Asset valuation in the age of inequality
Elon Musk bought Twitter recently. You may have heard. He paid $54.20 per share to take the company private.
From what journalists have gathered, Elon embarked on this journey because:
He’s rich and addicted to Twitter and thought, “Wouldn’t it be fun to own Twitter?”
He had several rich friends in his ear whispering, “You alone can fix Twitter.”
He thought $54.20 was a funny price. 420 is a weed joke. You may have heard.
There are two immediate follow-up points to be made.
Point 1: None of these reasons are what you’d consider “textbook grounds” for buying an asset. Regular people buy assets because they expect price appreciation, cash flows, utility, or some combination. They weigh the anticipated upsides against the risks involved and make a decision. I was once a financier, and much of the financial theory I applied hinged on the assumption that other people engaged in similar decision-making processes in more or less rational ways.
In retrospect: lol.
Point 2: Twitter isn’t a great business. For the sickos who enjoy it (e.g., me), it’s an indispensable tool built atop an algorithmic foundation that seems to have been trained exclusively on Mad Max movies. I learn a lot on the site and enjoy interacting with the many smart people who’ve made a nest there. I also know several people who work(ed) at the company, and they are talented and thoughtful. It’s been distressing (though unsurprising) to see Twitter’s employee base impugned for the company’s struggles when the problem has obviously been a comically long run of atrocious leadership (which continues!).
Still, it’s not a great business and hasn’t been since Jack Dorsey tweeted “just set up my twttr” in 2006. When deciding whether to buy Twitter stock at its pre-takeover price, this is something you’d probably consider.
In retrospect: lol.
After all, even if Twitter wasn’t rapidly growing its user base, it continued to attract influential figures benefiting from the winner-take-most dynamics of the modern economy. Obviously — obviously — it was simply a matter of time until one of them got so rich that they’d buy the site on a lark. (I will stop with the bird puns when you pry the keyboard from my cold dead hands.)
I’m being slightly tongue-in-cheek, of course. But also: Wealth inequality is rising! As it does, asset prices will be determined by an ever-shrinking pool of people. In time, their idiosyncratic preferences will dominate whatever “discounted cash flow model” (in retrospect: lol) that some Red Bull-addled Penn grad plopped into Excel.
Is Twitter worth $44 billion? Is the monkey JPEG worth $3 million? Is a plywood fort on a small lot in Santa Clara worth $2 million? $2.5? Who knows? It only matters that one rich person says yes.
Until the recent rise in interest rates, the financial story of the past decade was “too much capital chasing too few productive uses.” In such an environment, it makes sense to focus on moonshots: speculative bets with big payoffs far in the future. This allowed businesses with terrible unit economics like ride-sharing to get funding and paved the way for every media company to build its own money-incinerating streaming platform.
But one man’s moonshot is another man’s value-destroying quixotic quest. The more conspiratorial part of me thinks the Fed sensed too much of the latter and rose interest rates the same way a preschool teacher flicks the light in a classroom off and on — to stop the silliness and get kids to behave.
The problem is that it might be too late. The kids are already extremely rich and doing crazier and crazier things. If wealth inequality is a permanent and growing fixture of modern life, we should be prepared. But how?1
First, we should be ready for much higher volatility. Billionaire tastes can change as rapidly — perhaps even more rapidly — than anyone else’s. For example, Elon spent a significant amount of time trying to get out of his Twitter deal.
Second, I am bullish on anything that is fertile ground for competition between billionaires. How many professional sports teams are there? How about survival bunkers in prime New Zealand locations? The enterprising financier will find ways to allow regular people to get exposure to these asset classes. (Relatedly, I’m proud to announce my start-up, “Admissions.NFT,” the first marketplace for trading tokenized admissions offers from top universities. Who needs US News & World Report to rank universities when wealthy parents can determine the free market price together?)
Finally, and on a much less amusing note, we should be prepared for an even bigger gulf to emerge between work that is well-compensated and work that is broadly valuable for society. Ultimately, asset prices determine how we allocate capital and talent. If fewer and fewer people inform that calculation, we should expect the causes they obsess over (e.g., longevity research, AI doomsday preparation, blimps) to take a disproportionate amount of societal attention.
That means more of us working in careers that are lucrative but ultimately meaningless.
If we are to avoid this, then we must push back on this fowl trend. (Last one, sorry.)
Please note that none of this is investment advice. I have admitted how little I understand modern finance!