#984 - Is Inflation Back on the Rise? with Howard Lindzon

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0:56welcome to real vision daily briefing it's thursday february 29 2024 i'm ash bennington Our guest today is Howard Lindzen, CEO and co-founder of StockTwits and general partner of Social Leverage. Howard, welcome back to Real Vision. Hello. Ash, my man. It's great to be doing this with you, man. You and I have been just sitting here rapping for the last 15 or 20 minutes about everything in the world. Where the hell do we start? Well, I'm 58 and tending to my prostate. That's what we were mostly talking about. All you worry about at my age is your prostate. If you have everything's working for you, all you think about is what could happen to my prostate.

1:34And you must worry about your portfolio as well. I don't. No, I do. Everybody worries about their portfolio. That's one thing everybody worries about all the time, unfortunately. Yeah. PSA and SPX. Well done. Well done. Howard, let's get the preliminaries out of the way. Talk a little bit about what's happening in markets. Then we can go completely off the reservation. when it's too late to cancel us. What do you think about what's happening? U.S. equities, crypto right now is just red, red hot. What's your take on what's happening in markets more generally? Well, I think what's happening today is what happened two years ago, is no one wanted crypto.

2:19You know, you had, again, I'm not a crypto person. I have a lot of capital, spec capital in crypto through some funds. But I remember raising money for an emerging manager fund about 18 months ago in the bottom. And we were just getting yelled out of the room. We were just trying to asset allocate about 18 months ago with Bitcoin around 18, 20 ,000. And it was, you know, I still felt we, it didn't feel like a bottom, but it just felt like based on really strong signal of getting no after no after no, being laughed out of the room for even talking about crypto. And then you have The Economist. You had every news.

3:02You had everybody who was making fun of crypto that this is why we're at crypto today, right? You still have the same shitty global environment. You still have nobody wanting to deal with the reality of what the macro is, right? Like the global shrinking, you got a couple of wars. And so the macro environment is just still conducive to a lack of trust, and then you combine all the money still sloshing around, why would you tie your money up in venture capital when you can trade it in crypto and have 100 backers? So I can see this whole economy of speculation is playing out again in crypto. So that's the crypto market.

3:42In the QQQs and the Magnificent Seven, it's just incredible companies with incredible cash flow, with incredible power, incredibly diversified across consumers, across business models, across jurisdiction, across currencies. And, you know, I don't know, like, that's what people are doing. They're putting their money in the Magnificent Seven. I mean, will it last? I have no idea, but I can understand why this scenario is happening. Do you worry about the narrowness of the breadth? I mean, and the degree of the run-up? I mean, NASDAQ 100 trailing 12 a month, basically 50 % higher. Well, I mean, no, but yeah, I mean, define worry.

4:27I don't know enough to tell people I don't have the answers, right? Like I think it's not as narrow as people think because Apple's a hundred companies and you can't get it out of your life. So how narrow is that really? it's a narrow in the sense that you're buying one stock but are you really buying one stock when you buy google you're buying one company you're buying a you know gmail maps android is it one company it was one company 50 years ago before the spreadsheet but it's 100 companies you know really so i don't know like that narrow breadth i don't really buy um valuation um i guess seems a little stretch for the shrinking world but again i'm not a big equity guy you know i take so much risk and seed stage uh that i love watching the markets because you know i've stock twits and i love owning individual stocks but i've mainly become a direct indexer and etf person let's just touch on the news of the day here a little bit since It's a market wrap show.

5:37We'll get on to more fun stuff in just a second. PCE increasing four tenths of 1 % on the month, 2.8 % year over year. Obviously, this is the indicator of inflation. The Fed watches most closely. This is kind of their benchmark, not CPI. We should point out S &P 500, roughly 5%, call it half a percent higher for the day. Things kind of uppish to flat. NASDAQ, I guess, almost up a little over three quarters of one percentage point on the day. Perhaps a bit of a relief rally on the notion that there's not dramatically accelerating PCE. Any thoughts about inflation?

6:21No, I mean, I'm wealthy. So, like, I don't know, like, I don't see it. Like, I can feel it. Like, people talk about McDonald's being really expensive. But then I read about the app. If you use the app, it's kind of like their discount program. So I think it's real. Like I look at the prices, you know, I go to, I don't have an assistant, but I, so I book everything myself. I go to Google flights. I look at hotels, like I'm the consumer directly. I don't pass it off to anybody. So I know that hotel prices are high, especially in the luxury side. And I know, um, airline, it's more expensive to fly.

6:57Obviously it seems expensive, but, um, I don't think of the world the way other people do because I'm not as, you know, I'm not as affected by inflation. It feels like a lot of inflation at the grocery store. And it also feels like there's a lot of inflation in just trying to live. Like in an apartment on the coast, you got to sign your life away. Like I have a young daughter and I have all their friends trying to get apartments. You can't, you have to put up your left kidney to, you can't put up your left kidney. You have to sign your life away and they don't want to rent you an apartment. So it's harder to live.

7:36If you're in your 20s, you have to put up your parents' left kitchen. Yeah, right. It's your parents. So I'm like signing for friends' apartments and friends of friends. But it's so it's I think living is harder as a young person. I don't know about inflation, but I can't imagine when I was starting out in life, it just wasn't this hard. You had a credit card and you had Best Buy and you just ran up a bill and worried about it later. Kids today are on debit cards and it just seems more stressful. Yeah, extremely, extremely well said. And you see the goods and services inflation and dramatically outstripped by the asset price inflation.

8:17You talk about folks in their 20s who are trying to start households, start families. It's brutal, man. It's brutal. Because I shop for myself. I live part-time in Coronado, so I walk to the grocery store and I grab stuff for a week. And just no prices because I have to just notice that paper towel is ridiculously expensive. Like I always remember my wife saying, why are you using paper towel? You could wipe it with a cloth. I'm like, come on. And now that I pay for paper towel myself, I go, what am I doing? Paper towel is crazy. I just tweet. I don't know what it is with paper towels, but I just tweeted about the$30 bounty purchase I just made.

8:55Right. It's bananas. It's bananas. I'm just going to use underwear before I wash it. Probably be cheaper. That's a tip. That little tip for free on a stock show. We're going to take a quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing. Join over 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, June 5th and 6th, 2024. Raoul Pal, Benedict Evans, Balaji Srinivasan, Edward Snowden, and over 150 others will join the industry's most influential to explore and unveil the next wave of transformative AI technologies. Singapore will become a vibrant AI hub for a week from June 3rd through June 9th with over 150 side events that will make for unparalleled networking opportunities.

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10:59Let me ask you this, something you said when we were talking a little bit about crypto, when you compared crypto to VC investment, talk a little bit about that trajectory. You see, obviously, instant liquidity, I guess that's a blessing and a curse. But do you see in the future, things moving toward a more sort of fully fungible, digitized VC space. And what happens to the folks out on Sand Hill Road? That's a lot to unpack. So as a seed investor for the last 20 years, I'm in this period where I can't stand venture capitalists because I don't trust the stack above me, right? Even if I make a great investment at the seed level, I, based on SoftBank and Amazon and all this money above me, I have to now just make sure, not that my first investment is good, but some drunk late stage venture capitalist who has different goals than the founder and me doesn't wreck a cap table.

11:54That was, and during ZERP, no one cared about anything, right? So bad behavior, be damned. Paul Graham's a genius. He's not. He's also an anti-Semite, But I'm saying like there was all this Zerp nonsense where we could get away with mistakes. And now everybody was a genius. Right. Yeah. Everybody was a genius. Including myself. But I'm saying in hindsight, you were an idiot if you didn't make money. So let's just be honest about that. So now that the tide has wiped out a little bit and crypto is not going away, I don't know about whether it's Sandhill, but I know that BC is going to change. Right.

12:33And the way social leverage our firm deals with it is we want our companies to be cash flow sooner, like business first. They don't have to think about being a unicorn and don't trust the capital stack. Don't trust the next. Assume you're going to raise less money and build to a two to three hundred million dollar exit versus thinking about a billion dollar exit. because there is no such thing as a unicorn. That was like a moment in time. And those moments and times come back, but they look different when they come back. And we can see it in crypto. They came back right away while every VC is still out there raising money.

13:16And so what we learned is the crypto people that survived learned how to trade through a crash. And now they're smarter. So that game continues and the VC game is changing more. Does a VC game turn to blockchain? No. I just think companies raise less money because VCs are kind of useless.

13:41I love it. Go ahead. But VCs that invest in true venture capital are necessary, right? Robots. But a VC creating an app or a VC disrupting enterprise, all the rages of the last, the Uber this and this and that, venture capital is supposed to be venture capital, right? Like we see it in the chip industry, right? Like, I mean, we need venture capital. We just don't need it where we thought we needed it. that's that's so interesting so you're talking about really um you know long time horizon capital intensive uh manufacturing i mean there's just there's just no way that you're going to crowdsource uh the latest uh silicon uh factory right it's fabrication it's too damn expensive yeah so we went through this period of misallocation of capital it'll get better allocated so i think bc is going to change i don't think it means it's going to the blockchain Well, you get to look at things really early as a seed stage investor.

14:40Let's talk a little bit about that. What do you see? What's changed here in the wake of this period that we've just passed out of it? We've been talking about with massive central bank liquidity beginning to ease off. Well, there's still capital out there. So what's different this time is we're starting from a higher base of capital. We're starting with more people on the platform of investing because there's so many mentors in places like Real Vision and StockTwits and Reddit and Twitter and Discord. You have so many mentorship possibilities, right? So everybody's leveled up, plus there's more money in the system.

15:21And, you know, so it's, you know, for me, C-stage investing is about where, like, really, how do you fit in? Like, when you, how do you think about companies getting built? And then really trying to find some big trends. Because if you find bigger trends, it doesn't matter the size of the company. then there's just all kinds of exit and optionality possibilities. So as a seed investor, we went from an abundant period of, even if you don't execute, your engineers can go hang their hat at Google and Amazon and Facebook to this environment of AI. Well, that ain't possible anymore, right? Like no one wants an engineer unless they're a 10 times engineer.

16:04So as a seed stage investor, the level set for us was we had to rethink how we build companies and what kind of founders we're looking for and what kind of sectors are. So it's just completely changed. I believe the seed stage business has completely changed and the basic premise is less capital, get to a business first and stack the tech later. Like once you have a business and a little bit of a moat, you have way more optionality to stack the tech in your favor and expand to another region. We went through a ZERP period where it was like if you had product market fit, you would global domination the first day, right?

16:44VCs would – because of ZERP. It's like, does it really make sense that Robinhood as an investor tried to get into China in year three because Uber did it? You know, the playbook before Uber and Web2 was like, don't even think about China until year 10. And in Web2, it was like year three, let's go into China and we'll win. Like, does that sound realistic anymore? No. And it was, so that thinking has got to be completely changed. So let's talk about that. What type of investors are you looking, excuse me, what type of founders are you looking at now as an investor? Well, the goodness is we have a huge network for, you know, I write, you know, I have stock tweets, you know, we put the vibe out there, I would say about what we're looking for.

17:26So it's mostly inbound, right? We've been doing this for 20 years. So that's an edge. We, I tell people what we're looking for, just like I'm doing right now. Right. And so what we're looking for are founders that would be happy with a$300 million exit. So if you're happy with a$300 million exit, paid-in capital should be at most$30 million. So let's have a conversation if you think you can build a$300 million company on$30 million of capital. And then, by the way, take it backwards. What does a$300 million company look like in a 5 % interest world? It doesn't look like$3 million in sales and a million dollar a month burn.

18:09It looks more like 30 million in sales and profitable, right? And so if you tell that story enough, first of all, every founder doesn't want to talk to me when they hear that story. But eventually, founders that understand how we think call us and say, we get you. Here's our idea. And then it's just much easier. So we're still in that period of like romance and dating where we're telling people what the world looks like or how social leverage thinks exits look like. And then we're trying to find founders and then form fit companies to build to that exit so that our LPs make money. We have like we're on the same level when we invest.

18:50And then we can work the cap table towards like a right, you know, a rightful exit. So how you structure the cap table at the beginning really is the most important part. We were talking before we went live about the way commerce itself is being restructured, the nature of disintermediation, how digital content is coming of age in a way that allows creators, that allows entrepreneurs to directly monetize, own the relationships with the customers in ways that they never have before. We were paying homage to the great Richard Lewis a few minutes before we went live. And we're talking about Punch Up, something that you've invested in.

19:28And it's interesting to me in and of itself because I love comedy, but also because it's in some ways emblematic of a shift where you see this balance changing, where folks can own relationships directly with their customers without layers and layers of middlemen, not just stepping on margins, but even perhaps more important, disintermediating the direct relationship that people can have with technology, which I think is just a fascinating idea. So it's a good example because no one's heard of it yet, but they will. And Joe Rogan just mentioned it. So comedy, not a venture industry, forever. Believe me, I've made a few$25 ,000 investments because as a passionate, want to be funny person.

20:09yeah so because what for the last 15 years comedians and entertainers and so forth and us and influence have been said go online you know start a facebook account start a twitter account start an instagram account and by golly that was fun for a lot of people but in the end who's famous elon musk um donald trump uh kim kardashian they were going to be famous either way right so if we really think about who's famous uh the guy on youtube mr beast okay we did all this to get mr beast famous okay so obviously there's a lot more famous people than mr beast down on down in the trend line all those people either are gonna get screwed or have been screwed by the man youtube facebook twitter i'm rate limited or shadow banned on twitter i don't know why but Who cares?

21:04It's my fault for me being the product. So along comes crypto after 10 years of social media, and that's not believing owning our own customer matter. Along comes crypto. Everybody's like, that's the golden goose. That's going to disrupt everything. Well, guess what? There's this old tool, this old pipe that everybody forgot about called email, which is pretty damn not broken. Pretty damn good, right? Like, yeah, there's deliverability issues and you got to be careful, but you own that. If you have a subscriber on email, you can email them, right? It may or may not get through, but with Gmail and with Outlook, with spam detection, with et cetera, and deliverability by the email providers, it gets through, right?

21:50If it's meant to get through, it gets through, okay? So instead of crypto, the head fake, and instead of social media, email is the killer tool for entertainer, right? Because a comedian on YouTube can get banned for a joke, right? And his 200 ,000 subscribers, he doesn't know how to contact them. So along comes a kid, Daniel Frank, not a kid. And he'd been at Facebook for 13 years, a product guy. And he realized by talking to comedians and entertainers for 10 years at Facebook, they're getting screwed and they really need to talk to their customers directly. And so a few comedians started doing it.

22:36And in the last four or five months, hundreds of comedians have started doing it because they talk amongst themselves. And very non-scalable idea. But now the best comedians in the world realize that by owning their own email, they can drive ticket sales and see direct results. So the whole flip that has been promised by venture capitalists and Facebook and then by crypto was really just about email. Right. And it couldn't be easier. Everybody knows email. It was just forgotten on the shelf because everybody was chasing likes and retweets. And here we are back to what's old as new. 20 years later, like you said, Sam Murrell, right, can fill a stadium from his email list.

23:21Now, who has the power now with tickets, right? Sam Murrell. And maybe Sam Murrell now can lend his email list instead of his sending a tweet to a comic that he loves in Des Moines, Iowa, because he knows he has 1 ,600 people that will open his email in Des Moines. And so he can promise that comic that 1 ,600 people that love Sam Murrell probably would show up for his event. So again, we're flipping kind of the power, and it isn't a new tool. It's kind of an old tool. What's new about it is the company Punch-Up won't need to raise$100 million. So it's not exciting to a venture capitalist. But Punch-Up could be profitable in its first year.

24:02Oh, and by the way, he didn't have to get an article on TechCrunch. Joe Rogan had Sam Morrell on his podcast, and Sam Morrell was just in the course of, yeah, how do we find you? Samaral goes, I'm using this incredible simple tool called Punch Up. And Joe Rogan looks at him and goes, that's genius. And how do you buy that press? So we have two things going on. You have to have a leaner cap table. You have to have a business model that makes sense. And then you have to find a different hack to grow. And if you do those, you're still going to get rich as an entrepreneur in America. You know who's not going to get rich?

24:36The venture capitalists. And that's the only thing that's changing the way I see it right now. That's the big unlock. And so I think the big unlock is not that venture capital is going away. It's just really going to be different. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing.

25:00gosh that is so fascinating because it it just it harkens back to some just kind of core fundamentals that seem completely out of whack for so long right we were in this zirp period where everyone was just chasing as you point out this this massive unlimited scale right i want three million likes that's my goal i want three million likes i don't want to build a small business where we can make some reasonable profit control costs run a business like you know in a way that actually made sense based on fundamentals. The other fascinating thing that, go ahead, jump in. Well, capacity constraint, right?

25:29These are old terms, right? Like what makes social leverage? We're not geniuses, but we run a very limited size fund. So the capital constraint is the edge, right? Like that's hard, but it's also how you win, right? You have to fight in a weight class, like the best people stay in a weight class, right? Fred Wilson always kept his funds on their $150 million, right? Like Andreessen has a different game, right? They're playing a different ballgame. They're playing a media and asset game, right? The returns don't matter. So as long as everybody knows what game everybody's playing, that's fine. But it's up to the investor to know which game they're in.

26:10And as an investor, I want to play in one game. I'd set the rules. I'm going to be wrong all the time. That doesn't change. I'm going to be wrong all the time. But when I'm right. It's so much more fulfilling knowing that we did the deal this way. And it's something like the plan worked. And I see, and it's fun to do that right from the start. So, you know, the game changed, but the rules really are the same. It's just Zerp and the cloud and the mobile phone. It was such a euphoric moment in tech combustion and explosion of opportunity that, of course, we all got caught up. And it was a magical 10-year period of capital abundance and tech abundance and global markets were open to everyone.

27:01Of course, that happened. But it's not because you were smart. You just happened to be alive during one of the greatest floods of opportunity of all time. But what's so interesting about that is that even though this irrational exuberance period has passed, the Zerp era has passed, the infrastructure that was created during that period is now laying the groundwork for the generation of fundamentals-based businesses that are going to come after it. And the paradigm has shifted into this new digital space. Wasn't it irrational exuberance? I don't think it was the same. It was an irrational stupidity and mentoring by, I mean, Y Combinator is Harvard.