Dana Blankenhorn

Is the Volcker Precedent Wrong?

Fed chairman Jerome Powell is basing his anti-inflation fight on the success of Paul Volcker from 1979-1984.

The myth is Volcker sent interest rates higher than that era’s inflation, but the resulting recession set the stage for decades of growth to come.

What if it’s wrong?

I had already begun my reporting career in 1979. Volcker’s policy did cause pain. But interest rates didn’t start falling until the 1980s, and the Fed wasn’t the only cause.

The other cause was the State Department. In 1981 the Reagan Administration quietly negotiated an alliance with the Saud family based on a simple premise. They would sell oil in dollars and pump a lot of it. We would extend to them our military protection, specifically against Iran.

That alliance has held firm from that day to this. It held firm through the Gulf War. It held through 9/11, even though the attack was committed mainly by Saudi nationals and inspired by the son of a Saudi billionaire. It held through the disaster of Iraq.

It was this alliance that sent inflation down in the early 1980s, not Volcker’s Fed. Oil went from over $125/barrel to $80 in Reagan’s first term. Texas’ economy was crushed, but everyone else prospered. It was morning in America.

Our present inflation is also based on resources. Oil costs spiked from $80/barrel last September to over $115 in May. They’ve since fallen back to $80. The fall came about because we’re no longer in an economic era defined by resources.

The Three Big Challenges Boiled Into One

Nearly three years ago, after attending the Heidelberg Laureate Forum honoring great mathematicians and computer experts, I wrote a three part series on the big technologies of this decade:

• The End of Oil 
• The Machine Internet 
• DNA as a Programming Language 

This is a good time to revisit the trends. A recession is also the best time to start a new tech company. Incumbents are faltering and you get a clean sheet of paper to write the future on.

Junk Tech

Imagination is in a constant competition with Moore’s Law.

Imagination often loses.

Moore’s Law makes many things possible. Not all these things are worth doing.

I call things that aren’t worth doing junk tech.

Bitcoin is junk tech. Web3 is junk tech. Blockchain is junk tech. So is the “metaverse,” in the sense that we should all live in a virtual world rather than the real one.

Good applications can come from junk. The home shopping service I supported in 1984 became an Electronic Data Interchange (EDI) format. The map CD-ROM I worked on in 1989 became a format for geographic data. Creating lemonade from lemons is always a great opportunity.

Bad News is Good News

A few weeks ago, I noted how the “bad news” at Snap, Twitter and other social media companies can easily be interpreted as good news.. If people are no longer interested in rage tweeting, they could be becoming more thoughtful. They could be reserving judgment. They could have found real lives.

The same is true, doubly so, with the recent “problems” at chip stocks like Nvidia, Micron and Qualcomm. Prices for commodity chips are falling. The “chip shortage” is easing. In the near term it means lower profits for big chip companies. Sell, sell, sell.

But it also means falling prices and more supply for companies that use chips. It means car prices could start declining. It means the Machine Internet can get a fresh start.

Catching Up

I have missed the last two weeks because we finally took a vacation, one we had been promising ourselves for 3 years.

Nothing was going to stop us. Not this time.

You probably feel the same way. That’s the problem. We’ve all been feeling the same way for years now.

In a normal economy, we feel differently. We’re of different ages, with different incomes, different interests, and different lifestyles. Usually, it balances out.

Not these last two years.

First, we were all in lockdown.

Then we all learned about Zoom.

We all saved together, and last year we started demanding things together. The same things at the same time. This brought big raises and labor shortages, especially in scut jobs. Supply chains couldn’t adjust because demand exploded, and China wasn’t ready for it. (They’re still not completely ready.)

Then came the war. We cut off Russia, OPEC took advantage, and Texas knew it had a good thing, so U.S. supplies didn’t jump either.

The result has been a hit of double-digit inflation, the same kind I lived with through the 1970s. Markets are reacting just as they did then. When money costs money, you need an immediate return to pay it back. Equity grows scarce as investors rush for safety. The stock market was crap in the 1970s.

We’ve been whipsawed, and it’s natural to feel upset about that. Our spending patterns changed faster than the economy could. Stock market analysts were months behind these changes. Policymakers were even further behind. They still are. That’s why the national mood is sour. We’re headed for a crash, and it seems there’s nothing we can do about it.

But there is something we can do about it. Our collective common sense will get us through if we just believe in it and act as though our neighbors aren’t all idiots. They’re not. Most aren’t, anyway. That’s why democracy works.

Thanks to Moore’s Law, the speed of adapting to change will increase, too. We have the technology to beat inflation now. If tech companies want to abandon the coasts and find cheaper labor that just means fatter returns sooner.

You want your money in the long term trends, those I identified three years ago. The end of oil. The Machine Internet. DNA as a programming language. 

The problem is that, since we’re early in this new boom, the winners are hard to identify. Winners that look obvious, like Tesla and Enphase, are still overpriced. Look first to the Cloud Czars that will lead the Machine Internet forward. As to DNA, I’d buy an ETF like iShares Biotechnology (IBB) or the S&P SPDR Biotech ETF (XBI) until we know more.

Bear markets end. If you can wait three years, and if you’re investing instead of speculating you should be able to, you’ll mostly be whole and have a clearer idea of what will rise further, especially if you invest in real companies with real earnings. Now is a time to be thankful for diversification and cash.

This too shall pass. In a year or two, we won’t all be thinking the same things, doing the same things. I may be retired. You may be getting started on a family. Our interests and economic patterns will be different. That’s when we’ll find out what the “new normal” really means.

Unless Putin goes nuclear, in which case it doesn’t matter what you’re in because we’re all dead anyway.

Tech Demands Freedom

America dominates the global tech economy because freedom.

The freedom to think what you want, and be who you want, is now the key to economic growth.

This is a point that’s widely ignored by American elites today. Americans love to talk about what’s wrong and have overestimated our global adversaries since 1776.

It’s most obvious now in our economic competition with China.

China is a great manufacturing power. But it continues to trail in software and science. It deliberately put down its Cloud Emperors for threatening the state. It can’t deliver the latest semiconductor technology.

Software is the product of hands and minds. You can’t automate its production, the way you can a car. You can improve productivity with better tools. But organizing a team requires that coaches listen as well as speak. Man management, they call it.

The best scientists, coders, and writers are all motivated by something inside. We’re not doing it for the money, we’re not doing it for an ideology. We each have our own reasons. In my case, it’s a desire I’ve had all my life to be heard, to be seen, to be part of the conversation. If you want to get the most out of us, you must respect that. China’s government doesn’t respect that.

Dawn is Coming

We’re approaching one of the biggest snap back rallies Wall Street has ever seen.

Once Putin’s War is over, everything’s going up. How much depends on the result.

Right now, signs are good. Israel has joined the sanctions regime. China is only going to sell stuff to Putin for cash. But China is in worse trouble than we are. They’re still fighting COVID with lockdowns. Their stock market is a mess. Their property magnates are collapsing. Hong Kong has created a brain drain. Shared prosperity is becoming shared misery. I expect a slow policy readjustment.

Once the war is over inflation will decline. Not magically. Prices are always sticky downward. You don’t cut your price based on costs. You do it when your rival cuts theirs.

Technology remains our best weapon against inflation. My long-term concern remains deflation, and how the gains of technology are apportioned. Fortunately, all those forces who sided with Russia, including our worst oligarchs, are being discredited by events. No one in Washington can see this because they only see today.

Facebook’s Bigger Problem

Meta Platform (uh, Facebook’s) market cap has dropped 38% since its “disappointing” earnings release. The numbers weren’t all that bad. They make the shares look cheap, a price to earnings ratio under 14.

But before you run to your bookie, Facebook has a bigger problem than metaverse software, Europe’s privacy laws or media schadenfreude.

Its cloud is not set up to do what its software proposes to do. And it seems to be doubling down on that bad design.

I call Facebook a “Cloud Czar” because it has 15 hyperscale data centers around the world. They’re bought with cash flow. Once open, they drop its hardware and scaling costs to near-zero. You can count the companies sharing this advantage on one hand – Apple, Microsoft, Google, and Amazon.

Saving Facebook (Uh, Meta)

Shares in Facebook, uh Meta Platforms, continued to fall on February 7.

The most recent price, about $230/share, is just 16 times last year’s earnings. Considering that the average stock in the S&P 500 now has a PE of over 25, and that Facebook is bringing a quarter of its revenue to the net income line, that’s absurdly cheap.

It’s cheap because analysts are reading a shortfall in growth as a harbinger of doom. The three main apps – Facebook, Instagram, and WhatsApp – are losing popularity because people don’t trust the company. A lot of its future gains are going into “metaverse” software that analysts don’t understand.

Contradictions of 2022

As we enter 2022, the distance between markets and Washington pundits has never been greater.

The markets keep rising. They point toward continued growth, with more of it concentrated in fewer corporate hands.

The pundits keep screaming about inflation stealing our savings, making everyone poor.

Both can’t be true at the same time. Blue skies don’t fall.