Team Favorite: Anthropic , BYD Goes Global, The Billionaire Next Door

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30:58This is a story about being fit for purpose. As the IMF met in Washington last week, its mission of providing global financial stability has never been more important. But one of the fund's key participants expressed doubts about whether it's up to it, whether it is still fit for its very important purpose. I think we need to step back and look at the IMF and World Bank, their core missions. We cannot have these kind of elite beliefs get in the way. An awesome force of a thousand planes and riders thrusts deep into France. That core mission for the IMF and the World Bank was crafted back in 1944 in the White Mountains of Bretton Woods, New Hampshire, less than a month after Allied troops helped turn the tide in World War II by storming the beaches of Normandy.

31:50Eighty years later, the world is a very different place, and the wars that multilateral organizations like the IMF are contending with are now in places like Iran and Ukraine. Even if the war ends tomorrow, it would take quite some time for the recovery to kick in. War is in any circumstances the worst outcome. There are reasons to really worry about the upside inflation risks from the war in Iran. The IMF and the World Bank, I mean, these were institutions that were created even before the end of the Second World War, with the basic idea that if countries can work together and cooperate on the economic and the financial front, and we can have stability in the world, then we would have less wars.

32:37Clearly, that is being tested at this current moment. Until she joined the Harvard Economics Faculty last year, Gita Gopinath helped countries work together as the first deputy managing director of the IMF. In this current environment that we have right now Now with the conflict in Iran, the countries that have programs with the IMF, many of them are importers of energy and they're getting hit by these increasing prices. Many countries are in trouble right now because of the price spikes from the war. Kevin Gallagher is the director of the Global Development Policy Center at Boston University.

33:16We don't know where this war is going, how long it will last. COVID, as I recall, really hit global growth fairly substantially. Is there any prospect this could reach that sort of level? Well, the economy, the global economy has been really fragile, especially in emerging market and developing countries since COVID. And this shock is yet another one. We've had that. We had interest rate hikes just a couple of years ago. Many countries have had sort of climate shocks and droughts and then, of course, COVID itself. And so we're nowhere near the growth potential that many countries were on a path before COVID happened.

33:50And now the shock is really sending a lot of countries back. Since the start of the new millennium, we have lived through a global financial crisis, the recession that followed, a pandemic, and several wars. But through it all, the IMF has stayed pretty much the same. The IMF hasn't changed much. It's in a bit of a crisis right now. It still offers a family of emergency financing to countries that are in trouble. This is the time when the IMF is absolutely critical, given all the instability. First thing I would note is what the IMF is really good at is surveillance. And that is super valuable in this environment of very high uncertainty.

34:32Just coming out in terms of forecast and what the impact is going to be of the various shocks on the global economy. But this comes against a broader backdrop of perhaps increasing dispersion in the approaches of a lot of the member countries for the IMF in their approach to economics, certainly different from what happened after World War II when the IMF was created. What challenges does that present to the IMF? The geopolitics, of course, matters for the functioning of all of these multilateral institutions. I think the IMF is somewhat better placed because it plays the role of a firefighter.

35:07And when you're a firefighter, you don't really have the luxury to fuss around. It's not about whether you can have another more trade agreement or you can give money to a country to build a road that will be available in 10 years. but it's about are you going to bail out a country that is otherwise going to plunge into a crisis which is not only going to affect the country but is also going to spill over into the region. A firefighter like the IMF may not be directly driven by politics or differences in economic approaches but those politics and differences can sometimes create more fires to fight as they affect countries' fiscal positions.

35:46We've certainly moved away from the time of ever closer integration and an efficiency-driven global trade model to one where national security concerns are becoming important. And I'm not denying that that's not an important one. That certainly is much more salient in this current world we live in. De-risking supply chains are an important factor, making sure that you have strategic inputs in your own country. Factories for those in your own countries, those are coming up too. What the IMF cares about is countries' fiscal situations. And if you're going to end up in a world where everybody is going to spend a whole lot more on defense spending, a whole lot more on building semiconductor chip factories, more rare earth discoveries and all of that, then we could end up with this big buildup in debt in the world, which already is frankly on an unsustainable path.

36:39It's not just the economic approaches that have changed since Bretton Woods. It's also the relative sizes of some of the economies involved, most notably China, which dramatically rose to become the second strongest economy in the world, something not reflected in the allocation of quotas that effectively determine who has influence over the fund. The quota has gone up, but not commensurate to the formula that the United States made, which says that it should go up relative to the size of your economy. So given that China is now the second largest economy in the world, they should have the second most voting.

37:15But the U.S., in the last iteration of increasing quotas, they said, let's increase quotas, but not without voting power changes. Because Japan is number two, and both Japan and the United States don't want China to leapfrog over. It's caused a little bit of a legitimacy issue. Whether it's the U.S. or China, or the other major players in the IMF, like Japan, Germany, and France. The wealthy countries are the ones that control a fund whose entire purpose is to help poorer countries when they run out of money. But sometimes that has led to conditions on loans that some find unduly onerous. The fund was supposed to be there to help countries get a shot in the arm to get back on their feet.

38:01But over time, it's had almost the same policy, which is austerity. Now, it's important to have it in countries that are profligate, like I said. But so many of the crises that have been happening over the past decade have been external shocks to countries that have good fundamentals Is there an inherent even structural challenge for the IMF? And the difference between who needs the emergency funding and who decides on the emerging funding because the quotas are determined by How prominent the economy is how successful is how many reserves they have and the people who need it are the opposite of that So you have sort of the haves deciding for the have-nots Yeah, you put the nail right on the head there.

38:36The countries that receive the programs have no say in what the design looks like. They can request and they often get what they need, but they have no say in the terms. But Gopinath says from her experience that often structural conditions are required by the situation. The IMF has evolved as an institution in terms of the policies it recommends and what countries need to do in a crisis, just as the thinking in terms of the intellectual thought too, in terms of what helps a country in a crisis. So there was a time, and I was in the East Asian crisis, was certainly one of those, where there was an excessive focus on just spending cuts.

39:17And it was about cutting spending across the board without much attention to the details about where the spending cuts would happen. I think that was a strategy that was appropriately rethought. and now the IMF is more targeted in how it spends. In fact, when it goes in and tells countries to reduce overall spending, it very often says that you need to increase spending to the most vulnerable in society because you are in a crisis and this is a particularly challenging time for them. So far more targeted in terms of what's needed in terms of spending reductions. I mean, unfortunately, spending reductions are always part of the solution because that's the only way for the country to come back to a more stable macro environment without racking up a large amount of debt.

40:02These policies are never easy, they're difficult. I think the IMF has evolved over time in terms of making it better tailored to country circumstances. The world has changed fundamentally since 1944 when the IMF was created. And it appears that one of the largest changes is about to come, with artificial intelligence poised to change just about every economy. One of the things that we talk about all the time now is artificial intelligence and how it's going to transform our world. Typically, we don't know exactly how, but we think it's going to. When you look at specifically what the IMF does and how it may affect different nations differently, how can the IMF sort of anticipate that if it needs to?

40:44AI is hugely transformative and everybody has to pay attention to it, including the IMF. So even though the IMF has a relatively shorter horizon in terms of the kinds of problems it deals with, AI is something that they cannot not pay attention to. So they are in the near term just looking at where most of the AI development is happening and AI adoption is happening. It is happening in the more advanced world and I would say China among the emerging markets. But everywhere else, the momentum is not as strong. So at least in the near term, we could see a divergence where you would have more productivity growth coming out of the U.S.

41:24relative to, say, developing countries. But hopefully over time, when developing countries figure out how to deploy AI to close their skill gap, to make sure, you know, your scarcity of doctors and teachers and technicians, that you can close the skill gap through AI. Whether it's AI or an emerging China or a breakdown in macroeconomic consensus, Gallagher says it's hard for an IMF fit for its purpose in 1944 to remain so today. And that has led some to call for fundamental reform. It needs to get bigger, it needs to get better, it needs to get more inclusive. It's not big enough. The monetary firepower that has only about$400 billion for the poorest countries, And if they all went to the fund like they did during the global financial crisis, we'd be really drained.

42:14So one, it just needs to get bigger. Two, it needs to get better. It needs to tailor its programs to country circumstances. If it's an external shock, it should just give short-term liquidity without austerity conditions. And it needs to be more inclusive. The countries that are the biggest recipients need more say in the program design. Those are the three things. Make it bigger, make it better, make it more inclusive. Up next, the billionaire next door. They may not be as famous as Elon Musk, but there are more of them around than you might suspect.

43:13We'll be right back.

43:36Thank you.

43:44Additional restrictions may apply. Please speak with a business banker for more information. JPMorgan Chase Bank, NA, member FDIC. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins, or the S &P 500 minus high debt companies.

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45:42This is a story about your next door neighbor. They may not look ultra wealthy, like a Jeff Bezos or a Kim Kardashian, but sometimes behind that unassuming front door lives someone who's found the secret to attaining great wealth. Princeton economist Owen Zydar calls them everywhere millionaires. Our colleague Scarlett Fu had the opportunity to sit down with both an everywhere billionaire and a couple that aspires to be. You are one of the wealthiest people in America, but you keep a fairly low profile. I know that you are a known entity in Houston, but outside of Houston, there may not be a lot of people who know who Rich Kinder is.

46:20And that's just fine. Is that by design? That's just fine. Yeah, I wouldn't say it's by design, But yes, I guess it is in retrospect. Rich Kinder didn't make his billions climbing the corporate ladder. Instead, Kinder created the bulk of his wealth by buying boring yet essential assets and then scaling them into what is now one of the largest pipeline companies in North America, Kinder Morgan. I like unglamorous businesses, so it never bothered me in the least to be in an unglamorous business. Kinder is part of a cohort of high net worth yet unassuming individuals that economists call the everywhere millionaires, or in his case, billionaires.

47:00Wealthy people don't answer surveys and, you know, some of them are covered by the media, but that's only a small slice of what's truly there. There's basically a hidden world of everywhere millionaires. Owen Zeider is an economics professor at Princeton University who served on the Council of Economic Advisors during the Obama administration. He now focuses his research on tax policy as it pertains to high net worth individuals. His research will be published in a book titled The Everywhere Millionaire later this year. An everywhere millionaire is a private business owner who is wildly successful, but usually operates under the radar based on the place or the industry that he or she is operating in.

47:38So you should think of a local auto dealer who has a big vacation home and like a really nice boat. And there are a ton of them, and they're in basically every neighborhood in America. So the way we measure wealth is two components. We look at assets and people's debts. And so there are five main types of assets. There's pension wealth, private business wealth, public business wealth, fixed income, and housing. And so we basically add this all up for different projects. projects. Then on the debt side, most debt is housing debt. There's some student loans and car payments, that sort of thing. And what we do is we just take the difference at market values and that's your net worth.

48:22According to Zider's research, top earners derive most of their wealth from equity in businesses they founded or invested in. If you take dentists, dentists have more revenue than the total revenue of every professional sports team in America. So the NFL, the NBA, MLB, all of their revenue combined is smaller than the revenue dentists make. Manufacturing drives almost half of all corporate profits, but it makes up just a small share of the income going to millionaire-owned private businesses. Instead, these owners cluster in sectors like professional services, construction, and finance. What results is a quieter kind of wealth, earned through ownership stakes in privately held firms rather than big publicly traded companies.

49:06Most people think you have to be like Jamie Dimon or Elon Musk, these really famous public company CEOs to be really rich. But when you look in the data, there are a thousand private business owners who have at least$10 million in net worth for every public company CEO. You don't have to follow the traditional white collar path. Kinder is one of those individuals. After studying law and serving in the JAG Corps, he transitioned to the private sector. He was general counsel of a small energy company that, through a series of mergers, later became Enron. He eventually headed up operations there, which consisted mainly of pipelines.

49:44After leaving Enron, Kinder decided to double down on that expertise. You bought pipeline assets from Enron. And at that time, the company treated it as kind of unwanted relics of the old economy. What did you see in the pipelines that perhaps others didn't? Well, I saw that there was an opportunity to take midstream assets, and if you ran them correctly, and really watched the bottom line carefully, had a good mix of debt and equity that you could build those pipelines in a way that would allow your stock price to grow, and then you could use that stock price to make acquisitions of other companies.

50:23And that was really our game plan. Yeah, we started with really a tiny company. We had a market cap of the company. The value on the stock exchange is about$150 million, and we had about$150 million of debt. So overall, the enterprise value of what we started with was just a little north of$300 million, and we had 175 employees. We had this idea that we would look for assets. We would run them as efficiently as we could. We would bend over backwards to serve our customers. And we would provide a good return to our shareholders. And that's kind of the mantra that we've followed for almost 30 years now.

51:04And you built it through acquisitions. Built it through acquisitions and also just some build-out ourselves. Today, for example, we spend about between$3 and$3.5 billion a year on building new pipelines. The trick is don't overpay, but do what's fair and right to produce an adequate return for your shareholders. Sounds like a very predictable business then. I think it is. It's, you know, no business without risk. And the old saying that it's the unexpected that always gets you. Who could have anticipated what we're going through in the Middle East today? Who could have anticipated COVID? But if your business is built on a solid foundation, you can weather whatever storms come along.

51:50We are partnering to develop a pediatric cancer center that's going to be a new 22-story building. Rich Kinder made it into the ranks of the Everywhere Millionaires and beyond. But what about the rest of us? What are the chances we could join him? This was the, I think, second or third place that we saw. That's the plan for folks like Ray and Dana Cherry. The husband and wife team left their corporate jobs a couple of years ago. Popular for general handwashing. To buy a rather unassuming business in the San Francisco Bay Area, Monsam Portable 6. We assessed hundreds of businesses in this process.

52:23And when it came down to which ones we were going to buy, it was a very short list, maybe four or five. And for us, the focus was on the profitability of the company, that it had consistent profitability, that the business itself was near to where we live, and that the product or the service that it was offering was something that was unique and that we felt like we could come into and learn quickly and move to the next level. This is a business that was founded by a husband and wife team to solve a food and beverage service problem. They were selling funnel cakes to local festivals and fairs, and husband being an engineer decided to build a unit like this in their garage to help them pass their health inspection.

53:0628 years later now, that couple's retired, and this business has since solved these types of problems for over 11 ,000 unique customers. And all of that just really excited us. I'm wondering what led you to leave these corporate jobs, these safe and steady corporate jobs, and decide to become owner-operators. It's a pretty big leap. We had really successful longstanding careers in the corporate world. I was in finance. Dana was in marketing. Entrepreneurship was always a really big goal of ours. And we'd considered different startup ideas over the years. We'd always thought, hey, wouldn't this be really cool if we could do something like this together?

53:44And we came across entrepreneurship through acquisition. We thought this was a great time for us to take a shot at ownership, some autonomy and leveraging our own expertise to building a business on our own. This felt like a risk-adjusted path into entrepreneurship. The opportunity to purchase a business where there was already product market fit, that was already established, and had a path to having us come in and take it to the next level made perfect sense. We spoke with an economist, Owen Zeider, and he says that a lot of American wealth is built through private and what he calls boring, often overlooked businesses.

54:22Does that idea feel true to your life experience right now? Absolutely. as we've dug into this and you start to see which types of businesses are really running things in this country, that just became really clear to us the more time we spent in it. We're stepping into a world where there's a wave of small businesses and just businesses that are going to need to be transitioned as those owners retire. Basically, I think you better understand what you're walking away from and you better understand what you're walking into. And in my case, I understood very well what I was walking into. I knew those assets, didn't dream it would be as big as it would become.

54:59We've had a lot of luck along the way, but that's how I would view walking away from a corporate life. The Cherries are still in the early innings of building their business. And as they get ready to scale, established owner operators like Kinder advise that doing your due diligence is the key. Generally, I've always believed that you shouldn't really invest in anything you don't understand. And if it's a business you understand and can run the numbers on and understand the strategic concept involved, I think you generally do okay. It's when you wade off into something that you don't really understand and you're relying on someone else to tell you, well, yeah, this is something that will really go.

55:43Just stick with me. that's when you have to be, I think, very, very careful. What's your advice to someone who wants to build real wealth through their own company, but doing so without the attendant celebrity and white hot spotlight? I would say just pay attention to what you're doing and don't get carried away with PR or trying to be something you're not. How would you advise someone who has a real business idea, but is perhaps afraid to walk away from a stable career to go pursue it? Well, I think it just depends on your tolerance for risk. You know, I don't think you want to jump out of a plane without a parachute.

56:25So I think you want to have a good understanding of that business that you're starting. And in my case, that worked out very well because I knew with this small set of assets we had, I knew we could make those work. You know, the first analyst call we had as Kendra Morgan, there were so few people covering us that we just had an open line. So there were four analysts on, all of whom I knew from my Enron days. And so one of them asked, he said, Rich, you know, you were COO of this big company, and now you're starting this little company you're starting now. What do you expect to accomplish? And I said, well, you know, I hope in four or five years this will be a billion-dollar company.

57:03And one of those four people I could hear went, ha, ha. I confronted all four of those people years later, and they all swear they didn't do it. But I know for sure one of them thought I was absolutely nuts. That does it for us here at Wall Street Week. I'm David Weston. See you next week for more stories of capitalism.

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