Davos Man

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S1: Hello and welcome to the Davos man episode of Sleep Money, your guide to the business and finance news of the week, I’m Felix Salmon of Axios. I’m here with Emily Peck, also of Axios.

S2: Hello. Hello.

S1: I’ve been loving your newsletter. You are now actually putting out a newsletter every morning, and it’s amazing. What’s the name of the newsletter?

S2: Axios markets? Please subscribe. It’s me and and co-writer Matt Phillips, who is delightful and sometimes Neil Irwin writes for us. It’s like it’s really good and it’s free.

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S1: So Matt Phillips and Neil Irwin, they used to work for a terrible place called the New York Times, and now they went for this wonderful place called access. The New York Times is basically I have one reporter left at this point. Mr. Peter Goodman, welcome.

S3: Thank you very much for having me. I’m delighted to be the last person with the lights on at the shed.

S1: So Peter introduce yourself. Who are you and what brings you onto this show?

S3: I’m the global economics correspondent. I’m based in New York and I’ve written a book called Davos Man How the Billionaires Devoured the World.

S1: So if you live in the world, you should, you should listen to this. This is how you will discover how you have been devoured,

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S3: actually, even if you live in other worlds because you know, Bezos is going to space now.

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S1: Exactly. We are all like Jonah. We have been we are in the belly of the billionaire. We don’t even realize that we are going to talk about Larry Fink, who’s one of the classic Davos men and his business model. Over at BlackRock, we are going to talk a bit about some of the other billionaires. We are also going to talk about Satya Nadella. I’m not sure whether he’s a billionaire or not, but he’s the CEO of Microsoft is very much a Davos man, and he just announced that he was buying Activision Blizzard for $69 billion. We’re going to talk about that deal. We are going to talk about the fiasco that is the whole 5G rollout because it’s hilarious. We’re going to have a Slate Plus segment on Peloton because that’s kind of funny, too. It’s all coming up on slate money. So let’s jump into this this week is the week of the Great Davos show, I have recorded slate money from Davos on multiple occasions. It is always, I believe the technical term is a clusterfuck. It involves handing over envelopes of cash to random functionaries of Eurovision. The bottom of the hill and trying to get them to hand over what passes for a recording studio, even though there’s no soundproofing at all. I feel like the new way of recording Davos shows, which is where everyone is just sitting around at home. Drinking cups of tea is much more copacetic, especially when there’s no actual Davos because it was cancelled. I mean, this is the best possible Davos, right? Peter.

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S3: Well, the fact that we don’t have to put crampons on our boots and go through security 17 times a day, as if we’re, you know, simulating going through LaGuardia Airport 17 times in 24 hours. That is certainly very pleasing. The food is much better at home. The lack of, as Kara Swisher put it to me the other day, rich people walking around licking either rich people. Yes, it’s much, much nicer to contemplate the snow right here at home.

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S1: And so now it’s going to be it is going to happen, apparently in May. But the whole business calendar has got this sort of January focus. So you get things like the Oxfam Inequality Report, which always comes out the week of Davos and you get things like the Larry Fink annual letter, which always comes out the week of Davos. And you have things like the Edelman Trust Barometer, which always comes out the week of Davos. And even when Davos is canceled, all of these things still come out as scheduled. And I really wanted to talk to you about the Larry Fink letter, because Larry Fink is one of the main characters in your book, and he doesn’t come out particularly glowing and covered in halos and light in your book. So explain who he is and what the problem is with him.

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S3: Sure. So Larry Fink is the world’s largest asset manager. He has vacuumed up pension funds from around the world university endowments. He’s managing more than 10 trillion dollars. You heard that right 10 trillion dollars. And that gives him almost godlike powers of observation over the movements of money. He’s a genius by all accounts. I mean, he he’s worked essentially as the advisor to Uncle Sam, not just after the 2008 financial crisis, but now during the crisis in the first wave of the pandemic. I mean, people trust his counsel because he actually knows what’s going on, and he built out a surveillance system called Aladdin. That’s his attempt to keep tabs on, you know, unexpected changes in in in markets, increased borrowing costs, potential crises before they happen, and people pay good money for that. I mean, he he’s now selling Aladdin to other financial institutions that collectively manage more than $20 trillion. So this is somebody who, you know, has a great deal to say about markets, and that’s why everybody takes seriously this annual letter to shareholders. But he’s positioned himself as the hero of this thing called stakeholder capitalism. This idea that, as its champions would tell you, Milton Friedman ism is dead. It’s no longer just about corporate executives being as greedy as possible, maximizing returns. And through that, the magic of the markets will supposedly trickle down to the rest of us. Something that has in real life happened zero times. But we’re done with that conversation. The new conversation is about catering to stakeholders, the environment, labor, local communities. And so in Larry’s most recent letter, he doubles down on stakeholder capitalism because he’s getting attacked by the right. You know, the state of Texas has just reacted to his latest talk about climate change and the potential for pulling funds out of companies that don’t move fast enough to address climate change. So he’s doubled down and said, Look, you know, this is not woke. This is real capitalism, but it’s about getting ahead of the curve in terms of what we as corporate managers need to do.

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S1: So so he’s saying something which seems uncontroversial, which is the like. If you don’t position yourself as a company to be well positioned in a in the world of climate change, then that’s the sort of existential risk for your company. And I don’t necessarily want to be invested in that.

S3: Well, Davos man’s great at words and Larry Fink great at words. And I mean, there’s no question it makes all the sense in the world that if you’re going to invest in the mortgage backed securities market and Larry Fink actually pioneered the mortgage backed security back from his first Boston, then. Yeah, you want to know like, is a flood going to come that’s not built into everybody’s models, it’s going to wipe out the value of. Real estate pledged as collateral. That’s all great, you know? And he talks about the need to in this most recent letter to, you know, respond to the fact that work has changed during the pandemic. Employers have to deal with different expectations from employers. Other steps perfectly sensible. But think about the stakeholders that are perpetually missing from this. There’s a lot of talk of employees. There’s no talk of labor unions. There’s actually this incredible talk. I fished out this one quote about government. We need governments to provide clear pathways and a consistent taxonomy for sustainability policy, regulation and disclosure across markets. Yeah. You know who could argue with that? Of course we do. Well, you know, left unsaid is that BlackRock, the world’s largest asset manager, belongs to the Business Roundtable. The Business Roundtable has lobbied aggressively against regulations, helped deliver Trump’s package of tax cuts worth one point five trillion dollars lavished on people like Larry Fink. You know, that diminishes the ability of government to do what it needs to do, including collects taxes, including regulate effectively. He’s part of the U.S. Chamber of Commerce and and he has departed, you know, very clearly from his own stated principles, especially on the environment.

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S1: So, so OK. So basically your problem with with with Larry Fink is the kind of that there might be a hypocrisy there. Like he might be saying, a certain number of words in the words might all be well and good, but the lie, you know, he’s also. A rapacious capitalist, and we can’t trust him to save the world.

S3: The world has rapacious capitalists, right? That’s fine. That’s why we need regulators. It’s worse than that. He’s actually like other Davos men like Marc Benioff, who said at Davos last year that CEOs are the real heroes of the pandemic. They’re positioning themselves as the Saviors. They’re essentially saying, Hey, we’ve got this. We don’t need labor unions. We don’t, we don’t need regulations, we don’t need taxes. That’s just money squandered on bureaucrats who aren’t helping us. We can take care of life’s problems. And so it’s not merely hypocrisy. Look, everyone’s a hypocrite if you really look at people’s records carefully. It’s that he, as he is essentially propagating this idea that government doesn’t need to do its job well. Meanwhile, you know, BlackRock is one of the largest investors in JBS, the world’s largest meatpacker, which is clear cutting the Amazon to expand beef production.

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S1: OK, so I want to like address that because this is one of my my thing about Larry Fink is that there seems to be two general views of Larry Fink. One is that he is like the Davos view, which is that he’s this far sighted man who controls $10 trillion and is terribly important and can help, you know, what’s the word? Improve the state of the world to use the the slogan of Davos. And then the other one is that he’s actually making it harder to improve the states of the world because of everything you’re saying that he’s he’s, you know, making it harder for governments to regulate. And he’s part of this kind of laissez faire subtext to Davos, which has proved extremely harmful. And and my view of Larry Fink is actually neither of those, which is the roughly 75 percent of the money that he manages. He has no ability to actually choose where it’s invested. And it’s all it’s all passive. It’s ETF and index funds and iShares. And that kind of cut

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S2: you off because I saw you tweeting about that and like just to emphasize 25 percent of 10 trillion dollars is an awful lot of money. Regards to $1

S1: billion dollars, it’s like, you know, it’s it’s smaller than PIMCO. You know, it’s and

S2: we do know that companies make moves based on what this man says, like he wants people to. We do. I don’t think we do. There’s like an there’s an academic paper I can put in the show notes that shows like when he says, disclose climate risks in your filings. Companies actually just start doing stuff like academics have tracked it. I don’t know if this is effective to disclose the risks, but

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S1: it’s just so, so. So just to finish my thought, like one of the super interesting things about the Larry Fink letter this year is that he ends it by saying, What I really want to do is empower the owners of the capital. So the $10 trillion that he controls, yeah, he gets he has a certain amount of control over it, although, as I say, 75 percent of it, really not that much. People want to invest in the S&P 500. They give it to him to invest in the S&P 500. He doesn’t have any discretion about that. And what he’s saying is that for ultimately all of those investors, he doesn’t even want to vote those shares. He wants those beneficiaries. The actual beneficiary may be beneficial owners of the capital to decide how they want to vote. I mean, you know, proxy votes in that kind of thing. And really, voting is the one only place where he has power, the one place where he has powers to say he has 10 trillion. I have 10 trillion dollars. And so I can if I don’t like you, I can vote against you. And it’s true that he hasn’t used it, which is one, you know, extra mark in the column if, like, he’s actually pretty close. But even like if he kind of keeps that bazooka in his back pocket kind of thing and kind of walks into a CEO’s office and says, I’d like you to disclose more climate, you know, the CEO knows that, as you say, like he owns 78 percent more or less any company that you want to mention. And so he’s the major shareholder. He’s a long term shareholder. He’s the kind of shareholder that you want to keep happy. And so you do these things to keep those big shareholders happy. But if he gives up, even having the ability to control how those shares are voted, he just becomes like a super thin intermediary with no control over where the money is invested.

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S3: I think you’re missing a couple of big things. First of all, he’s given cover to people like the Saudi monarchy. I mean, he’s a huge investor in Aramco. He’s helping gather capital for pipelines that Aramco’s building. He shows up at Davos in the desert, right? I mean, this this event not long after the Khashoggi murder. I mean, this is this is a pretty nice laundering of image for people who need it and a clear sign that, you know, it’s not going to cost any money that you murdered a Washington Post columnist. Over he’s the largest player in the International Institute of Finance, which is the lobby shop for every financial institution on Earth and plays a very strong role in policy on emerging market debt. Now there is a massive debt crisis in in in the developing world, where you have countries in the middle of a pandemic Zambia, Ghana, Pakistan that are actually cutting their spending on things like health care in the middle of a pandemic because they have to pay back people like Larry, Fink, Larry Fink goes into Argentina and he actually heads the largest consortium of bondholders who are furious that they backed Macri. That we Larry Fink personally bought the Macri story, that this was the end of populism in Argentina that Argentina was going to become, you know, this normal, fiscally responsible company. And he was a leader in funneling, you know, $100 billion into Argentine bonds. And this is not the old days of, you know, the peso crisis in Mexico in the 80s where, you know, it’s just a bunch of it’s Citibank and a bunch of other banks. They get in a room. They can say, how big a haircut are we going to take to get this emergency behind us? Larry Fink has gotten, you know, school teachers pensions in the north of England. He’s gotten firefighters in Ohio and their savings are now in Argentine debt, and he’s going to have a hard time telling them that he’s lost their money on emerging market debt. And he understands that Argentina is merely the first of many countries around the globe where debt has to be worked out. He personally turns the screws to the Argentine government to sweeten the deal by a couple of pennies on the dollar. At the same time that he’s championing stakeholder capitalism. I mean, that’s that that that is power that he used at the same time that he will tell you, you know, if he’s asked, Well, how come you can’t if if this stakeholder capitalism is real and you care about the S in ESG, why can’t you cut a break to a country where poverty soaring, where people are diving into dumpsters for their dinner? And you know, he will say through the IMF, Well, you know, fiduciary responsibility what you’re saying, Oh, it’s mostly passive money. It’s not our money. We’re just managing. So he talks every which way, depending upon the situation.

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S2: One thing I thought was interesting was the brilliance. I don’t know about the brilliance of this man’s investing acumen, and I don’t really understand the Aladdin piece. Did he see the financial crisis coming? Like, I don’t get that of his software was so good?

S3: That’s a very good question. One thing.

S2: But the thing I wanted to note is just the brilliance of his rhetoric here, positioning himself as a woke capitalist and like purposely putting that line in the letter. It makes him seem like he’s not what Peter is saying at all. And and it makes like these Republicans in Congress Crazy Ben and and makes them attack him as a liberal, essentially. So it’s like a way he obscures what he’s doing. Unlike this, like other level, that’s almost insane to contemplate, and I guess it’s what kind of Davos does. More broadly, it makes all these folks seem super liberal and left and socially conscious when they’re doing the exact opposite. And all these people on the right, just buy it and attack them. It’s it’s like it hurts my brain.

S3: I think that’s actually strengthening for Davos, man.

S1: Are you saying that like, it’s good for Blackstone and Goldman Sachs and Credit Suisse and all of these big financial institutions to be attacked by the Republicans for being too woke because it makes the liberals think, well, they can’t be that bad if they’re being attacked by Republicans?

S2: I think so, yeah. It obscures the relationship between Republicans and moneyed interests, and it also kind of aligns the money interests with the left and with liberals, without liberals or the left having to think about the other stuff that Peter has written a book about. You know what I mean it. It like screws.

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S3: I buy that analysis because I mean, my whole argument about stakeholder capitalism is it’s a way of checking the box that we’re taking care of the big issues of the day. Why climate change? While in truth, Larry Fink is an enabler of the status quo, which is true of everyone at the World Economic Forum, you know, committed to improving the state of the world keynoting change. These are the biggest beneficiaries of the status quo. And in terms of how they spend their money on lobbying, where they deliver their capital, it’s all about perpetuating the status quo and their own privileges. So yeah, it’s great of the state of Texas has taken shots at Larry Fink and saying, don’t you know, don’t threaten to divest from fossil fuel companies. Hey, look, you know, these people are mad at me, so I must be on the right side of climate change. While in fact, I’m helping Saudi Aramco get more fossil fuels out of the ground and squeezing poorer countries to pay pennies on the dollar.

S1: Although I will say apropos the Tech’s this thing that Fink has been pretty explicit about not threatening to. Divestment is not one of the tools that he’s pointed to in his arsenal. He’s he’s always been, you know, on the side of like engagement and we want to talk to management and get them to change the way they run the company. And what good would it do if we were to sell our shares to someone else? The company would still be doing what the company would be doing. And like you can argue, both sides of that one bit. Ultimately, I think if you want to change a company, then having no shares in it is going to make it harder to change the company than if you do have shares Nate, right?

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S3: Oh, I think that’s a fair read. But you know, at the end of the day, we’ve got to see what change actually occurs. And he has intimated in the past, I mean, now he goes out of his way to say, we’re not talking about divestment. We need the intelligent, the people running fossil fuel companies to. They’re part of the solution. In the past, he has in previous letters he has intimated, you know, if you don’t get right on climate change, the markets will deprive you of capital. And he has held out the possibility of shareholder votes that then environmentalists complain never actually happened.

S1: Absolutely. Well, no, no, it didn’t. I mean, it happened with Exxon. We have seen it.

S3: Yeah, that’s true, actually. Yeah, in the last 18 months.

S1: I want to talk about Microsoft. I want I really want to talk about the phone because it’s a great like encapsulation of everything that we’ve talking been talking about. We have a scandal ridden company with its share price in the toilet on the grounds of exactly what you’re talking about the social and governance failures. And I’m talking, of course, about Activision Blizzard, the video game developer and what happens. But this big, boring megaliths Microsoft comes along and announces that it’s buying it for sixty nine billion dollars. Emily I know you have opinions on this one.

S2: OK, so this is a really, really big deal. Microsoft’s biggest deal ever, possibly. And the biggest, I think, video game deal ever. Interesting. The two biggest video game deals ever occurred this month in January, so it’s a very big deal. It means all kinds of things for video gaming. The only reason it’s happening, the only reason Microsoft was able to buy Activision is because Activision CEO founder Bobby Kotick behave so badly, which I think is is weird that like. So in July, and then in the fall, there are all these allegations about Kotek as the CEO of Activision. He basically oversaw like rampant sexual harassment. Women were underpaid, mistreated, propositioned by executives. Like all this bad stuff, there’s rape allegation even. And allegedly, Kotick, like, knew about it all never told the board. And when all this comes out, the stock price, like you said, just totally falls off the cliff. Everyone’s very upset. And Microsoft, which have been trying to buy this company for a long time because it owns really popular games like Call of Duty and World of Warcraft, was like, Now’s your chance. And they go to Activision, which wants to make a change but doesn’t want to get rid of Kotek because he’s been there from the beginning. And they’re like, This is our chance like to get out from under all this bad stuff. So now we have a deal and it just I was just thinking this morning how like everyone was upset about me to you back in 2017, like I was going to be so bad for executives and companies and all this. But really like, it’s all fine. Like, Microsoft is going to do great here. Satya Nadella wants to become the Netflix that wants the company to become the Netflix of gaming. It’s good. That’s what’s going to happen. Like, he’s going to benefit. Microsoft’s going to benefit. Maybe there’ll be some justice for the women who are harassed and the employees who work at Activision, who knows Bobby Kotick is going to get paid like 293 million dollars. He’s expected to leave the company once the deal closes in, like a year, but he’s got a massive, massive golden parachute. And I don’t actually think that they’re going to be able to, like, take any of that back or anything. Although there’s some, you know, shareholders have said,

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S1: Yeah, I mean, I’ve seen I’ve seen like the, you know, the woke capitalists come out and say he he shouldn’t get this massive payout. But like morally speaking, you’re right. Legally speaking, Nate, you know, as you said, he’s he basically has found a status in this company. He was the one who kind of bought it out of bankruptcy and built it up to what it is. He like owns equity in the company. And if someone is buying the equity, the way that you know, fungible equity works is you wind up making a lot of money and you have a contract like, I would love it if there were a way to punish him financially for the, you know, lax oversight that he showed and for the failure to report to the board. But like, I haven’t seen any particularly credible proposals of how the board might be able to do that, especially given that like he’s the CEO and there’s no way this deal goes through unless he agrees to it right.

S2: And I think the process of like trying to actually fire him for cause or something like that, like they would just get them thrown into court and it would be a whole mess like the Les Moonves kind of experience at CBS. So better to just let him go with his two hundred and ninety three million dollars. It’s just, I mean, the company has already pushed out, I think The Wall Street Journal reported, at least like 40 employees, right, have have gone and been disciplined, but not the CEO. It’s just it kind of ties back to Peter’s book. Honestly, he’s Bobby. Kotick is not a Davos man, but like, he’s got Davos manpower here.

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S3: Nadella is, and Nadella signed the Business Roundtable Statement of Purpose of a corporation. You know, Friedman ism is over. It’s about stakeholders. Well, the fantastic thing about this, I mean, it’s not fantastic. It’s really kind of horrifying. The this suffering of these women in this culture at Activision has effectively subsidized the shareholders of Satya Nadella Microsoft. Because the suffering comes to light drives down the price of Activision, Microsoft sees great way to fill up a hole in its portfolio and get in. Into gaming, and they can buy this distressed asset at a cheap price because of these women who’ve suffered in this company and the guy who’s essentially responsible for the suffering we know, thanks to The Wall Street Journal, you know, knew well and good what was going on, but took no action, shoved it under the carpet because it didn’t have anything to do with showing video games. He’s now, as you correctly note, Emily going to walk out the door with the very sweet deal. You know, everybody wins, except for the people who already lost.

S1: Is this a bad deal or a good deal? Like it seems to me that, you know, Matt Levine put it quite well in his newsletter. Like if Facebook had bought Activision, everyone would be like, Oh my God, the evil matter has gone and bought the evil Activision, and it’s just going to be this axis of evil. Whereas if Microsoft Buys Activision like you know you, you’ve basically fall asleep before you reach the end of the first sentence. And Microsoft has this kind of deadening effect. And if anyone can sort of exorcise the ghosts of Bobby Kotick, it’s probably Microsoft. They can just incorporate all of these different bits and pieces into the Microsoft blog, and this will be good for the employees at Activision. It will be good for the Microsoft shareholders. You know, it will be good for Activision shareholders. The one, you know, the one question I wanted to ask was like, this idea about Microsoft sort of getting Activision quote unquote on the cheap because the the share price has fallen after all of the revelations came out. That’s the one thing I might push back a little bit about that. I think that we should take that fall in the share price seriously, that it’s a creative company. The value of the company is and he is in the creative output of its employees. These employees are obviously extremely badly treated, and it was obviously a much worse run company than anyone had dared to imagine. And I think that the revelations reduced the share price because it made the market realize that the company just really was a bad company and was was not worth as much. I think that Microsoft is paying you obviously a lot of money for this, but I don’t think that getting I don’t think this idea that they’re getting it cheap kind of implies that it was it has some kind of correct value before the revelations came out, and I don’t think it did. I think it had an overinflated value before the revelations came out because the market didn’t know how bad it was.

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S2: I think the point isn’t that Microsoft’s getting it cheap. It’s more like Microsoft’s getting it at all because according to the reporting, Microsoft have been trying to buy Activision before the scandal dropped, and it was the scandal dropping and the stock price dropping that it made it possible. So it’s not like Microsoft was like, now we can afford this company. It was more like now the company will sell itself to us because they are desperate and struggling. You know what I mean? So it was the price that they were able to strike at. That’s all.

S3: If I may pull back very broadly, I mean, my book essentially argues that the billionaires are telling us that there are saviors and we can count on them to fix life’s problems, contrary to the lived experience of those of us who are not billionaires after the 2008 financial crisis. We, we have economies crumbling, people thrown out of jobs, people losing homes. We see no accountability for the financial players who are actually responsible for the shenanigans, the tank, the real economy. And we’ve seen again through the crisis of the pandemic. Yet this time we actually had real rescues for real people, expanded unemployment benefits in the states. We had all of these furlough programs in Europe. That was all very helpful. But most of the money was spent bolstering assets when you bolster assets that helps people who own assets. People can see that with their own eyes. And now, if you’re going to zero in on Microsoft and Activision, you get a company that we’re a culture is horrible, is predatory for women who who are leaving, who are actually going public with horrible things, and the people running the company are cashing out. The company that now owns it is cashing out. It’s just another indicator, I think, for ordinary people that the people running our economies are thinking about other things than the real needs. And any any kind of accountability. The real needs of those of us who depend upon paychecks to to pay our rent.

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S1: Talking of technology, I really and Emily sent me about eight emails, she’s rolling her eyes. She’s like, Felix, do we have to talk about this?

S2: And you didn’t want to do either.

S1: And Peter was like this.

S3: Are we talking about crypto?

S1: No, we’re talking about five oh, five g.

S3: Oh, no. That’s fine.

S1: Yeah, I love this 5G story because it really, to me, is the epitome of the weakness of the Davos model. And just to rewind the 5G story is that. The US government sold off a bunch of 5G spectrum for 80, some billion dollars anyway, it was a huge amount of money and then there was another 13 billion got spent on on other on building things out.

S2: They could have just bought a video game company, which is

S1: exactly like exactly with the amount of money that the Verizon and AT&T spent on 5G licenses. They could have bought Activision Blizzard and then they would have got even worse. But the but yeah, instead they bought these 5G licenses, which gave them the right to use that spectrum. And this was years ago, and soon as this happened, everyone was like, OK, there’s the problem here. A little bit of the electromagnetic spectrum that the 5G system uses is scarily close to the bit of the electromagnetic system that allows planes to land safely when it’s foggy and have bad visibility. We really don’t want the 5G interfering with the radio altimeters. So we should do something about this. And so what they do is the classic Davos solution. What they do is they put together a multi-stakeholder committee of a whole bunch of aviation people and a whole bunch of telecoms people, and they go into the gnarliest most awesome amounts of detail, and they create thousands of pages of technical specifications and they’re asking each got each other all of these incredibly detailed questions the telecoms people are asking the aviation people tell me exactly about how these allowances work and the aviation people are asking them telecoms people like, tell me exactly how much power you’re putting into these radio antennas. And with the whole idea is they can work out where there could be any any problems and work out how they might be able to fix those problems, except. That didn’t happen after all of the paper flying back and forth. What happens is they wind up writing this letter to the U.S. government basically saying, Yeah, there may or may not be a problem, but there’s nothing we’re going to do about it. And then nothing happened until suddenly like the, you know, Verizon and AT&T are going to switch on their 5G networks, and all of the airlines say, Well, OK, you can switch on your 5G networks. We’re going to have to cancel 15000 flights because we can’t fly it for you if you’re a 5G networks. And suddenly, like, everyone’s like, Wait, really? And they’re like, Yeah, really. I mean, like, it was such a fuck up. It was amazing.

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S2: But can we also explain why 5G matters? So as far as I can tell, it matters because it’s going to power a lot of cool stuff, internet stuff that doesn’t exist yet, but might in the future, like maybe whatever Microsoft does with its video games needs 5G to actually happen.

S1: Right? Yeah, it’s it’s all about it’s about low latency. You get to do things quickly. It will help self-driving cars. I’m, you know, I’m probably a I’m a 5G bat. Like, I don’t think that 5G is going to be nearly as transformative as the 5G bulls think is going to be very clearly. AT&T and Verizon have invested $8 billion in it, so they think it’s going to be a big deal, whether it matters or not. The fact is that the network is now something that exists, and it’s something that may or may not exist within like two miles of flight paths coming into airports. And someone needs to fix this, and there’s someone who needs to fix this is obviously and clearly and undeniably. The U.S. government, which controls the Federal Aviation Authority and the Federal Communications Commission, the FAA and the FCC are both arms of the U.S. government, and they can work out what the safe and proper thing to do is, and there’s no reason why that shouldn’t happen. Except the the FAA and the FCC seem to hate each other and just can’t agree on this yet.

S3: This, by the way, is fantastic for Davos man, right? Davos man wins when there’s uncertainty, dysfunction and confusion. I mean, one of the things that Benioff said last year at Davos, when he was saying that CEOs are the heroes of the pandemic, he said, and he was talking about, you know, vaccines and finance for staving off bankruptcy. And he said, Listen, you know, the government didn’t save you. NGOs didn’t save you. We saved you. And he added, I thought this was really wonderful. He said he’s a not for profit, but to save the world. Well, if we can say to your point, Felix that faced with the possibility that we’re going to shut down air travel for huge numbers of people, it’s a major air corridors unless the federal government acts. And yet we immediately get into bureaucrats, being being bureaucrats and thinking about their trip. I know this is reminiscent of, you know, something like 4000 years ago when I was a telecom reporter in Washington when we were still worrying about 3G. They auctioned off licenses for what was then known. If memory serves as the Channel 60 to 69 spectrum, these were still over the air television channels, and the FCC was prepared to actually raised a lot of money licensing them off to all the big telecom providers. And there was some question about interference with home appliances and what would happen to other TV signals. But that all got swept under the rug because the telecoms were so important, and all anybody cared about at that point was wireless internet. Whereas this is two things that people, you know, these are two high stakes areas. I mean, if you shut down flights, we’re going to notice that immediately and it’s going to be a problem. And the fact that the government can’t fix that just underscores the point that the billionaires are already making. Just leave everything to us. That’s how they get away with cutting taxes. Well, I mean,

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S1: but the point is that the the private sector multi-stakeholder convention between the CEOs trying to fix it completely failed. And the reason the government needs to come in and fix it is because the private sector and the CEOs didn’t fix it. And you know, the way it’s ultimately going to wind up getting fixed is almost certainly that the telcos are just going to have to not have their 5G along fight flight paths for the next five years or so. While the FAA goes through the process of basically reconfiguring all of the radio altimeters in all of the airplanes so that they can work alongside 5G.

S3: I’ll bet you dinner that Microsoft gets a contract to solve this at some point. Cisco will get a piece of the action. Don’t don’t weep for the telcos or the

S1: people now, you know, you know who’s going to make money from this is McKinsey.

S3: Oh, every which way. Yeah, every which way.

S2: Oh, McKinsey, I think, is making money from Peloton, which you said we could talk about in the plus. So.

S1: Oh yeah, yeah. We’re going to talk about Peloton in the plus, the amazing story of Peloton going up and down. That’s coming up in Slate Plus. But before that, we have a numbers round to get through Emily. Do you have a number? Yes, I have a number. What’s your number?

S2: Six point one. Two million. That is the number of existing homes that were sold in 2021, which is a lot of houses, the highest number in 15 years or so since since, you know, the bubble and everything, because housing is crazy right now, there aren’t enough houses to go around for everyone who wants them. Mortgage rates are taking up a little bit, but doesn’t seem to stop what’s going on, which is prices are going way up and supply is going way down. And at the same time, rents are going up. So it’s sort of an interesting time for real estate.

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S1: Yeah, this is going to really show up in inflation figures over the next six months or so because everyone looks at year on year inflation and we know what you know, where the prices were in the first half of 2021 and we know how much they’ve come up. And that’s just going to really even if all of the used cars come down in price, which they probably won’t even have, food and energy comes down in price, which you probably won’t like. The housing alone is going to keep inflation figures well above that two percent target, so the transitory is going to be very transitory.

S2: Yeah, and the whole market is super interesting because it’s like there’s all this movement out of big metro areas messing up all these smaller housing markets where you used to be able to get affordable houses. But because like people like who lived in Brooklyn or Westchester or moving to these smaller markets, they’re driving up prices there. So it’s all like really weird and interesting. I don’t know

S1: something, something they’re under. There aren’t that many cheap cities outside, basically Texas anymore. I’m going to come up with my number, which is 330 billion dollars. That is the final tally. That is how much money U.S. startups raised in 2021, which is which obliterates every previous record. It is literally double what we had in 2020, which was 167. It’s a complete record, and it’s not just the amount of money being raised that has hit like insane levels. The. Value of the exits of startups like getting acquired or going public with $774 billion, which is triple what we saw in 2020, the the VC slash startup world is anywhere you go right now and no one knows where it might end. Erin Griffith had a great piece in the New York Times about this. I’m talking about this wonderful thing called the reverse pitch, where instead of instead of companies going up to VCs and saying, we have a good company, can you please give us money? It’s now the other way round where VCs go up to companies and said, Say, we have done a whole bunch of due diligence on you without you even asking you. And here’s a 90 page proposal about why you should let us invest in your company. That’s amazing. So that’s how VC works now. That’s how Tiger gets the deals. Peter What’s your number?

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S3: My number, somewhat related to Emily is No. $300 million. That’s the amount of money that Steve Schwartzman’s Blackstone has spent just in the last few weeks buying up affordable housing in South Florida. Now, Blackstone made a fortune after the foreclosure crisis. They bought up huge numbers of single-family homes in all the Sunbelt, a hard hit places. Blackstone alla Davos man said this was just an act of civic virtue. You know, we we took these homes with their overgrown lawns and rodent infestations and fix them up and put families in. You could almost hear the soundtrack, you know, for a life insurance commercial with the golden retriever puppy romping around on a lawn with a toddler. Of course, the reality was he launched invitation homes to run this portfolio. And a lot of reporting has shown that invitation invited tenants to pay much higher rents while looking for customer service on websites that never got back to anybody. Jacked up rents and kicked a lot of people out when they couldn’t pay. That’s a template that Blackstone has applied in Europe and in other parts of the world. Well, now the new model is rent to own, where they give people these leases that are supposed to be getting them on the path to homeownership. And the early returns on that are that the terms are set such that it’s really very difficult for most people to get anywhere close to homeownership and people are giving up mid stride. But Schwarzman is back in the game because he’s got a nose for money.

S1: I am a big fan of anyone who’s turning owner occupied housing into rental housing. I think we need a lot more rental housing, but we have had this conversation too many times on slate money and we are not going to revisit that. I think that’s it for the main show. Thanks, Peter, for coming on. It’s been awesome having you.

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S3: Thank you for having me.

S1: Do stick around for the Slate Plus on Peloton. Many thanks to all of you guys for listening and sending in your emails. Sleep money at Slate.com. And many, thanks especially to Shane and Roth, has managed to put this show together amazingly as ever. We will be back next week with another episode of Sleep Money. OK. Emily, what happened to Peloton this week,

S2: Peloton is going to stop making its bikes and its Treadmills because it’s made too many bikes and Treadmills, so it’s said that on Thursday and then its stock went down like 20 percent and everyone was like, haha, Peloton because one one thing I wanted to explore with you guys was like, Why do people hate Peloton? So much so the stock is down. Peloton basically overestimated how many people wanted to spend a lot of money on Peloton machines and all that. So maybe it’s also a story about the pandemic darling stocks not doing well because like Zoom is down also. And in addition to Peloton, a firm is down the buy now, pay later service. That’s sort of part of it, which is

S1: also, yeah, a huge proportion of a firm’s earnings come from financing bikes. And if people aren’t buying those Peloton bikes

S2: and yeah, and we can say it’s a it’s a big change from a year ago January 2021, when Peloton was like, we don’t have enough Peloton to sell to all the people who want Peloton. So I mean, it’s it’s kind of just the story I think of supply and demand. Plus, like everyone hates Peloton, but what do you think?

S1: So the first thing I need to say is the Peloton has officially denied that it is going to stop making any of its bikes and Treadmills. They came out and said that that’s CNBC report was wrong, but it does look, you know, at best they’re going to wrap radically pulled back on the number of machines they’re producing and also the number of employees they have. The CEO basically came out and said there’s going to be a bunch of layoffs. The share price is the most amazing. It looks like, you know, the shot sale in Davos, it went straight up and then it went straight back down again and is now below its IPO price. The financials are truly terrible. It has lost over $300 million in each of the last two quarters, and now they’re guiding to another loss of around the same magnitude again this quarter for the fourth quarter. So clearly, you know, they don’t have an obvious path to profitability. The idea was that what you do is you’d get millions of people buying Peloton, Treadmills and bikes. And then it wouldn’t matter if no one knew was buying the Peloton Treadmills bikes because they’re all of these people are paying $40 a month for the programming. And then you become a media company and then you just sell like relatively cheap programming to millions of captive Peloton owners for $40 a month, and it’s a license to print money that has not worked out that way. They just don’t seem to have enough cash flow from these subscribers to be able to make money.

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S3: I think it’s deeper than that. I think this story indicates that you ought to be pretty careful if your business model rests on people’s virtuous pronouncements about how they’re going to live their lives. You know, Sony’s not telling us that, Oh, no one’s using our PlayStations. You know what? We better make fewer of them. I mean, let’s remember Peloton was initially the story of the supply chain chaos, and people are ordering them so much because we’re all stuck in our homes and we can’t go to the gym. I got to get a Peloton and they can’t even ship them fast enough. They were, you know, exhibit A for the container shortage in China. And the problem at the port? Well, now it turns out the people got their Peloton or basically hanging their laundry on them. And, you know, walking past these machines guiltily knowing that they’re not actually using them. So the subscription model, which is great if people use them, I mean, it’s recurring revenue turns out not to work because we all like the idea that we’re going to use our Peloton all the time. But in reality, we’re going to go sit on the couch and eat popcorn.

S1: I’m not sure about that. Like if you look at if you look at the Peloton financials, basically every machine that they have sold is still generating cash flow in terms of those owners are still paying that that monthly fee for the subscription. They may or may not be hanging their laundry on their machines, but they still

S3: pay Felix Emily and I worked at AOL, where people were still paying 20 bucks a month for their email for people who had died ten years earlier. So like, they may be paying, but it doesn’t mean they’re using it right?

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S1: But Peloton doesn’t care whether you use it or not, just as long as you’re paying.

S2: That’s true. I think there’s also a lot of competition for those exercise apps outside of Peloton. The the the pandemic did create a lot of new business for fitness subscription apps. I think Apple has one now. So it’s like a very competitive space, actually.

S1: Yeah, there are a lot of fitness subscription apps. There are a lot of now rival treadmills and bikes. It turns out that a stationary bicycle is not actually that particularly, you know, high tech. The supply chain problems are still in place, right? So one of the big problems the Peloton had, they announced that they would. You have to start charging a $250 delivery fee if people were ordering new bags because to overcome all of the problems with supply chains and no one wants to buy these ridiculously expensive bags in the first place, let alone if you slap on these extra fees. So they really are having trouble selling new bikes, but I still struggle with this idea of like the pandemic was good for that, right? They sold way more bikes than they ever dreamed they would be able to sell. They went public just before the pandemic. The share price went up like 800 percent. Once you’ve sold all those bikes. All you need to do is just sit back and have like a handful of instructors making videos and you should be having. You should be a licence to print money instead. You know, they run into all of this problem with with the federal was the Consumer Product Safety Commission saying that the Treadmills are killing babies. They have to recall all the Treadmills that cost them a lot of money, and they clearly don’t have enough connected devices out there yet to be able to make money as a media company. And that, frankly, you know, is a little bit surprising. But you know, these fast-growing companies seem to have no ability to pivot to profitability.

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S2: Also this I just need to add the sex and the City thing wasn’t good for the for the company it seems to get into seems like PR snafus. I mean, before the pandemic, it had a bad commercial that I haven’t forgotten, but maybe everyone else has, you know,

S1: Oh, I have not forgotten.

S2: I really enjoyed it. Oh, good. OK. Yeah. And she’s really skinny and she gets a Peloton for Christmas or something. And it was widely panned. And then the pandemic thankfully happened and that was forgotten and that the company started doing well again. And then it’s another year. And then I don’t want to spoil what happened on sex in the City. The return of sex in this. I don’t know what it’s called more sex, more city, I don’t know. But something bad happens with the Peloton, and they have like another issue PR related issue. It’s just like, yeah, the company can’t like, get out from under itself to just make money. Like it should be able to make money, but cannot. That’s the issue,

S1: that’s that that’s why the share price is in the toilet. All right. We Phil Peloton. Well done us.

S3: All right.

S2: Bye bye. Sleepless.