May 28, 2020

Dave Collum Explores Big, Dangerous Ideas | The Pomp Podcast

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Key Takeaways

• “Experts with massive resumes can all be wrong”
• Even a 90% economic recovery from COVID-19 still means a 10% drop in GDP – a disaster
• Because of low interest rates, corporations are incentivized to minimize owning assets and maximize cheap debt
• “If I want to know something would cost the same 6 months from now, I would hold dollars, not gold or bitcoin” – Dave Collum
• On the elections: Dave thinks Biden will be taken out, and the line-up will be Trump vs Cuomo
• Censorship of ideas that don’t agree with institutions is an attack on science and truth
• “We should be graduating half as many people from colleges as we are currently graduating” – Dave Collum
• Skills like being an electrician or a plumber won’t be automated away soon, yet less people are willing to learn them

Books Mentioned (Dave reads non-Fiction)

• How to Have Impossible Conversations: A Very Practical Guide – Peter Boghossian and James Lindsay
• Influence: The Psychology of Persuasion – Robert B. Cialdini
• Unbroken: A World War II Story of Survival, Resilience, and Redemption – Laura Hillenbrand 
• Ghost Soldiers: The Epic Account of World War II’s Greatest Rescue Mission – Hampton Sides

Intro

• Dave Collum (@DavidBCollum) is a professor of organic chemistry at Cornell University, a libertarian and fan of Austrian business cycle, Zero Hedge, and gold
• Host – Anthony “Pomp” Pompliano (@APompliano)

Lessons from Studying Organolithium Chemistry

• “Experts with massive resumes can all be wrong”
• For instance, it was long believed that when a chemical reaction occurs between 3 elements, it’s never done in one step i.e., a+b+c=abc
  • Rather, it’s done in 3 steps, because the probability of 3 elements colliding at the same time is minuscule
  • Turns out, Entropy favors the simultaneous reaction
  • “I swear to god you can ask a 1000 Ph.D. chemists what’s the answer and they would all agree, without fail all agree what the answer is, [but it] turns out to be wrong” – Dave Collum

On Investing

• For the last decade, Dave remained mostly on the side lines – why?
  • “I think the market has literally been screwed up for 10 years”
  • “Buying into these markets, if it got bad I wouldn’t have forgiven myself”
• If you are young, don’t worry about the government, instead:
  • Find a good financial advisor (rare), then see their personal returns for the last 5 years
    • Examine their returns during the boom, how are they managing their risk?
  • Look for equity that pays you to hold it, not give you some promise of the future
    • Think: No debt, steady business, 5% dividends
  • Switch your allocation when it gets lopsided
• You have to respect risk, or you turn into a “Darwinian smudge mark on the road”

The Economic Impact of COVID-19

• It’s a dream to think we can recover the economy back to where it was
  • Even a 90% recovery still means a 10% drop in GDP – a disaster
• We will have lots of missing jobs that won’t ever come back
  • You can’t run a restaurant with 50% capacity or cinemas with masks on
  • The only way back is if people collectively say screw it, which is a rising trend
• Some think it’s selfish that people go out, but many struggle to feed their kids and there is nothing selfish about that
  • “We used to say 40% of the people couldn’t put $400 together if they had to, these people now can’t put 50 cents together” – Dave Collum

COVID 19 Models and Data are Broken

• Neil Ferguson created a model that said a ridiculous number of people will die
  • Turns out its a hoax, and mortality rates are an order of magnitude less than model predictions
  • Moreover, even he wasn’t social distancing and broke lockdown to have an affair with a married woman
• Additionally, data collection is bad
  • Tests are not always done properly and may result in inaccurate statistics 
  • Skewed financial incentives lead to COVID reported as the primary cause of death even when it isn’t

Incentives and Stock Buy Backs

• In the past, assets on the balance sheet served to get low interest rates
  • Now, low yield means holding assets serves no purpose
  • Corporations are incentivized to minimize owning assets and maximize cheap debt
  • “The whole thing has been a complete Madoff scheme”
• Incentives have to be restructured, a few possible ways:
  • Give CEOs shares that they can’t cash or hedge for 10-15 years
    • In essence: “build us a company that you know 15 years from now will pay you handsomely for your efforts”
  • Never let a CEO be chairman of the board, and don’t let them load the board up with their friends or swap share positions with each other
  • CEO can apply for running a company for 3 years for free, they can get financial rewards if they run it successfully based on valid measurable metrics (not share price)
  • Create a rule that CEOs of bailed out companies can’t operate a publicly traded company for 10 years

Bailouts

• Big corporations create wealth, but we should be careful with government supported monopolies
• State and local governments are notoriously bad capital allocators, yet they will be bailed out
  • The debt is “odious debt”, similar to Greece handing over its assets in exchange for bailouts
    • “The Greek people didn’t hand it over, the Greek authorities handed it over”
• USD is the reserve currency for now. That said,
  • “You don’t get to keep reserve currency status if you act like idiots”
• Demographics issue: At some point, the boomers will be demanding money, millennials can’t buy houses that boomers want to liquidate
  • In short, “I don’t think the next generation could buy out the previous generation”

Federal Reserve Actions

• “The Fed’s actions have not particularly good in my opinion since Greenspan” – Dave Collum
  • For instance, 1987 crash should have been a wakeup call against pumping up markets
  • Greenspan got to ride the greatest bull market in the 20^th century all the way from 15% interest rates on bonds
• Paul Volcker was the last Fed chair to recognize that a depression is a purge of excesses
  • Fed chairs since then have been saying not on my watch, they just make sure banks are fine
• $6Tr of stimulus wouldn’t have to exist if we didn’t  go into COVID-19 with the world’s biggest corporate credit bubble of all time
  • Additionally, it’s the pensioners who hold all the credit debt and think they can afford to retire
• False sense of wealth: Governments deciding everyone gets free health care and good retirement
  • Everyone will perceive they are rich, and none of it increases wealth creation

Gold and Bitcoin

• “I don’t think gold is ever going away, it’s been around for 5000 years”
  • That said, if gold purchasing power drops then it was a bad investment
• Bitcoin is a great experiment, but Dave isn’t a believer – here is why:
  • It fluctuates wildly, hopefully it will settle down and flush the speculators out
  • It is yet to survive attacks by sovereign states
• “If I want to know something would cost the same 6 months from now, I would hold dollars, not gold or bitcoin” – Dave Collum

Separation of State and Money

• “I think the separation of currency and sovereigns would be over the dead bodies of a lot of sovereign leaders, and the bankers” – Dave Collum
  • Those who make and control the money control the world, they won’t lose that control peacefully
• If Bitcoin is outlawed in an increasingly oppressive world, will the average user still use it anyway?
  • “It [Bitcoin] might have a role, but that’s not your home run”
• One country banning Bitcoin doesn’t mean increasing adoption in rival countries – for a simple reason:
  • They don’t want to give up their sovereign control either
  • We might end up with “the real nightmare” scenario of Zuckerberg running Libra
• Money is a belief system, we got one shot at the separation of state of money, if it fails then people will cease to believe in the idea of cryptocurrencies
  • “if you shoot at the king you better kill him” – Anthony Pompliano

Biden vs Trump

• Dave thinks Biden will be taken out, and the line-up would be Trump vs Cuomo
• A future president prediction: Svante Myrick, the mayor of Ithaca, New York
  • Pomp’s prediction: Dwayne “The Rock” Johnson
•  “I’m not a big Trump fan, I’m Trump tolerant. But I love the disruption, I love the fact that he went against 2 parties simultaneously and won” – Dave Collum

On Zero Hedge

• COVID-19 posts and tweets from Zero Hedge get malware warnings
  • “Some people in authority who want to make sure that alternative views of the COVID virus are not getting out there”
• “Zero Hedge is way better than mainstream press” – Dave Collum
  • They have some wacky stuff, but you have to filter
  • That said, “I rarely see Zero Hedge look dead wrong”

Censorship is Dumb

• Censorship of ideas that don’t agree with institutions is an attack on science and truth
  • This is evident in institutions being repeatedly wrong about COVID-19
  • If you can’t question thought processes, you make no progress
• Additionally, a lot of math doesn’t add up about COVID
  • For instance, why was New York a disaster but not LA?

Ruining Health Care

• COVID-19 crisis is pushing hospitals into bankruptcy, and private equity is buying them at fire-sale prices
  • They aim to make a lot of money at the expense of health care – how?
    • Strip mine the thing, load it up with debt, then sell off a shell of a hospital
    • Result: A national health disaster
  • This is enabled by the Fed’s cheap money
    • “When money and capital is precious, people don’t buy shells of companies, they do their due diligence” – Dave Collum
• NYU medical school announced no tuition fee, many will follow suit
  • The result is society will pay doctors less and control them more
    • In short: more socialized health care

On Education

• “We should be graduating half as many people from colleges as we are currently graduating” – Dave Collum
  • “There are majors that should be minors, minors that should be courses, and courses that should be history”
    • For instance, you don’t need 7 years to get a law degree nor $250K to study sociology
    • If schools produce educated people who are then impoverished, then was it really worth it?
• How many “Microsoft founders” are being sent to cubicles to then may be become CEO of some company?
  • It would take a trivial number of these to have a big impact on the economy
• “I think that hobbling a generation with debt is a disaster, I think giving free college is a disaster” – Dave Collum
  • The issue is when you get into college debt, you will go to a paying job to pay it off, not go and change the world
• Trade schools are becoming more relevant –  here is why:
  • Skills like being an electrician or a plumber won’t be automated away soon, yet less people are willing to learn them

Additional Notes

• We have to make stuff and bring manufacturing back to US
  • Cash flow goes to where things are manufactured

• “I am still reasonably comfortable with the idea that he is not dead” – Dave Collum
  • He is probably under witness protection and underwent plastic surgery to change his looks