🐳 S3T Aug 9 - Capitalism's 'Special Room' problem, New AI buzzwords, Gov Whales

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In this edition of S3T:

• 📉 Market Turmoil: Recent market fluctuations linked to the Yen "carry trade," with stocks and crypto bouncing back slightly. Recession chances at 45% by end of 2025.
• 🏦 Government Bitcoin Whales: Some U.S. candidates propose holding Bitcoin as a strategic reserve. The U.S., China, and other nations already hold significant amounts.
• 🏥 Healthcare Affordability: The healthcare industry is being forced to rethink risk management due to financial strain and expensive treatments. New payment models are emerging, like mortgage-style plans and subscriptions.
• 📚 Economics Critique: Nicholas Gruen argues that economics has lost its way by focusing on scarcity, leading to harmful trade-offs, especially in healthcare. He advocates for integrating shared intentionality into economic frameworks.
• 🤖 New AI Buzzwords: Keep an ear out for terms like "Large Action Model (LAM)" and "Agentic AI." AI safety and security are growing investment themes, despite the mixed results from Generative AI.
• 🏛️ Capitalism's Special Room: Critique of how capitalism often benefits a few ("special rooms") while the majority struggle, with examples like medical debt and tax avoidance by large corporations.
• 🌍 Getting Capitalism Right: The need for a balanced approach to capitalism, moving beyond the false dichotomy of capitalism vs. socialism, and promoting an economy where everyone benefits.

Welcome to S3T, the essential newsletter, podcast, and learning platform for change leaders. Every week we review the top developments and insights you need to stay ahead of the curve, build your ethics & leadership skills, and drive intentional beneficial innovation.

Opinions expressed are those of the individuals and do not reflect the official positions of companies or organizations those individuals may be affiliated with. Not financial, investment or legal advice. Authors or guests may hold assets discussed.

Carried Away

Earlier this week the market threw a tantrum - partly linked to the Yen "carry trade" (nice short but comprehensive summary from Havre here). Stocks and crypto bounced, with the Dow recovering after slightly more cheerful labor market news. JPMorgan sees 35% chance of recession by end of 2024, 45% by end of 2025. Mortgage rates are falling. Everyone take a deep breath.

Governments - a new class of Bitcoin Whales?

Several candidates in the US Election have proposed that the US intentionally hold a strategic reserve of Bitcoin. The US, China and other nations already hold surprising amounts. 🐳

Healthcare: New Roads to Affordability

As noted in previous editions of S3T, traditional health insurance has a limited understanding of the broader set of financial instruments that other sectors use to manage risk and cost.

Now the industry is being forced to relearn what it knows about risk and underwriting thanks to the unsustainable financials of US healthcare combined with the emergence of extremely expensive but life changing treatments.

This week, the Economist reviews some of the emerging ideas - mortgages style payment plans, Netflix style subscriptions and more.

What ails economics

In How Economics Found Science …and Lost its Subject Matter Nicholas Gruen digs into why the discipline of economics is so hosed up:

• Thinking of itself as "the science of scarcity" as if scarcity should be the sole organizing principle of value and finance.
• Falling into all or nothing false tradeoffs that repeatedly prove to be at odds with the messiness of reality.

These fallacies are particularly damaging when used as a guide by financial leaders in healthcare. Gruen asks us to critique the standard "health policy trilemma" framework taught in leading Health Economics textbooks like this one, which asserts - with no evidence - that Health, Wealth and Equity are antithetical: the more you try to get one, the more you have to sacrifice the other.

This kind of irresponsible framing can signal to capital managers and financial leaders that it's ok to ignore health equity issues because "economics says so."

Not only is this harmful to individuals and communities, it also flies in the face of the real world case studies like Toyota's simultaneous gains in efficiency and quality during the 1970s-1980s. Toyota ability to improve both efficiency and quality defied the US auto industry's iron-clad belief that quality and efficiency were necessary tradeoffs.

Toyota was able to do what they did because they tapped into the power of shared intentionality - the ability of people to come together to achieve something that otherwise seems unfeasible. Shared intentionality - very different from the "invisible hand" - is missing from our current status quo thinking on economics. As the world shifts from theory driven economics to data driven economics it will be crucial to factor shared intentionality into our new economic frameworks.

Move over GenAI, here come new AI buzzwords

Perk up your ears, you'll probably hear these terms in Zoom calls and coffee shops this week:

• Large Action Model (LAM) - a system for understanding a set of instructions from a human, then carrying them out using computer applications and web sites. RabbitOS appears to be a leading developer in this space. Here is another elaborate use case related to food production.
• Agentic AI - An adaptation of LAMs involving foundation models trained on decision making and planning data. Orby AI is applying this technology to process automation.

AI Safety and Security continue to be investment themes

Haize Labs, an AI safety startup founded less than one year ago, has raised a round at a 100m valuation. (Also: full list of AI startups raising 100M or more in 2024)

The focus has been on GenAI Agents (conversational bots) that sometimes do impressive things but frequently miss the mark and ALWAYS require vigilance. Over the course of 2024, the market has reassessed the hype over Generative AI: it's costly, runs huge energy budgets, and so far hasn't offered clear paths for consistent sustainable revenue.

SO the hedge position that many seem to be converging on is:

• Aggressive experimentation with AI will continue, along with astounding advancements. Big Tech companies have too much invested and too much at stake (the future of search, industry competition etc) and the federal agenda (AI arms race, chip industry)
• Applying these capabilities to real world problems will continue to be hit or miss. Solution providers large and small will continue to target wide ranges of use cases.
• Most firms will continue to believe they can't ignore AI, and will continue to invest, as a mitigation against the risk of missing out on the next big competitive advantage.

In this environment, AI Safety, Security and Governance may be a growth industry for companies and consultants who can provide compelling offerings. At least that seems to be the bet that a set of VCs and consultancies are making.

Another safety angle: OpenAI warns you might get "emotionally hooked" to its new voice interface: “Users might form social relationships with the AI, reducing their need for human interaction—potentially benefiting lonely individuals but possibly affecting healthy relationships,”

The capitalism vs socialism memes are going around X again

Must be an election year. Sooner or later you're going to run into the old argument about capitalism vs socialism and all the emotions it brings up.

Today’s change leaders work at the intersection of technology, finance, and social challenges. This means you will inevitably encounter challenging conversations and decisions where you’re questioning your stance on critical issues. If you see yourself as a compassionate person who also believes in free enterprise, you might find yourself wondering, “Where do I position myself?” It’s important to develop a perspective that aligns with your ethics without veering into unhelpful extremes.

In this discussion, I’ll offer some perspectives that give you options for creating your own informed perspective that is both balanced and ethically sound.

Capitalism's "Special Room" Problem

If you grew up in those South Carolina summers - like I did - you'd understand why it took some folks a while to accept climate change (“Round here's been hot forever!”).

My parents couldn’t afford to air condition the whole house, so they got a small window unit, put it in one room, and kept the door closed. This became the "special room." It was refreshingly cool, the air was breathable, and it felt like a slice of heaven on earth compared to the hot stifling air in the rest of the house.

Capitalism - at least as commonly practiced in the US has a similar "special room" problem: a few live in a special room while the rest of the house is kind of miserable:

• While most in the economy fret about paying the monthly bills, high-end trophy home sales are booming.
• As medical debt hits all time highs, global firms like Coca Cola get to hide billions of profits and dodge taxes - for years... LeMonde 2015, FT Aug 7 2024

That last point is particularly galling: Did none of the smart people in the Coca Cola boardroom ever think to say "hey, the sugary drinks we sell do cause a lot of diabetes, so maybe we should pay our full fair share of taxes, cause we're contributing to an obesity epidemic that's putting a strain on national healthcare." ??

No probably not.

They were freed from any such responsibility the 1970 gospel of Milton Friedman, remember? The sole responsibility of a company is to profit its shareholders. In other words:

It's ok for me to ruin your health, pollute your water and air, destabilize your society with extreme financial inequity, deny climate change until the hurricanes and wildfires destroy your homes - as long as I give you a profit.

Of course, Friedman didn't mean exactly that did he?

No...He probably didn't think about the shareholders themselves being put at risk by a company's actions. This was 1970 mind you. The cultural mindset that bought into the Friedman gospel saw the world neatly divided into 2 groups...

• The people who own stock (in 1970 a privileged few)
• The people who drink Coke (everyone else).

This same cultural mindset believed it was ok to provide value to one by exploiting the other.

If you find this hard to accept, go read his works in context (full list of links here). He was specifically arguing against social responsibility of corporations.

In this worldview, corporations should be free to exploit society by selling cigarettes, military rifles, sugary drinks - whatever the market wants - while bearing zero responsibility for the outcomes, and enjoying a full range of tax avoidance schemes not available to the average Coke drinkers who of course will have to make up the difference.

Getting capitalism right

Don't get me wrong. I'm not against capitalism. I’m actually a fan of what capitalism can achieve when it is done right. I’m also a big fan of being a fierce critic of capitalism in the spirit of let’s make it work for everyone. Capitalism is at its best when everyone can participate and benefit. But when we create "special rooms" where some benefit more than others, we create problems that money can't solve, but certainly does complicate.

I also think it's probably time to retire the Capitalism vs Socialism thing. It's a false trade off. Neither of these describe what is actually going on in our economy today, nor do they accurately describe the ranges of options available to people who cooperate with intentionality.

If you'd like to see a small glimpse of how good it could be, take a look at this mini-documentary on one example of financial innovation and its far reaching impact, as shared by Anthony "Pomp" Pompliano.

Notes on the wealth inequality and the cultural context of the Friedman Doctrine

• In 1970, somewhere between 5%-20% of American's owned stock: 4.2% of Americans owned stock in 1965, 20% owned stock in 1990 (Investopedia references). 61% of Americans owned Stock in 2023 per this Gallup survey.
• In 1970 the market had not yet seen Individual Retirement Accounts (1974) or Index funds (1976). (Investopedia references)
• To learn more about data on wealth inequality, see these 9 Charts about Wealth Inequality in America.

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