Fat Tailed Thoughts

Today's discussion is on payment for order flow. Ever wonder why stock trading on Robinhood and other brokerage platforms is free? They're selling your orders to third parties like Citadel and Virtu. It's free because we're the product. The SEC is proposing new rules that would effectively end the business model as we know it, but the changes introduce their own challenges that may be even worse for investors.

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The US faces a crisis level shortage in baby formula. It's a story of good legislative intentions gone wrong. In our haste to subsidize families in need, we distorted the market and created a fragile industry. In retrospect, the only surprise is that it took this long to fail. We explore why the baby formula market is in crisis, what is being done to bring baby formula to market now, and how we might avoid such a crisis in the future.

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Terra blew up. Runs followed on other algorithmic stablecoins and many followed suit. Little about their failure was novel. They all implemented models we've seen fail before with fiat. We explore why they failed, how this could have been avoided, and consider the path forward for regulation.

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Jared rants about fraud in crypto. Steven tries to reign him in. It mostly goes off the rails.

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Welcome to the Fat Tailed Thoughts After Show! This is a more free flowing, less serious discussion of the episode. We discuss Buy Now, Pay Later... mostly.

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Today's discussion is on Buy Now, Pay Later (BNPL). BNPL is a novel alternative to credit card debt that's grown dramatically in recent years. We discuss how BNPL makes money, the impending regulatory crackdown, and why the enthusiastic reception by consumers and businesses alike begs a lot more attention. Please enjoy this breakdown of buy now, payer later.

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Today's discussion is on embedded finance. It embeds the financial product purchasing decision right alongside consumption purchase. We discuss why an embedded and frictionless user experience is a major leap forward for finance, how banks and startups can partner to create experiences better than either one can alone, and the powerful data feedback loop from combining finance and consumption. Please enjoy this breakdown of embedded finance.

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Today's discussion is on Netflix Ads. Netflix lost subscribers for the first time in over a decade. CEO and co-founder Reed Hastings opened the door to an advertising based model alongside the company's subscriptions. It's a bad idea. We discuss why combining advertising and subscriptions creates terrible incentives for Netflix, other business models for successful entertain businesses, and the many non-advertising options for how Netflix can grow revenues and subscribers. Please enjoy this breakdown of Netflix ads.

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Today's discussion is on a revolution in payments. Visa has dominated card payments for 50 years, but cryptocurrency networks pose a real challenge. Services like Strike help businesses transact over the Bitcoin Lightning Network practically for free. We discuss why Visa has been so successful, how crypto can win the coming payments war, and what this means for processors and other payments companies. Please enjoy this breakdown of the payments revolution.

Today's discussion is on bad money, the difference between Starbucks and a bank. Good money is backed by government guarantee or robust regulations. Bad money, like the 100's of billions now held at money services businesses, lacks those protections. It has all the makings of a crisis. We discuss the history of privately issued good money, the rapid growth of bad money, and regulatory updates that can turn the bad money good. Please enjoy this breakdown of bad money.

Today's discussion is on futures and the London Metal Exchange. The nickel futures market experienced a massive short squeeze in early March, driving the price up 250% in two days. The exchange responded by reversing trades and halting trading. We discuss futures and forwards markets, why the exchange's explanation for reversing trades is mighty fishy, and what opportunities this presents to challenge a 145-year-old institution. Please enjoy this breakdown of futures and the London Metal Exchange.

Today's discussion is on voluntary carbon credits. The market for voluntary carbon credits has been on a tear for the past year, but it hasn't always been that way. New demand to achieve net zero emissions is driving growth, but there remains a huge amount of work to do. We discuss why the market took over a decade to emerge, what still needs to be improved, and who is doing the great work of building. Please enjoy this breakdown of voluntary carbon credits.

Shoutouts to Carbon Streaming, InfiniteEarth, Moss.Earth, Pachama, and Watershed and the work they're doing in voluntary carbon credits!

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Today's discussion is on startup equity. We explore how founders and employees alike should value and structure equity. We discuss the many varied structures including RSAs, ISOs, NSOs, and RSUs, how taxes work, and what happens when you leave a startup. Please enjoy this breakdown of startup equity.

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When price increases, demand for most goods falls. But not all. There's a class of goods where demand rises with price. These "Veblen Goods" lead to businesses unlike any other.

We use Veblen Goods to signal - we're rich, we're successful, we have something you can't. Companies like Chanel, Montblanc, Rolex, Rolls-Royce, and Supreme have co-opted our need to signal to drive sales of their carefully curated brands.

In this episode, we explore the world of Veblen Goods and take a deep dive into watches. Co-host Steven Dickens shares insights from his 20+ years of watch collecting and opines on watches as an investment.

Ukraine is under attack. The world is responding with financial warfare. It's a new domain in multi-domain operations. Air. Land. Maritime. Space. Cyber. Finance.

We explore how financial warfare happens: how SWIFT works and why Russia's been kicked off, how the US can enforce sanctions all over the globe, and what freezing Russia's central bank reserves means for Russia's economy.

We conclude with a look at what each of us can do to support Ukraine. They're small acts, but they make a very real difference.

The theme of this episode is MORE. More funding, more startups, more investors, more everything.

Funding for startups has grown 10x in 10 years, an astonishing 26% annual growth rate. Money is flowing in not just from venture capitals, but from new types of investors as well. It's all been helped by an accommodative regulatory environment.

Those trends will continue to propel the industry forward. Expect more liquidity, more complex financial products, and more bundling of capabilities as the market grows.

We analyze the three big trends - more VC money, more new types of investors, and more investor-friendly regulations - before we predict the startups that will emerge to serve this market in the years and decades to come.

Selling your startup equity used to be the only option for startup employees to get cash prior to IPO. But as the number of unicorns has ballooned and startups stay private for longer, a new option has emerged.

Startup employees can finance their options.

An ecosystem of lenders stands ready to lend employees money to exercise their options, take ownership of their equity, and pay the associated taxes. No money is owed until the startup goes public or is acquired.

We discuss the tax treatment of options, the tradeoffs of financing, selling, or waiting, and the growing number of lenders employees can engage.

Shoutouts to EquityBee, ESO Fund, Liquid Stock, Quid, Secfi, and Section Capital for helping employees keep their equity!

The average time for a startup to go public has increased from 7 to 12 years in the past two decades. More and more early employees are left equity rich and cash poor.

An ecosystem has emerged to help. Four different secondary markets work with employees and the startups themselves to help employees, investors, and founders sell their startup equity for cash.

It's not all smooth sailing. The challenges of an illiquid startup equity market, complex regulations, and burdensome taxes are real. How to navigate is critical for any potential seller to understand.

The US stock market had its worst January since The Great Financial Crisis. But investment returns don't make a lot of sense without more information around "normal" returns and the period over which performance is measured.

In this episode, we look at 100 years of stock market performance - how changing the dates over which performance is measured makes huge differences in the measured outcomes, why average returns are misleading, and how poor short-term performance can create incentive misalignment between money managers and their clients.

Market makers and order books are core to how modern financial exchanges work. They're how we ensure there's a buyer for every seller and a seller for every buyer.

It's a model that works well in big markets. Jane Street, a premier market maker, traded over $17 trillion in 2020 and generated $1.6 billion in revenue. But the model fails in small markets. Jane Street's margin was just 0.009%. It's not profitable to be a middleman when trading volumes are low.

Automated Market Makers change the game. They can operate - profitably - in small markets. The model ensures there's always a price - buyers can always buy and sellers can always sell. It's a powerful new invention that's beginning to transform markets as we know them.

We explore how exchanges and market makers work, where the model fails, and the innovation unlocked by automated market makers. Shoutouts to Jane Street and Uniswap.

Headlines run every day with advice on "How to Win at Retirement Savings" and "10 Tips to Save Money." What most people don't know is that 89 million Americans have debt in collections.

Collections is industry built on abusing consumers. Over 870,000 complaints are filed every year. But it doesn't have to be that way.  Startups are proving that treating people well can be good business. They're 40%+ more effective at collections that the legacy dial-for-dollars. Not only is it more revenue, it's bigger profits and happier consumers.

The adult industry is bigger than Hollywood yet it largely lacks access to basic financial services. Cutoff from banking, payments, and venture capital, it is remarkable the industry exists at all.

Some sub-segments have earned their reputations as high-risk. But sexual wellness has not. It's a $10B+ industry cutoff from financial services despite being low-risk and highly profitable. It's an extraordinary failure.

We explore why the adult industry hasn't had access to financial services and the barriers still left to overcome today. We find that the industry is changing - the barriers are falling. Dame, Mauve, Hello Cake, and Foria have overcome tremendous odds to build promising startups. Lerer Hippeau, RRE, and a select few other venture capitalists are starting to provide funding.

It's never been a better time to fund and build sexual wellness.

Decades long technology revolutions can be multibillion dollar opportunities for those paying attention.

Yesterday's hype can take years to become mainstream. Even longer if you're a highly regulated financial services company.

We explore why only 8% of banking tasks have been moved to the cloud and how even these first steps have unlocked slow revolutions in equity markets and money movement. New capabilities are just coming online today that have been years in the making. They're massive opportunities for those paying attention.

Happy New Year! We're kicking off with our top 10 predictions for 2022!

Our top 10: 1. metaverse, 2. inflation, 3. globalization, 4. semi conductors, 5. nuclear energy, 6. payment rails, 7. digitization of paper, 8. NFTs, 9. regulation in crypto markets, and 10. central bank digital currencies.

One host bets on change - innovation accelerating across a broad range of industries. The other host bets on life moving more slowly - optimistic for the long term, but a more incremental rate of change.

Hyperinflation is real - prices increasing at least 40% per month. Our recent bout of inflation isn't anywhere in the ballpark. What we're dealing with isn't hyperinflation. It's hyped inflation. But inflation expectations can become self-fulfilling prophecies.

We explore why a coin flipping monkey is preferable to inflation forecasters, complex adaptive systems, and how inflation expectations can become reality. Will Bitcoin ever challenge displace traditional fiat money? We debate the merits and look to history as a guide.

Prices are going up, but by how much? Is the government squashing the truth?

We unpack the methodology behind the government reported Consumer Price Index (CPI) and explore sources of error including incentives for squashing the reported numbers. We explore why there are surprisingly few alternative inflation measures and analyze why some of the more popular ones have their own challenges.

The next multibillion dollar opportunity. Digitize data trapped on paper and build a business around the data.

We explore the three billion dollar opportunities for OCR startups digitizing data: sell analytics to existing customers, sell analytics to new customers, and expand into automating near-adjacent steps in the business workflows. Or build a competing startup that eliminates paper by digitizing forms and automating processes. We balance the revenue upside with the building challenges for each of these businesses before considering how the future will unfold.

Bank statements, credit card statements, and tax forms all contain valuable data, but it's trapped on paper and in PDFs. We humans recognize the ink patters them as letters, but they contain no instructions for the computer. Optical Character Recognition (OCR) is how machines learn to read.

We explore the mechanics of OCR - the scale of the paper problem in financial services and why paper-based data is so difficult for computers to extract. We look at how accuracy statistics for machines can be misleading and why that results in people - lots of people - staying involved in the digitization process.

This week's conversation is a prelude to the next where we'll look at OCR startups and the tremendous business opportunities they're starting to unlock.

Pundits on TV and cryptocurrency maximalists across the world regularly tout Bitcoin and crypto as "the fastest growing financial product in history." But is that actually true?

We benchmark oil, gold, stocks, and crypto to GDP and look at how they changed throughout history. From the 1901 oil strike in Texas to the gold rush of 1849, we look at both the sizes relative to GDP and the year-over-year change as a percentage of GDP.

Heads up - crypto's in a league of its own.

Exchange traded funds (ETFs) part two. We discuss the hidden risks of concentrated ETF holdings in Apple and Microsoft and the exclusive club of authorized participants, most of whom had to be bailed out in the Financial Crisis. We look at the exciting new bitcoin futures ETF and explore why that succeed where previous attempts had failed, how the regulators are thinking about bitcoin ETFs, and when we can expect a bitcoin spot ETP.

Exchange Trade Funds (ETFs). We discuss their remarkable history: from the innovations in mutual funds, through the initial flop of a launch, to their wild success as a $6.5 trillion industry. We explore how they actually work and why those innovations are key to their success.

The Great Wealth Transfer. We discuss the 5+ living generations, how their wildly different macro experiences have led to divergent wealth, and how the wealth-inheriting generations invest and spend differently than the older generations. But not all are set to see an inheritance. We analyze how the tax structure facilitates dynastic wealth and explore a future with significant intragenerational wealth divides. We wrap up on a high note looking at the new opportunities available who service both the haves and have-nots in the $68T wealth transfer.

Overdraft fees. We discuss the four different fee types, their magnitudes, and how some bad banks are almost entirely reliant on overdrafts for profitability. We turn our attention to legislative action and the appropriate role for regulators, taking into consideration recent research showing that overdraft services can increase access to banking for low-income families and the unbanked. We wrap up with a look at some of the startups and banks that are innovating in the space and what to expect next week.