might of the big four, which would be Apple, Facebook, Google and Amazon and say these guys are unassailable. They haven't been unassailable that long. And, and you know, I'm perfectly willing to go out on a limb and say that in 10 years time they are not going to be the unassailable big four.
- [37:14]
Anna Shymansky
I completely agree. Especially because if you look globally, they're.
- [37:18]
Felix Hammond
Very much hello Alibaba.
- [37:19]
Anna Shymansky
Yeah, exactly. I mean and Alibaba is in some sense almost better positioned because the Chinese consumers like more overall spending is retail spending than or is E commerce than in the US and you also have a number of Chinese equivalents of the Big four that like Baidu Huiwei in terms of as a competitor to Apple who have tremendous market share in China, which is the second largest market. And also in many cases they're just the market. And also I think there's a question moving forward that you know, as the developing world becomes more of the kind of consumer world, do they want some of these higher cost products or some of the lower cost alternatives that you are getting in a number in some of these other developing nations that are creating alternatives to these US Behemoths.
- [38:06]
Jordan
Well, so I, I'm Just going to say I don't think that US Antitrust policy really should be concerned about what's going on in China. Like, I'd be like, it's, it's not, it's specifically not like supposed to take a global viewpoint.
- [38:20]
Felix Hammond
It's about what you're doing. I mean, what you're doing here is you're proposing a huge root and branch change in the way that US antitrust regulators look at industry. And if you're going to do that and you're going to say we should just completely reconsider the way that we look at how companies operate on planet Earth, then I think part of that reconsideration process absolutely should look at what's going on in the rest of the world.
- [38:50]
Anna Shymansky
Right. Because part of Snap's problem is also they have a very national like small target focused in terms of their consumer base. They've explicitly said they're not looking for like broad scope. They want to just maximize the value of the users that they have. So they want people in developing nations who kind of like higher income nations as opposed to Facebook, which has said we want a more kind of global reach. And, and I think that that's again, I think that's part of the problem of Snap's overall strategy.
- [39:19]
Felix Hammond
But the other thing is that if and when these companies really do start getting ambitiously global, there are much more aggressive regulators in Europe and they have cracked down on Google many times. And to a certain de, a lot of these problems are being addressed by European regulators. And insofar as they're not being addressed by European regulators, maybe they're just parochial US Problems which aren't such a big deal.
- [39:47]
Jordan
I'm going to say that maybe the emergence of four. I mean, okay, there was the European settlement with Google, right. But what really have European regulators done that have fundamentally changed, that have fundamentally opened up competition in these markets? Like what you look at a lot.
- [40:04]
Anna Shymansky
Of countries and you look at market share. Google is not the number one search engine because they have local search engines that are more popular.
- [40:10]
Felix Hammond
And look at Amazon in Europe is big, but it's not dominant in the way that it is.
- [40:14]
Anna Shymansky
I think we have a tendency because in the US these companies are so huge that we think that's the case in every country and it's just often not.
- [40:20]
Jordan
And Amazon, we're not Americans. I mean Americans are concerned about the American market, like the US market and the US economy. I mean this is again like, like, you know, in terms of the way companies, you know, live and thrive. And die here. And you know who.
- [40:36]
Felix Hammond
Basically that's totally not true. The way that Apple lives and thrives is absolutely by selling its phones globally. The US is not the most important.
- [40:44]
Jordan
It is, it is part of it, but it is not the. I mean without the US market, as without the US market, it also would not be Apple. I mean, well, no, of course, of.
- [40:53]
Anna Shymansky
Course the US market's a huge, huge part of their overall market. But now we are like you have increasingly global markets. So I don't think you can talk about companies overall market share and say, well this is what it is in the US and not look at what it is global.
- [41:05]
Jordan
I think, I think to suggest that Americans cannot be concerned about how our antitrust policy is affecting, is or is not serving American interests specifically is kind of bizarre. I'm just going to say throw that out there. Like the idea that our antitrust policy should be fundamentally concerned with what's going on in Europe and China is a, is an interesting slight.
- [41:25]
Felix Hammond
Yeah, but that's, that's, that's a straw man. Neither of us are actually saying that.
- [41:29]
Jordan
What you're saying it should be significantly taken into concern. I'm saying it should be at best minimally taken into concern if we thought.
- [41:36]
Anna Shymansky
That what was happening right now was having a significantly negative impact on consumers or the market. And I just don't see yet evidence that that is the case.
- [41:44]
Jordan
I think that Felix is essentially saying I don't think these companies will be unassailable in 10 years. That it's complete speculation. We do know that they really don't have, you know, they don't have competition really in any meaningful respect right now. You know, I mean, at this point we have articles in Bloomberg, you know, in Bloomberg about whether or not Walmart can take on Amazon. Is it conceivable that Walmart could possibly take on Amazon?
- [42:10]
Felix Hammond
Walmart, it's bigger than Amazon and yet not.
- [42:12]
Jordan
Well, not in this space.
- [42:13]
Anna Shymansky
But doesn't that also bring up an argument of like 10, you know, five, 10 years ago when Walmart was the company that nobody could compete with in any way and now all of a sudden things have changed.
- [42:22]
Felix Hammond
Exactly. And Walmart is doing very interesting things. Snapchat is actually a good example of a company which took on Facebook and became a multi billion dollar company by doing so. And we are going to see many more and some of them are going to be flat in the pants and some of them are going to succeed. Okay, let's have a numbers round. Jordan, what's your number?
- [42:46]
Jordan
My number's a date. It's 1967.
- [42:49]
Felix Hammond
I don't know if we've had a date.
- [42:51]
Jordan
I know, and I'm writing a little article about this right now, but I'm going to shorthand this as the date that American men peaked or American middle class men peaked. And now I'm going to explain it because it's a little bit complicated. But there was a recent economics paper that showed that that was the year that lifetime earnings basically started to decline for 25 year olds entering the job market. So if you're 25, like between like the 1950s and the late 60s, if you are entering the job market around age 25 or your lifetime earnings were going up and up and up. And the way they figured this out is they looked at Social Security data for all of these people who entered the job market this time. So they will see what their entire careers looked like. And then people who entered after 1967, all of a sudden lifetime earnings started to fall.
- [43:37]
Felix Hammond
Well, this is just men, right?
- [43:39]
Jordan
This is, this is men. There's a different pattern for women. Their earnings continue to rise, which is not totally surpr. And so it's interesting because oftentimes we talk about kind of the, the fall of middle class, blue collar men and you know, the rise of inequality starting sort of the late 70s and maybe the 80s when manufacturing started to actually decline. And so we actually see this inflection point a little bit earlier on and it's not entirely clear why this is when it starts to happen. I've seen, I've talked to the Economist who wrote this about, they have some theories, but anyway, and we're talking about the median man, by the way, if you're at like the top 10% lifetime earning kept going up, you're still good. Yeah, you're still good. The top 10.
- [44:20]
Anna Shymansky
Still good to be a man.
- [44:21]
Jordan
Yeah, exactly.
- [44:22]
Felix Hammond
Yeah, it's still, I mean even today, amazingly, it's still good to be a man. Anna.
- [44:28]
Anna Shymansky
So My number is 10.3 million. That was the US gross for Baahubali 2. The conclusion which was.
- [44:37]
Felix Hammond
Is this a movie?
- [44:37]
Anna Shymansky
It is a movie. It was the third highest grossing film last week. And it is.
- [44:43]
Felix Hammond
In the world.
- [44:45]
Anna Shymansky
No, in the us.
- [44:45]
Felix Hammond
In the US. In the US oh wait, that's the US Growth in just one week. Yes. Okay, so.
- [44:51]
Anna Shymansky
And it is, it seems like 10.
- [44:53]
Felix Hammond
Million is not enormous for one week, but I guess that would make you the third highest.
- [44:57]
Anna Shymansky
The third highest.
- [44:57]
Felix Hammond
Okay.
- [44:58]
Anna Shymansky
And I think this is interesting. It's actually not a Bollywood film. It's a Tollywood film. The Tegulu language. It's film industry which is southern Philippines. No, it's Indian. It's just southern.
- [45:09]
Felix Hammond
Oh, okay.
- [45:10]
Anna Shymansky
But I think this is interesting. Both just. I think it's indicative of the kind of the growth of the Indian American community and the kind of growth of the consumer power of the Indian American community. And I think this is kind of cool. And also just personally I was looking. I've not actually seen the film, but I did look at the trailer and it's basically like 300 if 300 were a musical. And that makes me kind of happy because I have been dragged to many action films and I hate them and I love musicals. So I think if we can combine the two.
- [45:38]
Felix Hammond
So should I go see it? It?
- [45:40]
Anna Shymansky
Hey, why not?
- [45:42]
Felix Hammond
I'll go check it out. I'm sure it's playing in New York somewhere. My number is 99 or 99. It's 99% in New York. There's this new rule which forces the NYPD to start breaking things down by race, which didn't used to have to happen. And so now what they can look at is child in crisis incidents. This is where you get police officers called into schools and arresting children when the children are having some kind of issue. And these are known as child in crisis incidents. And in the extreme cases, the children get handcuffed. There were 262 cases in 2016.
- [46:34]
Jordan
I think I see where this is.
- [46:35]
Felix Hammond
Going where children were handcuffed. Of those 262 children, 99% of those children were black or Latino. Okay, I think that's it. On which depressing note we will leave it for this week. Thank you for listening to Slate Money. If you've seen Baahubali 2322 the conclusion.
- [46:58]
Anna Shymansky
So I think it's the last one.
- [46:59]
Felix Hammond
Do you think I should watch the first one before I watch the second one?
- [47:02]
Anna Shymansky
I'm not sure if. I think you'll probably be able to figure it out.
- [47:05]
Felix Hammond
Maybe I should watch the first one on Netflix. Anyway, anyway, if you've seen Baahubali 1 or 2, write in and tell us if we should go see it. The email address, as ever, is slatemoneylate.com and many thanks to Dan Schrader for taking the random voices coming through the tape and turning them into some vaguely coherent podcast this week. Thanks to the various producer types round these parts like Steve Lichti and June Thomas and Andy Power. They are all part of the Panoply Network. Those shows can all be found at Panoply fm and we will talk to you next week on Slate Money.