Free Money S02E09 Transcript
Featuring Tom Kalil of Schmidt Futures
Hello and welcome to Free Money, a podcast/newsletter from Sloane Ortel and Ashby Monk about how long-term investors can free themselves from the shackles of short-term thinking.
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Speaker 1 (00:10):
[Inaudible]
Sloane Ortel (00:10):
Well, welcome to the free money podcast, where we bring you the Brooklyn Bay area consensus on institutional investing you desperately crave. I think I stopped doing that lead in for awhile.
Ashby Monk (00:19):
You did. You took a pause at one point, I had like a little funny craving, something that came off and really weird cause you actually didn't say it. You gotta set me up for success here, Sloane.
Sloane Ortel (00:29):
So. Alright. Well we got to stay stay relatable for the listeners. You're living in a hellscape right now, which is pretty relatable for 2020,
Ashby Monk (00:45):
No joke. the pay area. Sadly, I don't know if I'm allowed to laugh when I say this, but it's on fire. We've got fire forest fires going big time. And I'll tell you, Sunday night, I think it was Sunday night. I woke up at 3:00 AM to like the craziest lightning and wind storm. I thought for a second, we were having a tornado in my house, the windows were like, buckling in, and no rain. And so ridiculous. And lightning strikes in California with no rain. And you get what we have right now, which is out of control fires. The fire is about 12, 13 miles from where I'm sitting. So if the wind changes we may need to cut this short Sloane.
Sloane Ortel (01:29):
Wow. I was, I was really struck earlier. I was reading the AP piece on it and they described like, what happened is an unprecedented siege of lightning. Wow.
Ashby Monk (01:42):
That is what it felt like. It felt seigelike it's pretty annoying because you know, obviously we have all the smoke, but like first off, like we don't know what the hell to do. It's like, you can't go outside. You're supposed to stay inside because of the virus. You can't go outside and get any fresh air because there is none. It's just like, I dunno, like I'm ready for 2020 to just be behind us, Sloane.
Sloane Ortel (02:15):
But the thing is, I said that about 2019, but at least, at least we know what we would be doing. Like if we were on the Titanic, you know, and everyone's like, some people are like screaming for their, like we would just be podcasting as that type of stuff went down.
Ashby Monk (02:35):
We would be calling people and asking, like what did they think about the chairs floating by?
Sloane Ortel (02:40):
Is that going to be a problem for pensions?
Ashby Monk (02:51):
So what's the news other than the earth fighting back?
Sloane Ortel (02:52):
Well, our friends at CalPERS, I mean, we have one less friend at CalPERS. That's kind of the big item that is just like, I mean, if I were more theatrical, I would do the like Chris Crocker leave pensions alone thing, but I can't fake tears very well.
Ashby Monk (03:09):
So yeah, me neither. But I have to say like, that is the vibe I get. I mean, maybe you tell the story and I'll tell my interpretation. I'm not sure everybody knows what happened, happened this past week.
Sloane Ortel (03:23):
So I guess I'll set a stake back, like, you know, maybe 10 years, right. Just to give a sense of like what I mean institutional investor called being the chief investment officer of CalPERS, the worst job in investment management.
Ashby Monk (03:35):
It's thankless.
Sloane Ortel (03:35):
Does that sound right to you?
Ashby Monk (03:41):
You know, there's not a lot of upside to taking the job except feeling good that you've tried to like save California from a fiscal catastrophe. It's a lot of downsides. And so I would say it's a thankless job and the people who generally are very service minded and like really focused on giving back, which makes like what happened in the past couple of weeks, that much more frustrating. But anyway, yeah.
Sloane Ortel (04:10):
So, so Ben Mang is a, you know, a us citizen who you know, I think was born in China, worked for the, you know, the Chinese state administration of assets, which is, you know, a massive asset owner organization. He had worked at CalPERS before then he came back to take the CIO job. And he was implementing a number of reforms, right? Like they called it sort of more and better assets was one of the terms that he, that he used.
Sloane Ortel (04:36):
So they took a bunch of money out of active managers. They shut down the emerging manager program. I mean, we, we, we reached out to Fiona Ma who's the treasurer of California and is on the board. And she was basically like, look, this is really sad. Ben delivered a return of 470 basis points, the benchmark is 430, you know, that's something and you know, Ben put us on a, on the path towards a 7% annual return, you know? And it seems like what precipitated his, you know defenestration, shall we say from CalPERS was the, like just, you know, so many little cuts, right? Where, you know, you had a us Congressman hurling, like this straight up racist stuff at him. He was accused of being a spy. You know, and then the last thing that happened was apparently he was disciplined for owning stock in a private equity manager. I think he owns stock in Blackstone at the same time he invested in one of their funds, which I can't imagine that he would. I mean, if, if that was a way to profit personally off of CalPERS, he sucks at that.
Ashby Monk (05:51):
If he was going out to like, lose his job to enrich himself, trust me there's a few different ways....
Ashby Monk (05:58):
Let me give you like my like 90 seconds on this thing. Cause it's, it's really been bugging me. I've always viewed myself as like this champion of the investment teams, because it's so hard to get really great people working at public pension plans. They are, I've already said pretty thankless, Ben, I know Ben he's a fairly shy and kind guy. He didn't take the job because he wanted to go on CNBC every 20 minutes and, you know, establish like a national profile. He did it because he probably really loved the idea of fixing the biggest behemoth pension fund in the business and helping the state. I don't think any of us expected him to be able to do that quietly, you know, which his personality is, but I also don't think any of us expected the level of personal attack. So you mentioned the one, supposedly serious people in our government accusing him of being a spy.
Ashby Monk (06:56):
This is like an American citizen, you know, working for a public pension plan. Like that's not okay. I mean, show the evidence if you have it, but it's not okay to just like go out and make accusations like this in order to win political points. So he took a lot of pain. I think that was, I don't know this for a fact, but I think that was probably pretty hard to go through as a, as a quiet, shy dude.
Sloane Ortel (07:16):
What a pain in the ass! This is totally unfair.
Ashby Monk (07:21):
And then the one thing that Ben, what happened next was he was dragged over the coals for removing this expensive hedge, you know, his downside hedge on the portfolio just before portfolios crater. And in my perspective, like he did the right thing, first of all, markets are back up. Right? So it wasn't like he was that crazy to say, look, it looks like there's more room in the markets.
Ashby Monk (07:44):
We should probably take this off. So that's the first thing. The second thing is I don't like it when pension funds try to get cute when they're supposed to be taking a longterm view, like putting these types of derivatives on a pension plan portfolio when you're like looking out 75 years is a really expensive way to be a longterm investor. If you need cash in downturns invest in cash yielding assets. So that was the second thing he had to deal with the third. Now, now you're getting into this ethics question where people are like, starting to question whether or not he knew he had the conflict. And frankly, I think it's somewhat ludicrous because the only reason we knew the conflict existed is because he reported the conflict where you're supposed to report conflicts. And so that was published the conflict and it turned out he had owned that Blackstone investment before he came to CalPERS and CalPERS had a relationship with Blackstone for many years before he arrived.
Ashby Monk (08:42):
And so what, right. Fine. I don't know. Maybe, maybe he didn't recuse himself and we need to figure that out, but I'm guessing that he wasn't defenestrated. I think he just left. I don't think he was asked to go, you know, CalPERS is a place where like, they don't even have coffee machines in there. It's so frustrating. You go in and have a cup of coffee and they're like, Nope.
Sloane Ortel (09:05):
Starbucks is around the corner, bucko.
Ashby Monk (09:05):
Because they're like, cause that could be perceived as currying favor and it's like, Jesus, I just want a cup of coffee. And look, I have no evidence about what I'm going to say, which is why we should say it. The hell you want to say, but like, I wonder, here's my conspiracy theory for you. And then you can go to our our energy drink and see if you can... Lotta inside jokes here.
Sloane Ortel (09:39):
I'm sorry. So my conspiracy theory is Ben was fed up. He was in the public light. People were attacking his ethics, but maybe he got wind that the US Department of State was sending a letter out to every single US university to tell them to dive this from Chinese stocks, which happened this week, by the way, it's like a huge intervention deal with state into fiduciary bound investors' lives. And he's thinking to himself is probably the most prominent Chinese investor in America. That maybe, this is the moment to exit and avoid having to be the kind of person to defend all this because the us state department just raised the stakes on like Chinese investments and fiduciary bound investors to a level that he probably wouldn't have been allowed to ignore. And so, you know, that's my conspiracy that like all this politicization of this process led him to think maybe I'm out of here, but I don't have any evidence for that Sloane.
Sloane Ortel (10:39):
Well, I mean, but like, you know, there's two Anon has been on the rise. We know we're starting F Anon. That's our, you know, conspiracy theory, nutcase club.
Ashby Monk (10:48):
Oh we are?
Sloane Ortel (10:49):
Yeah. I've just decided it's F and on it's happening. And yeah, that's at the core of the F unorthodoxy.
Ashby Monk (10:58):
That's like my NBA national bazooka association association. I've always had the idea of a national bazooka association where we go and pursue rights for Bazooka holders in an aggressive way, just to show.
Sloane Ortel (11:19):
Government jobs sound like they kind of suck.
Ashby Monk (11:25):
Here's the thing, how the hell do you bring innovation in the government? Right. We need innovation at places like CalPERS. I, you think yourself outsource innovation to the private sector. Then you never get longterm innovations relevant to longterm investors. We need them to innovate. We need them to think about what are the metrics that matter in 20 years and build the processes for thinking about climate change and all these things. And so like a huge part of my life is actually trying to think about how we catalyze innovation. And I think I've said this to you offline, but I have this whole concept of like the three Cs, which is about crises, consolidation and collaboration as means of driving innovation into public pension plans, crises, you know, in the current moment, there's new systems for liquidity that are being put in place. There's, you know, new portfolio resiliency tools that are being assessed consolidation as the second C you know, if you have a threat as a pension fund, that you will be consolidated into other plans, you will improve the way you operate.
Ashby Monk (12:35):
And if we consolidate these plans into kind of a bigger community of plans, then we have more resources for changing how we deploy capital. And then the last C is collaboration. It's all about pooling resources, ideas, legitimacy, and helping people work together to avoid getting fired. Because in my experience, the only way you get fired from a public pension plan is if you innovate,
Sloane Ortel (13:03):
That's so depressing. I mean, like, I feel like we're not letting that be the last word about innovation and governments though, because I think, I think let's phone a friend on this.
Ashby Monk (13:19):
We should call the guy who led technology and innovation at the U S white house under Obama.
Sloane Ortel (13:27):
That's gonna remind me of the Obama years and it's just going to be so good.
Ashby Monk (13:32):
It's going to be like watching the west wing. So we're talking to Tom Kalil.
Sloane Ortel (13:40):
And he's now at Schmidt futures, right?
Ashby Monk (13:43):
That's right. Hey Tom. Hi, Tom.
Ashby Monk (13:47):
How are you? Are you, are you in a smoky environment right now? Or are you somewhere out? Yeah, me too. Yup. Well, Tom, thanks for coming on. First of all, hopefully you're staying safe from the viruses and the fires and the firenado that happened this week. That's a real thing by the way, a firenado happened this week. Tom is the chief innovation. That's true. Tom is the, is the chief innovation officer at Schmidt futures. But Tom, we got you here because we've been having a chat about how hard it is to bring innovation into government. And now obviously in my case, it's innovation in public pension plans, but we've already told people that, you know, you were the deputy director for policy at the white house and really what you led was innovation. And so I think the first question I want to ask you, and then we've got a whole series of questions we want to run through with you is, you know, as the person leading innovation at the executive branch of the government,
Ashby Monk (14:52):
Some people might wonder, wait, the governments are doing innovation. How much innovation do governments really do? Maybe you could just give us a sense for like the level of innovation that went on from your perch at the white house and the types of things that you were doing.
Tom Kalil (15:07):
Sure. Well one thing that you might do is take out your iPhone and ask yourself where did the technologies for the iPhone come from? So the internet came from the government, GPS, the first graphical web browser, the advanced transistors, Siri, active matrix, liquid crystal displays the voice recognition technology. So a lot of the building blocks that have enabled the wave of innovation that we see in information and communications technologies came from government supported university research. So the government does have,
Speaker 3 (15:58):
I thought it was libertarian, libertarian free markets
Tom Kalil (16:03):
Obviously companies have to create and develop and market commercial products and services. So they invest more than the government to actually turn this into a product or service that can be sold. But if you say, where did many of the scientific and technological building blocks come from? A lot of it is the result of government supported research. So as you know, the internet started in the late 1960s with a program called the ARPANET back when that network was connecting computers in four universities. So it's didn't become a commercial phenomenon until the mid nineties and the same thing with GPS. So that's something that the military developed. DARPA invested in low cost, small receivers for the GPS signal. And then in the nineties when I was working for president Clinton, we made the more accurate version of the signal available, which is what enabled commercial location based services.
New Speaker (17:23):
So that basically means that I can make Location-based memes, which is amazing. One of our old canards on this show is that "free markets" are kind of a pleasant fiction, because there is so much happening behind the scenes to help you make location-based memes or just foment innovation in general. From a philosophical standpoint, how do you think the government should be working at that?
Speaker 4 (18:00):
Yeah, so I think there's at least three important roles. One is that the government has the capacity to make long term investments in the building blocks of economic growth and job creation and productivity. And those are things like basic research infrastructure and human capital. So that's one thing is that things like research, human capital and infrastructure that create the foundation for economic growth and job creation and productivity, the second is to create the right environment for a private sector investment and many things that we take for granted, like rule of law, the ability to enforce contracts. Those things are really important, but so is competition policy. So is a tax code that encourages companies to invest in research and development. So that's the second thing is creating the right environment for private sector innovation, both in terms of new business formation, but also investment in research and development. And the third is what I call innovation for What? What are the problems that we're trying to solve? And how do we use innovation to address those problems, whether it's accelerating the transition to a low carbon economy or allowing Americans to lead longer healthier lives or ensuring that the United States continues to have the strongest military in the world. So it's, it's channeling innovation in directions that are responsive to national priorities.
Sloane Ortel (19:45):
That's I mean, yeah, that makes a lot of sense. Like I think language that I've seen you use to describe this is sort of like a coherent relationship between kind of means and ends. Right. and I'm curious, like in particular, when you talk about something that sounds kind of broad, like let's fund more basic research you know, one could imagine you know, let's say the election goes a certain way and the conversation around innovation takes on a different color that you might get somebody in the white house who would say, yeah, sure do it. How would you actually go about doing that?
Tom Kalil (20:18):
Let me give you an example. So in the late nineties, when I was working for president Clinton, there was an emerging community of researchers who said we are very excited about the opportunities assisted with nanoscale science and engineering. And a nanometer is a billionth of a meter. So when you make things really small not only are they small, they start to have novel and potentially useful properties. So president Clinton went to Caltech and he gave a speech in which he proposed increasing the funding for nanoscale science and engineering. And he said, you know, imagine what might be possible. We might be able to store the library of Congress in a device, the size of your sugar cube or detect cancerous tumors before they're visible to the human eye or make materials that are stronger than steel and a fraction of the weight.
Tom Kalil (21:18):
So the way we thought about achieving some of those goals was number one, to invest in fundamental research in agencies like the national science foundation. Number two, to invest in centers of excellence, number three, to invest in user facilities. So places like Lawrence, Berkeley, national lab not very far for where I'm calling you today, where the department of energy invested in something called the molecular Foundry, which has under one roof, all the tools that you need to be able to do imaging and synthesis and fabrication at the nanoscale. And then finally investing in the workplace that we need to create interdisciplinary scientists who are capable of working at the intersection of fields like biology and physical sciences and engineering, which is where a lot of the potential for nanotechnology is going to come from. So that's an example, you've got this goal of, we want the United States to lead in this emerging field. We want to use it to promote advances in everything from better battery technology, to smart anti-cancer therapeutics that can destroy tumor cells while leaving healthy cells untouched. And then you've got to figure out what are the types of support for research that you want to provide in particularly in our universities and our national labs?
Sloane Ortel (22:52):
Yeah, I mean, that's awesome. I think that, you know, based on the, you know, the three or four SD cards sitting in my desk drawer unused and forgotten that probably could hold like together. I don't know, like as much as all of the computing power in my family, or as all the hard drive space in my family you know, five or six years ago. I think you've done pretty well on that nanoscale thing, but like, that sounds a lot, like if you think about the archetypal form of innovation where you're sort of making investments to meet national priorities, right. You know, and that's, I guess that's probably item one in the definition for innovation and the dictionary item two might be, you know, I think you defined in the white house strategy sort of institutional and public sector innovation. I wonder if you could sort of talk a little bit more about, you know, what's been going on there, what the opportunities are.
Tom Kalil (23:41):
Yeah, well when I worked for president Clinton I was able to get DARPA the authority to use something called an incentive prize. And then when I came back in the government during the Obama administration, I was able to work with the Senate to get every agency, the authority to use incentive prizes. So typically the way the government funds innovation is through grants and contracts. So if I'm the national science foundation and you're a university researcher, you would send me a proposal. There would be a panel of, of researchers who would evaluate that. And they would say, you know, these are the very best proposals that the national science foundation should fund. So that's using a peer review mechanism and that's a very important way to support innovation. But another approach that I'm very excited about is where the sponsor of an incentive prize identifies a goal and then says, we're going to provide an incentive to whichever team is able to accomplish this goal first.
Tom Kalil (24:59):
So when DARPA did this, they said, we're going to give a prize to whichever team can build a self driving car that can navigate this course through the mountains. And we're going to give the prize to whoever does it first. And then if, if you know, multiple teams are successful in doing that, then we'll, we'll give it to whichever team to the fastest. So the first time they ran that the DARPA competition, no one won the second time they won a team led by Sebastian Thrun at Stanford won, Larry Page was at the finish line and he promptly acquired the winning team. So that's where the Google self driving car effort which is currently called Waymo came from, so this allows the government or the sponsor of an incentive prize to set a goal, and yet to be indifferent about which team or approach is going to win. So it has a number of advantages relative to grants and contracts. So that's an example of an institutional innovation. I could give you a bunch of other examples, but that's, that's a specific example.
Ashby Monk (26:19):
One of the questions that I've been grappling with and wanted to talk to you a little bit about is the mix of innovation dollars and the types of innovation that gets done. A lot of the work I do is trying to help these big public pension plans innovate.
Ashby Monk (26:44):
And people are like, why would you want them to innovate? Shouldn't they be outsourcing the innovation to the private sector? Like isn't it, a hedge funds job to be innovative or, or some other. And my response is often like, well, look, if you want 20, 30, 40 year innovations innovations, where we're helping investors understand the consequences of climate change, you have to drive that innovation through these long horizon investors, because the hedge funds don't care, they're going to be out of the securities by the time climate change hits well, in that context of like, we need longterm actors to drive longterm kind of transformational innovations. Sloane And I saw the congressional research service is noting that only 22% of all the R and D expenditures in 2018 are from government, which is the smallest proportion on record, which means we're shifting a lot of those innovations that are kind of what I would expect are longer term innovations towards actors in the private sector of which might be more short term and thus, maybe less ambitious. I'm curious what you think the consequences or effects of this shift from government led innovation to private led innovation means for the innovations themselves.
Tom Kalil (27:56):
I think it's a, it's good news that the private sector is increasing its investment in research and development. That's unambiguously good news. What is not good news is that we're allowing as a percentage of GDP, federal investment in research and development to decline. And the reason is, is that the government is more likely to fund research that has spillovers. So, you know, if you think about the types of projects that the government has supported in the past particularly when it's supporting, for example, university researchers their incentive is to publish, their incentive is to make sure everyone knows about the their results because that's how they get promoted. And therefore that's more likely to have spillovers than you know, internal corporate, R and D that they're not sharing with their peers. So there are still, you know, spillovers from private sector research you know, economists estimate that the private sector only really captures a small percentage of the societal benefits of the innovations that they produce.
Tom Kalil (29:15):
And that a lot is results in consumer surplus. But it's very important to keep the government as an investor in in research and development. You know, one of the reasons for this is that the government support for university research often results in serendipitous innovations that would have been impossible to predict. So the reason that we have a green fluorescent protein which is a breakthrough in terms of biomedical imaging, is that some researcher was interested in why certain jellyfish glow in the dark. Now, can you imagine you know, you're, a CEO and one of your employees comes to you and says, I'd like to understand why a jellyfish glow in the dark that's probably not going to be a project that you're going to be super excited about funding. So because of the serendipitous nature of research that we can't predict where these breakthroughs are gonna come from, same with CRISPR, which is the, you know, technology does your in terms of being able to edit the genome that grew out of a research that was trying to understand the immune system of bacteria.
Tom Kalil (30:49):
And again, that's not the type of thing that the private sector would have invested in.
Sloane Ortel (30:53):
Just imagine what it must've been like to, you know, like what your email, email inbox must look like over the years is like, you're, you know, you're going from green protein to nanoscale off to all these other things. And, you know, I, I can't help but wonder, I mean, I think in one of the documents that, that you shot over sort of spoke to like building for more than just this administration. And it kind of sucks that I'm have an inherently cynical expectation of your answer, but to what degree do you think that your work in, you know, the, the Clinton, the Obama administration has sort of survived?
Tom Kalil (31:33):
Yeah. well, I'm going to give you the historian's answer, which is that you have a mixture of change and continuity. So I'll give you some examples of both. So this initiative that I worked on for president Clinton, which he unveiled in a speech that he gave in Caltech in early 2000 is still going on and it's resulted in $27 billion in funding for nanoscale science and engineering. So it's survived the transition, multiple administrations, the ability to use incentive prizes. You go to challenge.gov, you'll see over 1000 instances where agencies have used this authority. I worked on the brain initiative, which president Obama announced in April of 2013. And Congress did something that they almost never do which is to provide 10 years of funding for the NIH component of the brain initiative. Generally, as you know, they just provide funding one year at a time.
Tom Kalil (32:43):
So there are some things that I've worked on that have survived. Probably the most important thing that I did during the Obama administration is recruit at any one time 20 people to come to the white house. And they worked on everything from going to Mars to making computer science, a new basic to reducing the waiting list for an organ transplant, to preparing and recruiting a hundred thousand high quality math and science teachers to investing in advanced manufacturing and the people who had the opportunity to work at the white house, learned a lot about how you get things done, how you exert influence without authority and how you build high impact multi-sector collaborations that involve government industry, academia, foundations, and civil society organizations.
Sloane Ortel (33:36):
I mean, that, that, you've definitely taken a, what was at the beginning of this episode of pretty dour perspective on public and sector innovation and, and given us some instances to be happy about.
Tom Kalil (33:46):
Well, I believe that it is better to write light a single candle than cry it out the darkness. I think that you know, philosophically I'm a meliorist, which is sort of different from an optimist or a pessimist Meliorists believe that things can get better, but only if we work at them. So it is not determined whether things are going to get better or worse, you know, on the one hand you can look at what's happened to under five child mortality over the last several hundred years, and you can conclude three things. One is, things are still really terrible, you know, 5 million kids under the age of five diary, year, number one, number two things have gotten much better that is they've improved by an order of magnitude relative to the 18 hundred. So if we have the same level or rate of under five child mortality, that number wouldn't be 5 million. It would be 50 million. And third things can be much better still. That is if the world were at the level that Sweden has achieved that number, wouldn't be 5 million. It would be 500,000. So I believe that you have to simultaneously think that things suck. They've gotten a lot better and they could be much better still.
Sloane Ortel (35:12):
Yeah. And have the capacity that'll hold those all in your mind without going insane.
Tom Kalil (35:18):
Yes.
Ashby Monk (35:18):
I think you've brought me over to meliorism.
Ashby Monk (35:19):
I'm all for it.
Tom Kalil (35:22):
Alright.
Ashby Monk (35:25):
For hopping on the call with us. I mean, I want to learn more from the experience of driving innovation and bringing collaboration into the white house. We need it in the world of public funds, but that's for another project on a, on another day. So thank you so much for taking 15 minutes out of your Friday to chat with us.
Sloane Ortel (35:45):
Yeah. Thank you. Thank you. Thank you. Yeah. Okay.
Tom Kalil (35:50):
Alright. Thanks.
Sloane Ortel (35:51):
I feel like the world sucks marginally less than I did before we got up on the phone.
Ashby Monk (35:55):
Totally. You know, the fact that he was able, I mean that that's the power of the white house as compared to the power of the public pension. So brilliant, amazing people will take low pay to go and work 18 hours a day for the president. When brilliant, amazing people go and take a pay cut to work at CalPERS. They get crapped on. Yeah. Yeah. Sorry, sorry to bring you down there Sloane.
Sloane Ortel (36:23):
Know what I was thinking about as I heard him talking was like, you know, kind of the, you know, in the unofficial power of that office, right. That he got to work in: the presidency, right. Where, you know, you can imagine maybe in a different context, like the president would be like, Hey, that sucks. When a member of Congress shoots racist stuff at like a very influential public servant, you know? And like, it's definitely, you know, if you're a type of person and I think that there's so many of us who are subject to a bigoted racist, whatever-ist kind of invective it can be really powerful to have like a tone at the top that that seems like it's going to definitely, you know have your back. And I think, you know, maybe, maybe that played some, some role.
Ashby Monk (37:13):
I mean, the power of the office is incredible. That's originally I met Tom through a project that the white house was doing to try to unlock investment for solutions to climate change. And, and I worked closely with a few people on his team and we ended up launching this aligned intermediary, actually at the white house in 2015. But the idea was like, let's use the white house and that, and the convening power of the president in order to bring philanthropists, pension funds, entrepreneurs, everybody together. And ultimately we managed to use that as a way to raise about 2 million bucks in philanthropic capital, get a whole bunch of commitments from pension funds to invest in solutions to climate change. And funnily, the government never spent a dollar. All they did was convene, you know, and thank god they didn't spend a dollar cause it would've gone away in 2016.
Sloane Ortel (38:15):
True, true.
Ashby Monk (38:16):
But so I've seen it firsthand, the power of like sending somebody an email and saying, Hey, do you want to come to the white house and, and talk about how we invest in solutions to climate change? Like nobody says no to that. Yeah. And so like using that for good is I think that's partly what Tom was, the artist he managed to do it.
Sloane Ortel (38:39):
Yeah. And you know, one of the things in the documents he sent over you know, in like the footnotes, it says that he threw really great parties. I think that that aligns with the free money ethos, about as closely as I think anything can.
Ashby Monk (38:54):
Yeah. That's ultimately what we want to be known for whatever else they threw. Good parties. Yeah, exactly. But know, I mean, with that it's time for the ultimate party - the Dear Ashby segment of the show.
Sloane Ortel (39:11):
This is the segment where we answer listener questions. And that includes questions from you, beloved listener. So if you would like to ask a question on an upcoming episode, just go ahead and send an email to freemoneypod@gmail.com freemoneypod@gmail.com. And while you're at it, why not give us a review? That would be cool. We had a review that review accused us of being relatable. Did you see that?
Ashby Monk (39:34):
I did. We have to get up a little higher in our ivory tower. Yeah, exactly. Now I, I appreciate being relatable.
Sloane Ortel (39:46):
I don't moisturize five times a day and have this flawless skin to be relatable, Ashby. Okay. So the first question for this week is given the rise in SPAC issuance. That is: Special Purpose Acquisition Companies. I, you know, individual companies floated on an exchange designed to buy other companies and take them public. Should we expect to see the free money podcast float in blank, check IPO of its own anytime soon?
Ashby Monk (40:17):
Shouldn't we though? We try always been fascinated by specs in part, because there's like all reasons to be crappy about specs, right? Like a good friend of mine, Martin Alvarez wrote up a medium post that like was like, SPACs are the fast food of IPOs.
Sloane Ortel (40:41):
I saw that.
Ashby Monk (40:41):
It's a really good article. Everybody should read it. I've always been interested in specs because they're kind of like a fascinating alignment of interests for investors. If the spec doesn't find an acquisition, they don't, you know, it's a very strange concept listeners, if you've never seen it, that you raise money into a company that has no company. Right? Yeah. And then that company goes, it acquires another company. And then low and behold, the company that was private is now public. And so people invest in this back, but it has very interesting terms.
Ashby Monk (41:14):
For example, if they don't find a company to merge with the investors, get their money back with interest, which means that the asset manager here is actually paying investor for the right to manage their money. Kind of like when we give a bank, you know, our money, they pay us in interest. Well, in the asset management industry industry, it's the opposite. We pay asset managers to take our money. Then they take more of our money if they make a profit. And so I've always found a fascinating experiment in alignment of interests because you get paid for giving them money. That's the first thing. So I always enjoy watching them. The other thing that's fascinating though, is how much SPACs ended up being a leading indicator of crises. And the last time we had this many SPACs was it the year, 2007? And then for some reason it dropped off like a cliff in Oh eight Oh nine.
Ashby Monk (42:21):
And I'm trying to remember what happened around then, but I'm guessing if we're already at, what are we, I don't know. It was like 67 specs already this year 66 maybe.
Sloane Ortel (42:32):
Sounds about right.
Ashby Monk (42:35):
If, if we're going to follow the, like the way things went for the global financial crisis, then we've run out of time slot for our free money Slack. I don't think we're going to get our, our, our chance to do it. I think by the time we get around to actually filing it and taking it public, we're going to be in a painful period.
Sloane Ortel (42:55):
If you're out there and you're an investment banker who wants to file our SPAC, you know, slide into the freemoneypod@gmail.com. And there's like some Goldman Sachs junior intern listening to this, he's like, I got a live deal. You know what? Let's just take free money, public through a spec. I mean, we have revenue now. That's a great point. We do have revenue. We've got like 125 bucks of revenue through the free money atelier, which will be linked in this episode description. Yeah. So our key ratios are no longer infinite.
Sloane Ortel (43:38):
We have actual ratios now, which is a key step. It's going to be, that's going to be in the, in the investor deck. You know, we got ratios and everything.
Sloane Ortel (43:51):
Is it true that a pension funding debate plays a significant background role in the ongoing us post office debacle?
Ashby Monk (44:01):
It is true. That is a true one. And this goes to the.
Sloane Ortel (44:07):
F Anon is real!!!
Ashby Monk (44:08):
On this one, F Anon is legit. There's kind of two key things that happen. So I think it was 2006. We got this new this new piece of legislation. I'm going to try to remember it, postal, accountability, and enhancement act, something like that. And basically what it said was we need to pre-fund health benefits and pension funds, and we're going to, you know, like state agencies and other government entities, you need to pre-fund these benefits you're promising first because it makes them less costly.
Speaker 2 (44:48):
Cause you get the power of compounding over time rather than doing a pay as you go approach, which is very common in Europe. And, and, and second, it just makes the promises more secure and allows governments to kind of make these promises and ensure they respect it. So the rules did change, but the people who are like, Oh, come on, this is insane. The postal service can't be held to a different standard and they're complaining about something, all these other governments are doing, like they're stopping right there because where there's truth to it is because the the discount rate that the postal service is using in order to calculate their liabilities is I think at last check about three and a half percent.
Sloane Ortel (45:38):
Whoa.
Ashby Monk (45:40):
Yeah. So like the way we calculate liabilities is in the public pension space, it's probably around somewhere between six and a half to eight and a half percent is the discount rate. And, and just so that people know the higher, the discount rate, the lower, the liability appears the lower, the present day contribution you need to make. And.
Ashby Monk (46:05):
so you're basically assuming how much your money will grow at over the course of the investment. Right? So if you, if you assume 3%, you have to put, put away way more money. Like it, I don't want, you know, yeah. So, so like if you put $1 away at three and a half percent in 60 years, that would be $8. The rule of 72, I'm like running this in my head,
New Speaker (46:29):
Look at this guy.
Ashby Monk (46:29):
But if you do 7%, I'm going to do it in 60 years. It's something like $64. Okay. So same dollar today going in at a three and a half percent versus the 7%, which are both legit expected return counts used in U S government agencies today. One is the postal service, one is, you know, CalPERS. And in 60 years, one is worth $8 and one is worth 64. And so there is a lot of flexibility here to play with these things, but the postal service has a very low discount rate. Now, all that being said, I think the postal service has been defaulting on its required payments since 2012.
Sloane Ortel (47:15):
Siiiiiiiick
Ashby Monk (47:15):
So they weren't doing 5.6 billion annually for a long time. I think from 2007 to 2012, which was a huge hit to their budget. But as of 2012, I think they were like, forget this. You know, it's too much, it's too onerous to keep up the services. So the reality is we're asking the postal service to behave like other governments and pre-fund, but then the liability that we're calculating for them is, is kind of unfair vis-a-vis the other government agencies.
Speaker 2 (47:47):
Yeah. It seems a little punitive. It's like they're doing the right thing the wrong way. Yeah. So there's, there's both camps. This is why it becomes an F anon topic, right. Because both camps kind of can make a credible case that like their argument is sound, it's just unique. I think we need to have all the details to kind of get into it. Yeah.
Sloane Ortel (48:09):
And the details will come out as F reveals them from their perch inside of deep inside of the federal government.
Ashby Monk (48:15):
I've decided to put a giant F on my back windshield.
Sloane Ortel (48:23):
I'm totally putting a bumper sticker in the, in the free money atelier.
Ashby Monk (48:27):
You gotta add that for sure.
Sloane Ortel (48:30):
The last question for this week is it's been a year since that famous slash infamous business round table statement about the purpose of a corporation, or they said it was, you know, more than to, you know, make money for shareholders. It was to make money for all of its stakeholders. So suppliers, employees, the public at large, is there a meaningful difference between, you know, the way that corporations are now practicing social responsibility and like, you know, what would be corporate, actual responsibility where they really kind of grow up and serve you know, the public at large.
Ashby Monk (49:03):
I wish we could have tested it in a different year, you know, as like an academic, I look at it and I'm like, yeah, it would have been neat to see it in kind of a academic terms, but like holding all other things constant, you know, we get that. So now time goes by and then we can see like, Oh yeah, companies are taking, we've had 20, 20, nothing holds in 2020. Black lives matter, like Pandemic, Covid, PPP.
Ashby Monk (49:43):
I'm seeing companies come out and talk about black lives matter in ways that are profoundly cool. Like you log into Amazon and it's like the first page. And it's like, but like, it's cause it's 20, 20. It's not because you know, the business round table got together and said, we need to treat stakeholders correctly. I do see this like generation of companies here, especially in Silicon Valley where like, there are all these founders that want, you know, it's like when Google got public and they're like, don't be evil. You do see a lot of that nowadays where like a lot of these young founders, they come up, they have kind of a different corporate governance structure because many of them have like these super shares and they, I think they want to be more stakeholder conscious. And so this will be really interesting with like this longterm stock exchange, which was approved by the sec and like full disclosure. I'm an advisor there, but it'll be interesting to see like what companies choose that as a venue because that exchange, which has listing requirements, demands, that companies adopt five principles, which are all about improving relationships with the earth, with stakeholders, you know, all of those things, right. Longterm is just is just a proxy for all these different things that are important for the business. You know, the business round table are talking about.
Sloane Ortel (51:12):
Yeah. I mean, it's, it's so funny to think about what it would be like if they made that declaration in 2015. And like how, I mean, you know, it's, I think like the only company that I'm sure would have done exactly the same thing is like Ben and Jerry's, which Darryn who we had on the podcast is on the board of, you know, just like racism sucks, We're against it, we'll knife anybody who does racism.
Ashby Monk (51:33):
Well, they knew black lives matter a while ago. And, and this kinda goes like to some of the stuff we were saying at the beginning of the show, which is like, you need prices to drive innovation and yeah. Like where you find the crisis kind of doesn't matter so long as you find some good crises to latch onto, to unlock resources, to shake people up out of the status quo. And, and so hopefully what, what 2020 will reveal to people is they have to engage with their stakeholders. They have to make sure they have healthcare. They, you know, all these different things that we want from companies. I don't know. Maybe, maybe we look back at 2020, and we're like, thank goodness. That year sucked so bad because it drove all this important change.
Sloane Ortel (52:25):
That's I think we gotta leave it with that. I mean, and we got to start saying like, selling, like eat, pray, love, style, find your crisis stuff.
Ashby Monk (52:34):
Maybe that's something F Oh yeah. Oh man. These crises were manufactured to change capitalism.
Sloane Ortel (52:43):
I think that the F anon mythology is starting to make a lot of sense, you know, made, just made up of like, you know, concerned citizens like you. And I hear that.
Ashby Monk (52:53):
I hear, they like us.
Sloane Ortel (53:01):
Listeners and the Fanon faithful. We love you all.
Speaker 5 (53:23):
[Inaudible].