Moments of Bravery
Plus: Announcing The Deload
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Announcing The Deload
“I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think.”
Warren Buffett
The fundamental job of an investor is to read and think to come up with ideas worth acting on. The same is true for entrepreneurs or anyone running a company.
The thing about reading and thinking is that you have to read a lot and churn through a lot of ideas before you find something worth acting on.
If you’re like me, you spend hours of your week reading. You subscribe to dozens of thoughtful newsletters. Maybe you have 50 tabs open with things you hope to get to. Eventually.
For the next several weeks, I’m going to run an experiment in this newsletter where I build on the best ideas I read during the week.
I call it The Deload.
Deloading is a term in strength training for a period of active rest after a hard training cycle. When you deload, you lighten your training load so your body can process the training stimulus from the prior cycle.
The Deload consists of two sections: The Build and Notes and Quotes.
The Build is my synthesis and, hopefully, enhancement of my favorite idea of the week. The goal of this section is to spark a new, independent thought for you.
Notes and Quotes is a simplification of ideas through my personal notes on an article. The goal of this section is to deconstruct long articles into short paragraphs to save you time and mental energy.
As always, let me know what you think of this experiment, and thanks for reading.
The Build: Moments of Bravery
Life is the search for moments of bravery.
Moments of bravery define lives. Finding those moments must be the purpose of life.
Some moments of bravery are small. Making an investment that seems crazy. Starting a business. Asking someone on a date.
Some moments of bravery are big. Committing to have children and raising them to be good people. Taking care of a loved one who is terminally sick. Surviving the grief and anguish that might follow.
Some moments of bravery are existential. Risking one’s life to save another.
We’re all presented opportunities for bravery throughout life. When we choose bravery, we remember it forever. Sometimes others will too. When we choose the opposite, we remember it forever. Sometimes others will too.
Another word for bravery is courage, and that’s a word Tim Urban (Wait But Why) used in a recent talk he gave about the state of American politics. At the All In Summit, Urban shared his framework for what’s going so wrong in political discourse.
The crux of Urban’s argument is that instead of thinking about modern politics as left vs right, it’s better thought of as high rung vs low high. The high rung is about the search for truth through principled debate with the other side. The low rung is about tribal allegiance at the expense of truth.
Unfortunately, the low rung dominates the broader discussion more than ever, which Urban attributes to changes in the media environment. Human nature doesn’t change but environments that yield behaviors do.
The media used to draw attention for unbiased, fact-based coverage that fostered high rung discussion. With cable news and the Internet, incentives changes. Now the media is incentivized to cater to the low rung with biased and often inaccurate coverage.
As I’ve written here before about the Attention Game, extremity is rewarded with attention in today’s media ecosystem. Objectivity is not. In Urban’s framework, virality dumbs down information because nuance doesn’t hit as hard.
Urban explains that we’re all high rung and low rung at different times. The challenge is to find awareness of when we’re on the low rung and move to the high rung. This is where Urban’s courage comes in. It takes courage, especially given the toxicity and power of the low rung, to stand for principled truth that goes against your tribe.
Normally this is the part where I’d try to tie these concepts to investing or business. I might have explained how low-rung myopia makes us worse investors and that we need to try to move to the high rung to search for truth through the art and science of investment analysis. This week, I’m skipping that.
America is in a crisis of courage.
We’re starved for someone to lead us with bravery. Instead, we get low-rung caricatures. We’re starved for principles and truth. Instead, we get tribal idiocy.
This past week made our political morass clearer than ever as the low rung engaged in the gun debate after a tragedy that seems defined by a lack of bravery.
Thinking about dead kids makes me sick. It makes all of us sick. I have a young daughter, and I’m about to have a son. I own guns, and I like owning guns. More than anything, I want my kids to be safe.
Seeing the discourse between right and left this week made me sad as an American. We used to be able to rally around tragedy through a common empathy, but that hasn’t been the case for a long time now.
It’s easy to blame the media, or politicians, or the other side, but we should look at ourselves. The media gives us what we pay attention to. Politicians reflect what they think we want to earn our votes. The other side serves as an enemy to rally against instead of work with to find strength in debate.
We are responsible for all of this. We choose to engage in low rung behavior.
When we call the other party derogatory names, it only makes them hate us more and listen less. When we blame all bad things on the other side, it creates irrational moral high ground and denies a search for truth. And through all this unreason, we get the politicians we deserve.
The decay in political relations has created an existential moment for America that only bravery can address.
If we individually can’t find the bravery to take responsibility for principled truth, then America is destined to languish in power and influence. But if we can take that step, I suspect it will lead to a resurgence in much larger braveries. The kind of braveries worth remembering forever.
Notes and Quotes
Sylvera
The most interesting business I learned about this week was Sylvera.
From Rex Woodbury at Digital Native:
“You can think of Sylvera as Fitch or Moody’s for carbon offset projects. Just as Fitch and Moody’s rate the creditworthiness of a company, Sylvera rates the quality of a project. If you’re a multi-billion-dollar corporation, you want to make sure the massive amounts of offsets you’re buying are legit; you can use Sylvera’s carbon intelligence platform to do so. Companies like Bain & Company, Delta Airlines, and Cargill use Sylvera.”
I love financial ratings businesses. They lend to monopolies built on brand standards. Those monopolies come with attractive and sustainable margins. See Moody’s. If Sylvera can establish itself as the standard for carbon offset ratings, they should be able to build a real and valuable business.
Direct Response Ads Replace Brand Ads
Simply put by Ben Thompson at Stratechery reviewing Snap’s Q2 guide down:
“A slowdown in brand advertising should lead to an acceleration in direct response advertising.”
In recessions, brand advertisers tend to pull back as consumers spend less. The reason that slowdowns in brand lead to accelerations in direct response (DR) is simple supply and demand. Less demand from brand advertisers lead to more attractive conversion dynamics for DR advertisers, who are happy to spend more when they can get a strong return on their ad spend (ROAS). More spend from DR advertisers should bring demand back up and pricing in turn, which results eventually brings ROAS back to some equilibrium.
Snap’s disappointing Q2 update suggests that their direct response business may not be as strong as previously thought. Thompson believes this may be because Snap’s direct response customers that are driving non-revenue actions (e.g. an app install) may actually be seen more by advertisers as brand ads with an action attached. Facebook’s advertiser breath probably spares them at least somewhat from the same fate.
Unstable Stablecoins
Volatility begets volatility, and sustained volatility creates fissures in fragile market structures created in friendlier times. In traditional finance, hedge funds don’t usually blow up in calm markets. They blow up in the face of volatility.
The same is true in crypto land.
An algorithmically governed stablecoin project called Terra failed a couple weeks back. If the volatility in crypto doesn’t subside, it’s likely other flawed projected suffer the same fate.
Another stablecoin, Tether, is worth watching as it’s seen more than $10 billion in redemptions since the Terra crash. Tether has long had skeptics due to poor audit and governance policies. They previously settled with the NYAG and CFTC for making false statements and being undercollateralized for much of 2017 through 2018.
Patrick McKenzie from Stripe detailed his belief that Tether was recently undercollateralized again based on its own attestation report:
“The Consolidated Reserves Report alleges that Tether’s reserves included, as of March 2022, $4,959,634,446 of “Other Investments (including digital tokens).” A 3.27% decrease in the value of these investments wipes out all Tether equity and causes their tokens to be undercollateralized. (Tether alleges a mix of assets outside this line item which, if one takes their words at face value, should have had flat-to-decreasing value over the course of the prevailing interest rate environment.)
Cryptocurrency suffered a broad-based decline in May 2022…As an example of an asset which is certainly impaired: Tether has invested $62.8 million of the reserves into Celsius Network, including $52.8 million into their Series B of October 2021. (I am indebted to Intel Jakal for some legwork here.)
Celsius is in free-fall due to the current market dislocation; the value of their native token is down by over 86% since their Series B. Clearly, that investment has suffered more than $20 million in impairment. Impairment of 1% of one line itemon their balance sheet ate more than 10% of their equity, under assumptions which are extremely generous to Tether.
Tether should have repeated a similar analysis for each of their equity and token holdings. That analysis would have, certainly, suggested that their liabilities exceeded their reserves at multiple points in May. This is an occupational hazard of attempting to back a money market fund with almost no equity cushion with VC investments and other risky assets.”
We don’t do much shorting at Loup, but I’ve spent time studying great short sellers. A frequent lesson is once a fraud always a fraud. That sticks in my mind regarding Tether.
Here’s a thought experiment: If every single Tether tried to redeem for dollars tomorrow, what are the odds they could honor every Tether?
My guess is not good. I don’t know if that means they could redeem tens of billions without trouble or only another few billion from here.
Tether is the biggest short to medium term threat to crypto. If it were to fail like Terra, it would cause havoc across the ecosystem, although there’s a case to be made that it would also make the ecosystem stronger long term.
Vitalik
In the spirit of stablecoin thought experiments, Vitalik Buterin shared a thought experiment to consider other stablecoin protocols, but his conclusion to the piece stands without further color:
“In general, the crypto space needs to move away from the attitude that it's okay to achieve safety by relying on endless growth. It's certainly not acceptable to maintain that attitude by saying that "the fiat world works in the same way", because the fiat world is not attempting to offer anyone returns that go up much faster than the regular economy, outside of isolated cases that certainly should be criticized with the same ferocity.
Instead, while we certainly should hope for growth, we should evaluate how safe systems are by looking at their steady state, and even the pessimistic state of how they would fare under extreme conditions and ultimately whether or not they can safely wind down. If a system passes this test, that does not mean it's safe; it could still be fragile for other reasons (eg. insufficient collateral ratios), or have bugs or governance vulnerabilities. But steady-state and extreme-case soundness should always be one of the first things that we check for.”
Thanks for reading, and see you next week.
Doug