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This piece was originally published April 20, 2020 and updated January 31, 2021 to reflect recent calls by Chamath Palihapitiya.
“You keep saying propping up zombie companies…are you arguing to let airlines, for example, fail?”
A stunned Scott Wapner, a longtime CNBC host, stammers and stutters…”why? How does that make sense in the broader scheme of the economy?”
“This is a lie that has been purported by Wall Street, when a company fails it does not fire its employees, it goes through a packaged bankruptcy…the people that get wiped out are the speculators…those are the rules of the game…these are the people that purport to be the most sophisticated investors in the world…they deserve to get wiped out.”
“How does anybody deserve to get wiped out?”
“Just to be clear, who are we talking about, a hedge fund that serves a bunch of billionaire families? They don’t get the summer in the Hamptons, who cares?”
Wapner, still clearly stunned, kept hammering the point, implying the events of COVID-19 are like a natural disaster. Chamath Palihapitiya articulated what anyone who isn’t broadcasting from the comforts of a Wall Street studio already knows. “What’s happening right now…on Main Street today, people are getting wiped out. And right now rich CEO’s are not, boards that had horrible governance are not, hedge funds are not, people are. Six million people just this week alone, basically saying, holy mackerel, I don’t know how I am going to make my own expenses for the next few weeks, days, months, so, it’s happening today to individual Americans and what we have done is disproportionately prop up and protect poor performing CEOs, companies, and boards and you have to wash these people out.” This April 2020 interview with Chamath Palihapitiya went viral and has made him a unique voice sought out during the COVID-19 pandemic.
Can the status quo corporate conventional wisdom withstand another recession?
It’s a sentiment not shocking to the average American. Maybe the memory of the 2008 recession is too fresh. Many of the companies that made the mismanagement decisions that led us to the recession were bailed out. The American people received little to nothing to get them through. Home foreclosure records were broken. Unemployment rates reached their highest marks since the 1970’s. Yet, other than a few tax breaks, a few small direct payments for those eligible (no more than several hundred dollars in most cases), and a promise from big business and banks to do better, conditions remained largely the same in the great recovery of the 2010’s.
CNBC, established in spring 1989 shortly after the conclusion of President Ronald Reagan’s second term, is largely emblematic of an America that puts the interests of business first with the hope that their prosperity will benefit the average American worker. In the decades since the Reagan years, largely the business and political world, with minor deviations, have stood in lockstep with this type of thinking.
Bitcoin & Game Stop
Anti-establishment sentiments have always been rocket fuel for bitcoin. The establishment has belittled cryptocurrency for years and has predicted its demise, yet it continues to rise. While bitcoin is becoming increasingly accepted in the mainstream, Chamath Palihapitiya is among a camp of long time bitcoin bulls.
As far back as 2013, Chamath is on record calling bitcoin ‘gold 2.0’. When bitcoin soared in December 2017, he predicted bitcoin would someday go to $1,000,000 in the next 20 years. In early January 2021, Chamath said that bitcoin will eventually go to $100,000 then $150,000, and upward.
When the Reddit fueled Game Stop rally happened, as many in the financial establishment belittled the band of misfits, Chamath took a bull position in Game Stop in solidarity. While he did close his position rather quickly at a substantial profit, he donated his $500,000 that he made to the Barstool Sports fund to help small businesses during COVID-19. Obviously, he became a legend among the Reddit crowd when he bought in and expressed support for their cause.
These are further examples of a new generation of financial titans, with billions to back their strong voices, speaking out against the status quo thinking of the financial establishment.
Chamath Palihapitiya and a shift in business leadership
The world is changing. As baby boomers begin to age out of the economy, it ushers in a new generation of more socially conscious entrepreneurs that, at the very least, try to pay lip service to more liberal and progressive ideas. Chamath Palihapitiya is a billionaire venture capitalist, but grew up very modestly with immigrant parents in Canada. He got an electrical engineering degree at the University of Waterloo in Canada and then broke into the investment banking world in the United States. He became the youngest vice president in AOL’s company history in 2004, heading its instant messaging division. He then became an early leader at Facebook when the company was little over a year old in 2005. He made successful side investments during his time at Facebook at that allowed him to break off on his own. He eventually started his own fund in 2011 that is now known as Social Capital where he has made successful investments in companies like Yammer, Box, and Slack. A critic might note that Palihapitiya, as a venture capital investor, has way less to lose if traditional “zombie companies” get “washed out” (as opposed to more traditional investors). Venture capitalists focus on new companies and start ups and are often out of the investment as soon as the companies have their initial public offering (IPO).
Paliyhapitiya has taken other positions in the past that have generated headlines. He has expressed regret for being a part of the founding of Facebook, saying that social media is “ripping society apart”. He has criticized the lack of affordable housing and care for the poor in San Francisco. He has also called out the lack of diversity in the venture capital space.
Paliyhapitiya: a generational shift or voice in the wilderness?
It’s no surprise that CNBC first hit the airwaves just after the Reagan presidency. The conventional wisdom of propping up businesses first and handling everything else later has successfully been the first line of thought on a bipartisan basis for the over 30 years since Reagan has left office.
Yet, income inequality has festered and now has become a top of mind issue in the United States. Just a few weeks back, it seemed a self described socialist, Senator Bernie Sanders, was on track to become the Presidential nominee for the Democratic Party. Businessman Andrew Yang was able to gain a young cult like following of supporters in the 2020 Democratic primary on a universal basic income platform promising every American a $1000 payment per month. Running against a shoo-in legacy politician like former Florida Governor Jeb Bush in the Republican primary and a candidate with an ideal political resume like former Secretary of State Hilary Clinton in the general election, a populist unhinged reality TV host businessman like Donald Trump was able to soar to the White House in 2016.
Chamath Palihapitiya represents a phenomenon of first-generation tech billionaires aging from the quirky socially awkward guys in hoodies and now moving toward their prime years of business leadership. As baby boomers move toward retirement, it feels like Cold War fears of socialism and the Reagan era approach of treating big business with little to no accountability is further in the rearview mirror.
Congress, on both sides of the political aisle, unlike in the 2007 downturn, barely blinked before knowing they had to provide direct payments to Americans in response to COVID-19. As we noted in a recent piece, there’s even bipartisan talk of banning stock buybacks. Income inequality has fueled populism all over the world. At best, populism is a change agent that corrects inequalities, at worst a dangerous worldview that results in rioting in the streets and instability. The question is, will the new generation of business leaders respond to the crisis of income inequality or let it continue to simmer like we have the last four decades?
With January 2021’s Game Stop saga as the latest example, one thing of note is both the political right and political left are trying to own this latest brand of populism. Populism has not only become a powerhouse force of politics but now has also found its way into the global markets.