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"A great place to be from"

By Daniel M. Ryan
web posted August 14, 2017
Signs placed across the street from Google's Venice Beach offices
Signs placed across the street from Google's Venice Beach offices

Sometimes, apparently unrelated observations fit into a pattern. The outcry about Google's firing of James Damore, a firing that may have contravened employment law, subtly but definitely dovetails with David Einhorn's Internet Bubble 2.0 thesis. Firms that are in the grips of a bubble become a little bit nutty. Typically, the nuttiness combines hubris and haste. But sometimes, other forms of nuttiness show up – like the "diversity" nuttiness that was very publicly exposed by Mr. Damore's firing.

To see this, keep in mind that Mr. Damone was a Senior Software Engineer. This is important because he was, at least on the face of it, a revenue-generator for Google. His position was analogous to an equities researcher whose job is to find stocks that the brokers can sell to their clients. The bulk of his enemies were part of or dependent upon Human Resources and the "Diversity Office." To continue the analogy, HR and DO are like a stock brokerage's back office: support functions. So, what transpired last Wednesday (to complete the analogy) is a back-office cohort getting a revenue-generator fired. Members and attachees of a cost centre got someone from a profit centre canned.

Diverse Perspectives On Bubbles

The drunken-to-hungover analogy is well-worn, but it has an explanatory power that's hard to beat. Life after a bubble is a lot like a hangover: it very much includes the self-reproachful "What what I doing!?" In a bubble industry, the "drinks" actually come slowly: they consist of a high-performing industry or base commodity besting common sense, again and again. It's a wonderful, heady feeling whose workings strip away prudence. Consequently, when the "party" reaches its climax, every enthusiast is living in La-La Land. Populists will never believe this, but the CEOs of bubble-propelled firms are usually late to know when the party's over. They're in La-La Land as much as any top A-lister.

Case in point: the late, once-great Jack Gallagher. During the high-inflation 1970s, his Dome Petroleum was a hot growth stock. So hot, that he got the (in-retrospect loony) idea of building an oilfield megaproject in Tuktoyatuk, a hamlet in Canada's Northwest Territories. Cost analyses said that he would have needed two hundred and fifty dollar a barrel oil to make it pay. Did that stop or even deter him? Not at all!

Nor did it deter the Government of Canada from pouring taxpayer money into the area. Nor did it deter Canada's big banks from loaning Dome lotsa money. The current reputation of Canada's banks, forged in the ‘08 crisis, will not survive an examination of 1977 to ‘82. They lost billions on bad mining, natural resource and oil-and-gas loans.

In these low-inflation times, the late ‘70s make a good contrast to show how unhinged people can get. The U.S. ten-year bond topped out at more than fifteen percent in 1981, and yet the new witty wisdom said bonds were "certificates of guaranteed confiscation." The sophisticates of the time really believed that 15% a year over ten years was a sucker's deal!

In that high-inflation environment, natural-resource companies became the darlings. So did commodities. In the early 1970s, when silver was at about $2 an ounce, a silver bug named Jerome Smith predicted that silver would "double, and double again." $10 silver would have over-fulfilled his prediction. Yet, as the ‘70s closed, silver was careening up to $50.

This fusty vignette shows plainly how a bubble distorts thinking: predictions which were wildly optimistic at the time they were made, look conservative and even timid later. It's this process that pickles prudence and sends the players into La La Land.

Lest you think that these are creaky old tales, allow me to supply you with a more current one. In December of last year, I bought three million units of a cryptocurrency called the New Economy Movement (NEM). I bought it on news that it had attracted real interest in the fintech sector in Japan. (Just to let you know, I bought it when that news attracted a lot of scoffing on Bitcointalk.) I paid about eighty satoshis each, less than one millionth of a Bitcoin per; in total, I spent about 2.5 Bitcoin for the three million. Back then, Bitcoin itself was below $800.

After I bought ‘em, I began fantasizing that one day, some day, each unit of NEM would be worth a dime and I'd be rich. In these fantasies, I had assumed it would take three to five years for that happy day to arrive.

As I write, NEM's current market value is more than twenty-eight cents – and Bitcoin's is above $4000. NEM blew through the ten-cent level less than six months after I bought it. Had I put my dreams to digital paper on Bitcointalk, I would have hedged it by saying I was happily dreaming. But had I done so, "ten cents in 3-5 years" would have looked timid in retrospect.

On the ground, the day of the bubble is a magical time. Controls get chucked out the window. Why worry about cost control when the capital markets gush forth a river of cash? "Don't worry about the truck; we'll buy a new one. Everyone makes mistakes." All are focused on making as much hay as possible now that the sun is shining. Such required the thresher to boogie along at full tilt. Controllers, including cost controllers, are sometimes told that they're getting in the way of the thresher.

Inevitably, some of the cornucopia of capital turns into what could be called quality-of-life accoutrements. Why eat ramen when you can chow down on rib-eye steak? Why be petty and mean? The guys in the field are hunting the elephant! They're finding the mine! Once that billion-dollar baby is nailed down and put into production, a few rib-eyes won't even be a rounding error in the company's books!

As indicated above, the "bubbleicious" mentality does spread to the guys at the locks who direct the river of capital. In the mining industry, in normal times, capital is hard to get and usually comes with strings. Lenders normally demand sweeteners to the deal, like free warrants that allow the lender to buy a block of stock of the company for a fixed (low) price. There's a whole sub-industry called "streamers" which make loans with the demand for the right to buy X% (about 15%) of a mine's yearly production at a bargain-basement price for a couple or few years. To get the capital, the companies have to agree to this. In normal times, they do.

Another common financing, from a huge major producer, is a "joint venture." The major producer agrees to finance the bulk of the capital cost for developing a mine – in exchange for a majority stake in it. I saw one joint-venture deal that saw the exploration company hand over 80% of the project in exchange for the major building the mine. Since the capital costs for the project were way over the head of the explorer, management was glad of the deal: it was the only way to get the mine into production. 20% of something is better than 100% of nothing.

In these normal times, there's one method of financing that's so mythical that it takes on the status of an Eldorado: a straight loan from a big bank with no strings attached. Legendary, except for one special, magical period...

The Status...The Status...The Status...

In the heated hurry-burry of a bubble, narcissism waxes, hubris grows and greed is unleashed. These binges are typical and easy to understand. However maniacal, they're rooted in business thinking.

But there's another bubble-fertilized growth, one that addles the Big Men in the boom towns.

There's an old, wise Wall Street saying: never confuse genius with a bull market. (An important variation, one worth remembering, is: a bull market is a magical sump pump that bails you out of your mistakes.) The Big Men, as noted above, very much partake of the La-La juice. And why not? They're the guys at the epicentre of it. When they started off, even the specialized financial press didn't give a rat's behind about them. But as the bubble grows, business reporters court them frequently. If the bubble's a big one, they'll be courted by the mainstream media. They not only become ultra-wealthy, their words are hung on as if they were gurus.

Inevitably, they become awfully tempted to think of themselves as more than mere businessmen. They start to think of themselves as statesmen. Instead of besotted by greed, they become besotted by status-hunger.

In the long run, this hunger tends to be a good thing. Billionaires who crave status tend to become philanthropists. Some may do so out of mixed motives – George Soros' philanthropic efforts can be cynically described as the best reputation-management campaign evah – but Adam Smith and others remind us that we should judge a tree by its fruits. Andrew Carnegie, regardless of his motives, got a lot of libraries built.

However, there is a dark side. All-too-often, these Big Men satisfy their status needs through political influence. If you're wondering how Michael Bloomberg got to be Michael Bloomberg, this desire does pertain. Significantly, a 2015 survey of Silicon Valley movers-and-shakers elicited beliefs that are a lot like Mr. Bloomberg's. The results show that "the government to be an investor in citizens, rather than as a protector from capitalism." A nice ideal, ‘tis true.

A related write-up also shows the all-too-typical mindset of the highly successful businessman: all the world would be run better if it were run like Silicon Valley. Just like the dyed-in-the-wool union man thinks that Utopia will arrive when everyone belongs to a union and the system become syndicalist, who dreams of a world where everyone stands tall and no-one is economically anxious, so it is that the techie Big Men believe that the best of all possible world is one where everyone's living in high-tech cities and folks commute via bikes, electric vehicles and bullet trains. And, no-one is economically anxious.

Vanity, true, but vanity that's quite understandable. It's normal for big winners to enthuse about a world where everyone's a winner. And as long as the bubble keeps a'growin, who knows better about how to win than they do?

There's another facet isn't all that benign. The write-up shows that "49% of founders believe that nearly everything people do–even what someone eats for breakfast–makes a significant impact on other people's lives." Significant enough to imply government policies that, shall we say, are intended for the peons' own good.

You don't need to be a trained psychologist to read something into this.

King Of Fools

Inevitably, these Big Men get the status hunger to the point where it affects their business judgment. When the 1980s takeover boom first got rolling, a takeover artist's lieutenants parleyed with a CEO whose too-plush office was decorated with hunting trophies from his safaris. Needless to say, they were not enthused.

That kind of status-seeking is old-style Anglophilic. The mere businessman fancies himself a country gentleman with a competence. (See #2.) As consistent with Anglo norms, his status needs are essentially apolitical.

This kind of hunger is not the type which entrances a middle-class guy who grew up in a nation of political animals. Instead, the poison of choice is political clout.

Remember Jack Gallagher? As the ‘70s climaxed, he spent a lot of time in Ottawa even though there's nary a drop of oil there. True, one purpose was crony-capitalist schmoozing: the government of the time, then headed up by Justin's father Pierre Trudeau, bequeathed a special depletion-allowance write-off for oil-and-gas that was nicknamed the "Gallagher Amendment." He did know how to work a crony-capitalist hustle.

But Mr. Gallagher also fancied himself as an avatar of Far North Development. A vision of previously-barren land growing populated and prosperous thanks to all those resources treasures boxed in the rocks of the Far North. A dream of towns and cities growing in land that was nothing more than caribou pasture. Motivated by this dream, as well as by bubble-time La La Land, he not only persuaded the federal government to direct lots of money to Tuktoyatk but he also sunk a lot of Dome Petroleum money there.

The Gallagher Amendment benefited Dome quite a bit. But "Gallagher's Folly," plus a climactic empire-building acquisition, did the opposite. The company he had spent decades building stumbled into the hands of Amoco Petroleum through a desperately friendly takeover. Both Gallagher and his shareholders paid dearly for his statesman's vision predicated on $250 oil.

Big-Game Diversity

Google's enthusiasm for Diversity – waxing in a magical time when Google and President Obama were closer than were Jack Gallagher and Pierre Trudeau – has gotten to the point where a mob of SJWs, whose power base is rooted in the back office, got a Senior Software Engineer – a producer – fired.

This is so topsy-turvy it's mind-boggling: especially from the standpoint of the classic "human capital" business, the brokerage firm. A big producer in a brokerage house, when given flak by the support staff, thought nothing of marching up to his branch manger (indirectly, to the senior VP of retail) and stating: "Get those [never mind] off my back or I'm gone." And believe you me: if those [never mind] weren't batted down, he would walk - and all his human capital went out the door with him.

In the olden days of Wall Street, Merrill Lynch had the repute of being a great place to be from. They had the best broker-training program in the business. But they also had a corporate structure which chafed at the free-wheelers. The ones who had built their books to the point where they were up-and-coming big producers, found that they had their pick of job offers if they up and quit.

To top management's sometimes-spiteful sorrow, Merrill's very slick marketing department was poor competition for: "Hey, Frank! It's Stan. How are the kids?... Frank, I'm no longer with Merrill. I jumped ship to Blankety, Blank & Co. Why don't you follow along and transfer your account here? Just give Merrill a call..."

Granted: a lot of this jump-ship was motivated by good old money-hunger. Typically, Stan moved to Blankety, Blank because he got a bigger piece of the action. But there were enough Stans to make it clear that a big producer could jump out the window and land on his feet...even if he quit because he felt disrespected. So long as the guy brought in the bucks, the senior veep of Blankety, Blank couldn't care less about how prickly Stan was.

As a result, the [never mind]s in the back office didn't give the brokers much grief. They also figured out that a researcher whose calls generated a lot of commission dollars enjoyed a similar don't-mess-with-me immunity. "My last five recommendations generated hundreds of thousands in commissions. Why do I have to put up with grief from those [never mind]s?"

True, computer-programming genius is a different skill set than stockbroker's flair. But those differences do not pertain to the underlying commonality.

Vox Day pointed out that Google's money engine is Adsense and search, just like an old-style retail brokerage's money engine was commissions. As his correspondent pointed out (bolding added:)

The money-making core of Google is a tiny speck of its workforce, a tiny core of people who make AdWords work. The fear is not that 2/3 are SJWs, it's that one or two or three of the key engineers, who are working on the next version of Search and Adwords, who are actively fighting and hardening against existential threats to the product, might walk, or even just do a slightly less great job.

Google is actually a very fragile company...

If I were one of those uber-nerds, who program ten times as well and adds a hundred times the value, I couldn't help but notice that James Damore got two very public job offers within a day of he getting canned. If I were walking on eggshells because of Diversity, and haunted by anxiety about my lifestyle taking a dive if I were to walk, I'd be re-evaluating my anxiety and wondering why I have to walk on eggshells at all.

Because of last Tuesday's very publicly splayed Diversity mess, it's not that hard to foresee Google becoming Silicon Valley's answer to Merrill Lynch: a great place to be from.

It would be doom-porn exaggeration to prophesy Google's demise; like Merrill Lynch in the old days, Google will stay afloat. But it's not doomsaying to prophesy that Google – and its stock – are in for some rough seas.

All because the top boys in G's C-suite got bubble-addled: bubble-happy enough to trade some business savvy for some Real Big Status. If Mr. Einhorn does not have Google in his Bubble Basket of short sales, I'd be really surprised. ESR

Daniel M. Ryan, as Nxtblg, is shepherding the independently-run Open Audi Initiative Prediction Market Shadowing Project. He has stubbornly assumed all the responsibility and blame for the workings and outcome of the project.

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