China and "Competitiveness": The Insect Method

The purpose of exports should be more imports; exports are real costs, imports are real benefits. When economic behaviors do not reflect this, an insidious strategy is taking shape.

If global trade were driven by comparative advantage, what free-trade types will tell you is the case, persistent major trade imbalances would not exist, because your exporting success necessarily sows the seeds of your future exporting disadvantage.

There would be a natural equilibrating force that manifests between currency strength and exports that results in something approximating mid-to-long-term trade parity between nations. This is not occurring.

There is one materially flawed point in QT that Balaji and others completely overlook: what the word "competitive" means, how it's achieved, and on what terms.

How did China become so darn "competitive"?

It’s often the case that chronic surpluses are accomplished via varying tactics of domestic wage suppression. A tactic that subverts the natural equilibrating forces of balanced trade.

Germany and China are particular culprits, who coincidentally just so happen to have the two biggest trade surpluses.

China is not “more competitive” due to some Ricardian “free trade” advantage. It has taken the perverse approach of depriving its middle class of its share of GDP, which is a fancy way to say structurally diminishing wages.

The popular human-readable narrative is that China's trade success comes from superior efficiency and work ethic. They're extra busy bees over there!

The reality is something different: through its industrial policies (which manifest as de facto trade policies) it's systematically underpaid workers.

When you pay workers less than their productivity warrants, you're not being "more competitive", you're just shifting money from workers' pockets to exporters' profits. This isn't free trade; it's wage suppression dressed up as economic efficiency.

If your labor input is cheaper because you subvert the wages of labor, it’s not all that surprising where your “advantage” comes from.

This is the Strategy of the Bug. The Method of the Insect.

China didn't magically grow more competitive than the US because its workers one day decided to “save more” or “work harder". People love these story-telling narratives rather than looking at the raw mechanics of what's going on.

China's exporting "competitiveness" is in large part achieved because its workers have intentionally received a smaller share of their productivity gains.

This isn’t "efficiency" but rather a transfer of wealth from workers to businesses.

In China, it's the Hukou system that exploits labor rights and wages. Think of it like the US H1B program, but on steroids. It creates a servant-like, low-wage underclass that China uses to its exporting advantage.

The system classifies Chinese citizens into two categories:

Agricultural (rural) hukou
Non-agricultural (urban) hukou

This classification determines not just where you live, but access to jobs, education, healthcare, housing, and other social benefits.

To compete with this... *shudders*

"Competitiveness"... who wants this?

This is not the only way China facilitates its mercantilist surpluses. It also manipulates its currency, keeping it artificially depressed.

This is of substantial benefit to manufacturing (exporters) at the expense of households (all households are effectively importers, because they only buy goods and do not produce them). A weaker currency aids exporters and is a hinderance to importers.

Important: What matters is whether workers' compensation reflects their productivity. It's the productivity share of GDP where this dislocation has its impact. That's where the Hukou system takes its toll.

To illustrate: on a GDP/worker basis, Chinese workers are around 20% as productive as US ones. If they earned ~20% of the wage that'd be fine and not a competitive advantage.

But they don't, they earn around 10-15% of the US worker. This is a major difference for manufacturing labor inputs.

China has a substantial productivity-income gap relative to the US, and it allows their sustained surpluses to perniciously persist.

The average Chinese worker produces about a fifth of his American counterpart, but consumes an even smaller fraction of that output.

"COMPETITIVENESS"

A global race to the bottom ensues on account of a cancerous globalism wage assault, and the middle class bears the brunt of it. As the only way to compete in this shitty worldwide competition is to continually undermine wages.

To "compete" with this on its own terms is to overtly vitiate labor and hold your middle class in disregard, seeing them as little GDP variables and nothing more. Americans have no desire to "compete" with this, nor should they. Nor should anyone.

I hope this elucidates why certain types love the US H1B program so much, as well as the obsession politicians have with allowing in infinity immigrants.

They present it as “inclusion” “refugees” “diversity” and all walks of warm-and-fuzzy platitudes. This is a lie. It’s a wage-suppression technique.

What else keeps wages down? Labor supply. What increases supply? More warm bodies. Your wages can’t rise if we’re importing a bunch of guys that will work for half the price.

No more.

Don’t worry “free traders”, what you have here is not free trade anyways. You have mercantilist subversions that you have allowed to happen at your expense, because you prefer simple soundbites like “tariffs are tax” rather than root-level, distal-cause analysis.

Industrial policies are de facto trade policies. China can say it has "free trade", but that's a lie. Because it manipulates both its currency and domestic labor, which is every bit a functional trade policy as tariffs are, just with optics that deceive people.

The best time to address this was when it first started, the second-best time is now.

Reject the Insect Method.

Blog in profile.


No more destruction and disregard for the middle. No more Harvard Business Review as your gospel.

https://x.com/BackTheBunny/status/1838189260626927779

You Can Just Learn Things

The old economy was run by those who knew the right facts. The new economy will be run by those who know how to ask the right questions.

AI is devastating if your professional reason to exist was just regurgitating facts, or reviewing facts and approving them. If that's what you do, you are done.

The only reason these jobs will persist is because some (most) people won't know how to fully use AI, or regulations will act as a meatshield that legally requires a human tell you facts instead of The Machine.

If you know how to use these LLMs, you are liberated to do almost anything you want. You are no longer constrained by information.

AI truly makes "you can just do things" a reality, because you are now reliant almost entirely on yourself to make shit happen. You and your ability to us The Machine is the only blocker insofar as knowledge and information are concerned.

Centaurs (machine + human hybrids) are those who best understand how to collaborate with The Machine, and extract the wealth buried inside it.

These LLMs are treasure chests, and knowing the right sequence of words that unlocks that chest is the true competitive differentiator now. Claude, Deep Research, DeepSeek, the gifts they offer you if you know where to look are incredible. I'm beyond grateful they exist.

As with all things, when everyone has access to the same tools, it's still the uniquely gifted that stand out. With AI, even more so. The Machine amplifies a certain type of person, and marginalizes most else.

If everyone is standing on a 6" box, then no one is taller in a useful way. If everyone is taking steroids, it's no longer a competitive advantage to do so. You do it to just keep up.

With AI, it will be even easier to stick out, and dominate, if you are authentically unique and insightful, because you'll visibly be the only color atop an ocean of gray.

The next wave of riches will belong to the verbally gifted, because they will know how to coax and confer best with The Machine. They will be the best Centaurs.

The same way natural athletes still rise to the top if everyone is juicing: it's the verbally skilled and genuinely creative that will become even more valuable as AI proliferates.

You can just do, and learn, things. Anything.

https://x.com/BackTheBunny/status/1684496961091796992

Worship. Adoration. Valence.

The sexes resent each other when they cannot glorify each other.

The feminine yearns to worship. The masculine craves to adore.

Feminine Worship

Women evolved to selectively provide approval, veneration, and submission to the masculine. I think this can be understood holistically and spiritually as a desire to worship.

If you’re going to submit to someone, you must be deferential to him, which means you must respect him, which means he must do respectable things. Submission is always earned.

To venerate strength, someone needs to be strong. Masculine actions demonstrate these traits to the feminine to win her worship. You willingly allow someone to lead who shows you he’s capable of leading. For the feminine to devote herself to the masculine of her own volition, men must behave in a manner deserving of her surrendering.

The feminine yearns to worship the masculine in this way; she wants to dispense it, but doesn’t just hand it out to. Her intrinsic currency is her body and her worship, and it’s up to her to be prudent with it by allocating it to men she deems worthy. The modern term for this is “hypergamy”.

The masculine wants to feel powerful like the feminine wants to feel safe and beautiful; to feel powerful requires you demonstrate power, and feeling beautiful requires an embodiment of beauty.

This drives men to perform in ways that exhibit power; if all it took to feel powerful was feelings, then it would be meaningless. Power acts, beauty is. This is why women are born, men are made.

Men seek admiration, prestige, dominance… these are proximate motivations and nominal descriptions for what’s ultimately a distal aspiration to be worshipped. The masculine wants to obtain the feminine’s fawning through acts that demonstrate he merits it; when he does this, she freely surrenders.

Men won’t describe it as wanting to be worshipped though, they’ll say they want “respect”, “recognition”, “honor” or something that sounds more selfless. However wanting to be worshipped isn’t pejorative or narcissistic, it’s noble.

If a goal requires you do noble things to achieve it, then the goal itself is a noble one by virtue of the actions it necessitates. The road to hell is paved with good intentions, and the road to heaven is paved with good deeds.

An impotent tyrant forces a woman to fear him with a gun; a man earns her respect with his conduct. If you’re voluntarily revered, genuflected, lionized… you are worshipped. If you’re admired, that means you did admirable things. Male achievement informs male value.

Male sexual market value is cultivated via output and competence. Men strive to become someone worth worshipping, and women reward us with it. The masculine urge for conquest and outcompeting each other to gain eugenic access to women makes the world go ‘round and creates shareholder value. Men may superficially seek monetary currency, but the real currency is the organic reverence of our women, and respect of our fellow men.

When the masculine resorts to violence to get what he wants from the feminine:

Beating her until she does what you want is not respect, it’s not worship, it’s an admission you’re barren of any noble traits or accomplishments; if you can’t inspire submission, you impose compliance.

If you can only get a creature evolved to behave eugenically and hypergamously to be around you by force, you are shit. You can’t make someone worship you, but you can make them to obey you.

Inept hyper-masculine societies are perennially violent, unstable, and dysgenic, in part because they deny the feminine her duty to eugenically choose.

Violence is how laws, property, and nations are upheld and defined, and men are the gatekeepers of it.

However when violence is used on an individual scale to rob the feminine of what she gatekeeps, sex and reproduction, it’s a testament to how dysgenic and inferior that environment is. In noble societies men covet and earn feminine worship, not her compliance.

This is to say, reasonable feminism is eugenic. Man must domesticate himself to some degree to even permit it, and it encourages males to think and behave with lower time preference to gain female sexual access. This creates positive externalities for society.

Sperm donor preferences tell the story, hypergamy’s north star corroborates it. Women are the most eugenics-promoting beings alive. Let them cook.

The 3rd-wave radical feminist is perpetually at war with her ingrained desire to worship. She protests nature and repudiates the feminine for her natural programming to honor the masculine, while castigating the masculine as if it’s his fault she’s like this. Patriarchy, or something.

The radfem lashes out at the masculine for the same reason the incel reviles the feminine. A woman with nothing worthy of her submission is an unhappy one. An incel has no hoes; a radfem has no man she looks up to.

1/6
Masculine Adoration

The masculine has its own mandate to worship the feminine back, but for very different reasons, and in a different way. He doesn’t worship her, he adores her.

It’s not female accomplishment that elicits a man’s adoration, but a woman’s beauty, pleasantness, and quirky little affectations.

Wearing a sundress? Adore.

Listening to a weird indie band called Neutral Milk Hotel? Gosh that’s cute.

Have any silly idiosyncrasies, like calling hamburgers “steamed hams” or muffins “nibble nubbins”? Do you have any idea how fucking precious that is.

The masculine urge to simultaneously tenderly kiss your forehead and savagely bend you over is overwhelming at the mere mention of how you enjoy your nibblies in a sundress.

The below video is a form of masculine adoration of the feminine: a song about how you’re amazing because you’re... a girl who’s pretty. This is like 50% of the songs guys write, tributes to the feminine for just existing! Goddamn simps, all of them!

Female value comes from feminine essence. We adore it.

A woman simply needs to wear a sundress, be sweet, listen to Electric Jelly Cathedral, call hamburgers “steamed hams”, and men will write sonnets and sacrifice themselves to lock that ass down.

The feminine worships masculine achievement; the masculine adores… the feminine.

We’ll make up excuses so it seems profound and enlightened, but we’re simply acting out our sundress-seeking programming. God’s plan.

The guy who wrote this 4chan text absolutely thought about them growing old together off this encounter. Men are the real romantics.

You too can be a protagonist’s love interest in a 400-page novel if you’ve got that Anne Hathaway energy going and are into poetry or something. You can be basic, a barista with James Dean posters on your wall and everything, men will fall over themselves if that feminine light is divine.

Exalted for your spirit and “I’m just a girl” vibes. Your accomplishments could not be less relevant. Has anyone told you how pretty you look when you smile? You mostly just have to smile. Men are designed to adore this. We reciprocate the feminine’s worship in this way. Both parts of the dyad want to love the other for what they do best.

Men view women as magical elf-like creatures; women view men like making an investment in the stock market. Women come out of the oven ready made for adoration, whereas men require some elbow grease to unlock their worship.

2/6

Midrange Jumpers for the Middle Class

This chart made me sad. It’s the inexorable result of moneyball. When every decision is maximally maximized, when every choice is an expected-value calculation.

It’s also the inevitable result of globalism.

Moneyball kills your midrange jumpers, globalism kills your middle class. Both in a poetically similar way.

Excessive optimization in all things eventually turns the human spirit, sports, and supply chains, gray. Unrelenting pursuit of 1% better margins or 1% greater chance of success in *insert competitive domain* is how the McKinsey consultant sees the world. It’s how the pedigree-touting economist understands every decision.

These are people trained to think unnaturally, inculcated to believe what the Excel sheet spits out is absolute truth. The most noble pursuit to attain is that which maximizes the expected value.

They go to schools that exalt undermining the parochial, viewing their neighbors with disregard, so long as it enhances gross margins. Because, hear me out, if it helps gross margins, it MUST be what's best for everyone. Because it makes the trinkets cheaper. Because we are trinket maximalists. Harvard Business Review is scripture.

Why create your trinkets domestically when China has an underclass that exists on 1,400 calories a day and will do it for a fraction of the cost? The answer to this is obvious, if you assume people only value cheaper trinkets, hedonism, and materialism. The middle class has no desire for eudaimonism, and fulfillment from a life that imbues purpose.

This must be so, because the Excel sheet doesn’t know how to calculate those other things (eudai-what? dude stop making up words and get in on this sale), and my MBA says more is more.

When globocorp’s bottom line is the unwavering guiding light, when the expected value of each basketball position is the only consideration, actions eventually converge on the same expected-value-led strategies. Tedium. Mankind needs variance, otherwise he'll breaks things until the volatility and color he secretly relishes returns.

If you go too long without a life of purpose, without eudaimonism, something inside you begins to chafe. Grayness seeps in.

Life needs color, which is to say that which you can’t always predict. You know what maximizes predictability? Expected-value thinking. Moneyball. Globalism. You can push the grayness beachball underwater, but eventually the volatility tax will be paid.

An expected-value existence is corrosive to the middle. Empirically. Demonstrably. The Excel-sheet mind cannot comprehend this, but the NBA shot chart and the factory worker can.

RELIGION, PRETENDING TO BE ECONOMICS

Just as the priest only knows “Christ is King”, the Trinket Maximalist only knows “open trade open borders good”. It's religious thinking, masquerading as post-hoc, economic-presenting rationale. Because you cannot possibly conceive that the highest-order value for a nation isn’t the cheapest trinkets possible. Unfathomable.

When all your beliefs and motivations can be distilled down to “what gives the best margins?”, you implicitly worship the material. Because explicitly, the material is all you value when you think this way. You project this value onto others, often unwittingly, when you treat global trade as Christ 2.0.

This is the religion of consumption, hedonism. No salutary purpose, eudaimonism. If it doesn’t facilitate profligate intake, I’m going to have to kindly ask that you go to college.

If a couple more basis points of gross margin is the North Star, and one more point on the scoreboard is all the strategy knows, you're left with no midrange jumpers, and no middle class.

Remember Rip Hamilton? Kobe? They lived in the midrange. Jordan did everything, everywhere, all at once. Now you know what you do in the modern NBA? You either get a sniper to shoot a foot behind the 3-point line, or you throw it to the post.

Listen, we ran the numbers, and the Monte Carlo analysis says what it says: no more 15-footers or you’re benched. No more domestic manufacturing, or you’re out of business. Diversity? Lol yeah not that kind. Have you seen the NBA’s ratings? You get what you fucking deserve.

Who cares about all the action in between the 1st quarter and the final buzzer. The sport whose very reason for existence is to entertain and excite. The event we gather in big stadiums for and have our identities tied to. Meh, you see, all that matters is just one. more. point. than the other guys.

Who cares about a population’s sense of identity and esteem. A blue-collar existence of dignity and self-sufficiency. The men who derive their purpose, value, and autonomy from their ability to provide. It’s fine if we rob them of their agency, because the trinkets are that much cheaper for it.

You don’t need a sense of independence, you need a smartphone that folds! A hedonistic worldview like this dominates everything else you believe.

Boy you’re really laying it on thick for those flyover-state peons! All we want is just one. more. point. of gross margin bro. Chill. You clearly don’t read Harvard Business Review.

> "What's the expected value of each possession? What’s the cheapest way possible to build that product?"…

This kind of thinking produces grayness, and disembowels the middle. No midrange jumpers. No middle class.

Blog in profile. If you read this far, you owe me a follow. I think that's fair.

A related essay in QT: related:

https://x.com/BackTheBunny/status/1809891095758651753

Chevron, Power Redistribution, and Legislating From the Bench

Overturning Chevron is good in that it detracts from regulatory power, but power is a zero-sum game, where did it just redirect to? The judiciary.

Even more authority has now been handed to judges. Judges are effectively despots, who can do nearly whatever they want in that small room where they're basically kings.

The interpretation of the law is what they say it is. The same conflict can have two completely different rulings depending on who's wearing the robes that day.

The judge's politics guide the interpretation of laws; this is part of the human condition. It doesn't matter where you went to school, your moral foundations will always be expressed in interpretive political analysis. If it's legal, it's inherently political; which is to say no matter what the judge says, her moral beliefs are seeping through into her decisions.

Originalism (conservative jurists) is almost pure authority/subversion moral foundation adherence. You defer to the authority of those who made the law based on their intentions, not yours, when applying it.

"The living constitution" (judicial legislation, liberal jurists) is pure fairness/cheating and care/harm. The law is whatever you think is most fair. You probably personally agree with most of your rulings when this is your north star. It's a very enticing mode of legal analysis for this reason.

A sign of a good jurist is hating some of your decisions on a personal level. Scalia taught me this. You should hate some of your rulings, following the law should not always be personally rewarding.

WHY THE JUDGE MATTERS

Judiciary power and how deeply interpretative it is, is something of an unsolvable problem. It's why you see judge shopping.

Example: an obscure judge in Hawaii blocked Trump's immigration orders while in office. Something the president campaigned on and was democratically elected to implement. One little tyrant said "no, I don't see it that way."

Why'd they take the case to Hawaii? Is it because the law is better understood by the beach? Or because they knew a hyper liberal judge will rule how the state wanted so they said "Aloha"?

Originalism is the only real legal analysis because it best attempts to separate the judges feelings from what the law dictates. Everything else is legislating from the bench. I'd be fearful of even more judge shopping as a means for the state to still get what it wants with Chevron gone.

Judges matter, a lot. The only reason I sort of care about the presidency is because of the judicial appointees he gets to make. Because the judiciary exerts actual power over the people. The president is otherwise mostly a totem. many, many, such cases (basically all such cases):

https://x.com/BackTheBunny/status/1778605541834838365

100% agree. the Fed is an asset swapping accountant; it's never asset creating.

when the Fed "prints", something else dies. it's balance sheet is an accounting fiction, more appropriately understood as a graveyard. one asset birthed, another asset killed.

From Part 1 (remove 7s):
backthebunny.subs77tack.77com/p/the-fed-part-1-qe-a-mechanical-deconstruction manipulative, mendacious middling bureaucrats who play pavlovian games. there's no institution less deserving of your fear and respect than the fed.

you may hate it, but you do respect it, because you fear it. it's as if the Wizard of Oz became a government institution.

YARVIN, RUFO, AND NEVER-ENDING FACTUAL SEDIMENT

I didn't really like this @curtis_yarvin vs @realchrisrufo exchange. Not because it wasn't entertaining, but because it perfectly exemplifies the futility of political discourse. Moral frameworks talking past each other.

Both men are verbally adroit, so we got a lot of entertaining dunks and witticisms. They both masterfully curated sets of facts that concocted narratives for conclusions they long ago decided were true.

The TL;DR of the debate, from the lens of a radical systematizer:

>"Wow, you actually were unaware of this FACT? Also you failed to mention this FACT and another FACT that undermines your whole world view. Read a book!"

>"Aha, foolish you are for completely ignoring these little-known FACTS, which when viewed in conjunction with another FACT, shows you to be nothing more than a chimp in shoes!"

Intelligent people with high verbal IQs are more adept at obfuscating their moral imperatives with carefully arranged facts that craft their narratives. This makes their conclusions seem more correct or informed to the uninitiated.

Politically “educated” simply means a masterful recall of factoids that make a narrative appear superior. The verbally skilled often dominate political domains because they’re the most compelling advocates of their moral foundations, and attract support from those with similar temperaments as a result.

This is what happens when you put two different temperaments with high verbal IQs in a room. You get a lot of spectacle and little true systematizing focused on problems and their eradication (to his credit, Yarvin does systematize some things). Just endless FACT dunking about whose reading of history is wrong.

Facts are tools, they are not prescriptive. Narratives are prescriptive, and narratives are in service of moral foundations. Moral foundations are a product of temperament, and temperaments are biologically ingrained.

Intelligent people have a lot of factual sediment to wade through to get to what they're actually advocating for: their moral foundations, masquerading as political policy.

Yarvin scores very high on Authority/Subversion

Yarvin is a monarchist. He views rigid, absolute authority as the only path to rectify structural issues. Almost all of his work is centered around placing utmost emphasis on this moral foundation; he's magnificently well-read in his advocacy of it. How do you think he came to be so singularly focused on this moral foundation? Must have been all the books...

Chris Rufo emphasizes Sanctity/Degradation, with secondary focus on Fairness/Cheating

Rufo's hyperfocus is on DEI: which undermines values he holds sacred regarding merit and notions of fair treatment. Leftist race communism spits in the face of these things, so he believes eradicating it is paramount. He sees the continued degradation of these sacred ideals as a core culprit for US decline.

I think it's useful to deconstruct political dialogue in this way to understand:

1. Why does this guy keep focusing on certain FACTS and not others? What narrative is being created here?

2. To understand which moral framework is at play by each party, and then try to figure out which one has greater utility in our current environment (they all have utility, but some more than others depending on the political climate).

I have Yarvin sympathies in that I do have a "fix the actual problem and stop with the surrogate activities" mindset. I think Rufo is excellent, but his actions will produce pyrrhic, symbolic victories.

However I believe I'm telling you more about my biology than anything else with these observations.

To understand what I think true political systematizing looks like, and where this unusual analysis comes from, you can read the next comment in this tweet.

remove 7s:
backthebunny.subs77tack.77com @curtis_yarvin @realchrisrufo Poverty and wealth sit on a spectrum. Moral foundations derive their utility and social emphasis based on where a nation sits on this spectrum.

Moral genotypes produce political phenotypes. Genotypes are expressed differently as their environment shifts.

https://twitter.com/BackTheBunny/status/1735175459288264798

Speed Running Financial History, Lessons from TradFi for DeFi

Part 2: Why Did Investors Stop Demanding Dividends?

1600s-1900s: What Does the Stock Do?
2020s: What Does the Token Do?

DeFi needs more awareness of our TradFi parallels. Many of our problems, discoveries, life cycles, etc. are not new. The point of this series is to predict the future and clarify the present, by looking to the past. Crypto is not reinventing human behavior or financial axioms. We’re creating superior environments for them to take place.

Remember, DeFi users aren’t some new breed of enlightened human. We’re not changing the state of man with atomic swaps and L2s. We’re seeing the same greed, fraud, leverage, innovation, and hard lessons of our financial ancestors.

That’s what happens when a lot of value is being created in a permissionless, open system: it attracts all types, good and bad. “Speed running financial history” means we can glean historical wisdom from lessons that have already been learned. We would be wise to learn from them.

An instance of said speedrunning that’s happening right now: fee sharing. AKA staking. AKA “utility”. AKA “if the token doesn’t have yield, what does it do?”

TradFi has a name for this, it’s called dividends. Back in the day, they didn’t care much for abstract notions of equity in the business, they wanted cold hard cash for holding your stock. Right now, DeFi is of a similar mindset. Parallels.

1600s-1900s: “If it doesn’t pay dividends, what does the stock do?”
2020s: “If it doesn’t let you stake for yield, what does the token do?”

We’re doing the speedrunning financial history thing again. Flat circle.

Let’s review historical examples of what TradFi already experienced, and what DeFi will eventually make peace with.

Before diving in, I want to emphasize the first part of this series: Governance Tokens, Tech Stocks, Dividends, and "Utility” (QT’d). It goes into very literal detail that shows deconstructing a stock that pays no dividends and has no book value… is just a governance token. This is important to internalize. If that feels viscerally wrong to you, read Part 1. Unless you’ve amassed enough stock to launch a hostile takeover, your equity is not equity.

-- STOCKS 1.0: WHY WERE THEY OFFERED IN THE FIRST PLACE? --

Our TradFi ancestors shared many of the sentiments and feelings DeFi presently does, and at one point stocks with no dividends were unacceptable! They used to demand ‘real yield’ (a cut of earnings), because what else does the stock do!? TradFi’ers once saw stocks from this lens, and yet now only 50% of the Nasdaq pays a dividend… how did we get here?

The instinct to tie the value of an abstract, intangible asset to something recurring and concrete is logical. There are a lot of scams out there, and proof of profitability via payouts is a solid heuristic for avoiding them.

However, this heuristic now carries inverted utility for growth investing. In modern finance, if you’re paying a dividend that means you don’t have enough growth prospects to invest in, so you return money to shareholders. If you’re rapidly growing, you keep your earnings and deploy it back into the business. I’ll cover this in more detail at the end.

-- A BRIEF HISTORY OF STOCKS AND DIVIDENDS --

The first instance of an IPO and publicly tradable stock in financial history came in 1602 from the Dutch East India Company, ticker VOC for Vereenigde Oost-Indische Compagnie.

The reason for VOC stock provides insight into business models and investor expectations from that era. VOC needed big chunks of capital for specific reasons: to finance voyages for its massive spice trade. VOC issued stock and bonds to fund highly uncertain expeditions, which could either pay out a lot or nothing at all. If the voyage was successful then everyone got paid, if not then no dividend.

Capital markets used to view stocks essentially as junk bonds. They paid a dividend that was greater than the debt coupon, however it was junior in the payout waterfall and contingent on certain degrees of success.

Here’s an example prioritized payout structure:

- 1st: Bondholders receive interest payments (eg 4%)
- 2nd: Preferred shareholders are paid next. More than bonds, but less than common stock (eg 6%)
- 3rd: If there’s remaining profit, then common stock gets paid. This dividend was the most uncertain, but also the largest (eg 10%).

Fun fact: sometimes dividends for VOC holders were in the form of pepper, nutmeg, cloves, and other kinds of spices! Imagine dividend day arrives and you get a big chunk of oregano in the mail. RETVRN.

Older companies issued equity for specific endeavors that required a large amount of money at once: we’re going on a voyage, we’re building a factory, a railroad, etc.. Growth was achieved in chunks, not increments; this is not how growth works today.

In modern times, businesses can use their profits for generalized, gradual expansion; you can do something productive with $500k or $50M. The old-school mindset was “we need $20M for an investment we think will make X amount of money, and we’ll pay you Y if it does”. If a voyage costs $20M, keeping only a fraction of that as retained earnings doesn’t do you much good. Growth came more in waves, less in persistent increases.

Here are excerpts from the brilliant @ByrneHobart that are very much worth your time. He’s incredibly insightful on dividend evolutions and the reasons behind them; I deeply appreciate this kind of nuanced analysis and draw heavily from it.

Today, retained earnings facilitate incremental reinvestment that wasn't practical or possible in the past. Capital gravitates to its most efficient uses, and it makes intuitive sense to me that earnings distribution vs deployment would evolve in a way that favors deployment. For the same reason water takes the most direct path downhill, capital eventually flows to its most productive uses.

-- INVESTOR EXPECTATIONS AND RETURNING CAPITAL --

A company can do two things with earnings. Two. You can:
- Reinvest the money into the business
- Return the money to shareholders

There are tech companies that raise money in big chunks for multiyear continuous growth: early stage VC-backed ones. And these startups are well-known for paying fat dividends…. 🙃

Do you know how many startups pay a dividend? Zero. Why? Because they use that money to 1000x by investing in growth. Pre-revenue, positive unit economics, it doesn’t matter, you do one thing with that money: grow, aggressively.

(I’ve only heard of one previous startup paying dividends: Kickstarter. And they’re extremely weird and not a big growth story.)

If growth investors wanted a dividend, they’d buy a tobacco company or bonds. We’re here for capital gains, not 4% yields. Paying a dividend would essentially be a sign of failure for a growth business… “Here take your money back, we can’t find enough productive things to do with it.” Empirically, investors now value growth above all else, and would rather management keep the money if it can be redeployed into expanding the company.

Investors just don’t care about “real yield” like they used to.

The environment for what modern businesses need to grow is much different than VOC times. Earnings can now be productively reinvested into the business and have a higher ROI to the company than paying them out, and modern shareholders are more than ok with this.

GrowthCo’s do not pay dividends, and they’re the most richly valued stocks. OldCo’s need to entice you with dividends, because performance isn’t cutting it anymore.

DeFi projects (crypto startups) have no such VOC-style limitations of yesteryear, yet the cultural demands act as if we’re going on a spice expedition.

-- Financial Natural Law, 100x or 5%: Pick One --

Do you buy a hypergrowth company for a 5% yield or a 100x capital gain? You know how you’re going to get that 100x? By the company growing rapidly. Do you know how the company will grow rapidly? By spending a lot (a lot) of money on marketing, product, marketing, employees, product, and marketing. It’s expensive out there.

DeFi is constantly hunting for the next 100x gem while also asking “do we get a yield too?”. That’s speaking out of both sides of your mouth. You can’t be a long-distance runner and a bodybuilder simultaneously. If someone promises you both… recall the saying on “free lunches”.

The growth-vs-dividends dichotomy feels tantamount to finance natural law. No reward without risk. No huge gains without volatility. To want 100x and 5% is to seek stability and volatility concurrently. To want reliability and wife-changing returns from one asset. It’s a contradiction. Devs have not outprogrammed the rules of leverage nor have they reinvented axioms of economics.

I’ll end with an interesting cultural insight: in the 19th century and earlier, wealth was often measured in terms of annual income, not the value of your assets. The historical emphasis on dividends makes a great deal of sense when you consider this social-signalling component.

It’s the exact opposite today. The ultra-wealthy only speak in terms of capital gains and asset prices. Even lower classes look to asset-based net worth as the barometer of wealth, not your salary/dividend streams.

Considering that absolutely no one in crypto measures their wealth in staking yield, I don’t think it will take all that long for us to speedrun the dividend thing. DeFi is currently in its VOC phase. This too shall pass.


Addendum: dividends put cash in your pocket, and technically hinder stock price while doing so.

When a stock goes “ex dividend”, it typically falls by the amount of the dividend. The share price includes the cash the company holds on its balance sheet, when you reduce that the price goes down commensurately.

Management cares a great deal about stock returns and are often judged and compensated based on it. Token performance is also a proxy of sorts for product success, and handing out cash should be expected to have similar impacts on token price.

Speed Running Financial History, Lessons from TradFi for DeFi

Part 1: Governance Tokens, Tech Stocks, Dividends, and "Utility"

DeFi needs more awareness of our TradFi parallels. Namely how our problems, discoveries, life cycles, etc. are not new. The point of this series is to predict the future and clarify the present, by looking to the past. We are not reinventing human behavior or financial axioms. We are creating superior environments for them to take place.

YOUR EQUITY IS NOT EQUITY

Governance tokens… perhaps not as valueless as we’ve been led to believe. And stock "equity" isn't exactly what it's sold as, either. Let’s observe how TradFi views them, functionally and literally.

There’s hyperfocus on DeFi projects’ revenue distribution, which means you receive fee share when you own the project’s token; it’s tantamount to a dividend (idk why DeFi rebranded the term "dividend" to "rev share", maybe because it feels more community inclusive). Is this necessary for the token to accrue value? Does it give it “utility”? What do we even mean when we say that?

When you break down the “equity” platitudes and get down to concrete situations, you’re being hypocritical if you deride governance tokens but would own Nvidia, Google, TSLA, Cloudflare, or any tech stock with no dividend. What does your “equity” mean here?

I’ve taken CFA tests, I know the official theory. What I’m interested in is situational reality; what do you actually get at the end of the day with these tech stocks? Because when I break it all down, it isn't a claim on cashflows or company assets. So what is this “equity” you speak of?

Last I saw figures on it, about 50-70% of stocks pay a dividend, and the most richly valued ones (tech and high-growth stocks) rarely do. I believe less than half of the NASDAQ pays dividends (if someone has Bloomberg and wants to get exact numbers that'd be great). No cash will ever be returned to you from many of these. So why own them? Where is their “fee switch”? Because that’s how something accrues value right? Well, tech stocks do not do that. And yet, they’re very valuable.

It's odd how we describe dividends as "utility" in DeFi, but no one says a tech stock has/doesn't have utility based on if it pays dividends.

BANKRUPTCY AND BOOK VALUE

The value for the stock must come from the equity claim on company assets then...?

Nope! Especially if they're tech companies. Most tech company assets are intangibles. What are intangibles: things like IP, goodwill, the spoils from research and development, etc.. They're the brand and service they've built via investing through the income statement, not the balance sheet.

Here’s an infographic on how tangible assets for US companies has been declining, broken down in 10-year chunks. As you can see, it's mostly intangibles now.

This means there's no factory for you to lay claim to in bankruptcy (a factory or equipment would be examples of tangible assets). No hard assets to be sold off to make you whole. You have no “equity” in anything concrete here. The investments these tech companies make are often in things that seem periphery like customer support and advertising, but are critical capital assets of the tech world.

These squishy tech assets are very valuable... to the company. But they have little salvage value in liquidation. What is MongoDB going to do, sell its advertising investment and goodwill in bankruptcy?

Common stock is a junior claim on assets if the company fails. You get the leftovers after bond holders and preferred shareholders are repaid. And you sure as hell aren't investing in a tech company, or any company, hoping you get scraps in bankruptcy. That means the company failed and the share price was decimated.

And you're not going to get anything anyways, because the tech company has little salvage value for its assets because they're all intangibles. What is your "equity" equity in??

So what are you getting when you buy NET?

- no cashflows
- nothing in bankruptcy
- voting rights!

When you buy NVDA, CFLT, SNOW, etc. all you get is to vote in shareholder meetings. Neat! Wait, what's a governance token again?

No cash is returned to you from tech stocks. And you don’t buy them hoping for that anyways, you want 100x, not a 4% yield. You can't have both at the same time. Life doesn't work that way, that's called "having your cake and eating it too".

You buy these things for huge capital gains, not a bond yield. Companies who start paying dividends only do so because they can't reinvest all the profits back into the business. Paying a dividend means your growth is slowing. The history of this will be covered in detail in Part 2.

The financial laws of physics dictate the valuation of equities follows some DCF iron rule that says they go up in price as revenues, cashflows, margins, etc. increases. For many stocks, you will never touch that revenue. You will never exercise any claim on the company’s assets. What, exactly, is your “equity” giving you equity in?

If that tech company fails, the stock is a zero. And there are no assets to be sold off to make you whole. In essence, you own a governance token with no cashflows, and by the grace of god its valuation is tied to company performance. Tech stocks and governance tokens, mostly a distinction without a difference.

STOCKS CAN'T RUG AS EASILY?

I’ve heard some say legal protections make stocks safer, and from a “rugging the business” standpoint, that’s true. However this is value-accrual analysis, not a legal-protections one.

Why does the treasury of Cloudflare make NET more valuable when you will never touch one penny of it? Ok so @eastdakota can’t just steal the corporate bank account because of laws, yes. But that doesn't refute how you'll never get anything valuable returned to you from owning NET.

ON SHARE BUYBACKS

Some important points on share buybacks vs dividends: they're technically the same thing if you're taking a CFA test. I understand the accounting logic and the tax-advantaged approach. But it doesn't change the central point being made here.

You're still not getting any income stream with buybacks, and you still have no functional claim on company assets.

How do you acquire actual dollars out of your stock, post-buyback? You have to sell those shares to get anything. You receive absolutely nothing by virtue of owning them besides… voting rights.

But there are less of them now because of the buyback, so just less of something makes it magically more valuable? Why the hell was it valuable to begin with though?

This artificial-scarcity act pleases the DCF gods that say your stock price should go up now by virtue of there being less of them. But you still have a governance token. A share that only lets you vote on things, has no profits returned to you, and has no real claim on any resources.

Buyback or no buyback, you can still just vote with your stock and hope number goes up as the company does well. And as the company grows and its margins improve, that’s exactly what happens!

Empirically, this is the case whether or not cash is ever returned to you. Fee switch or no fee switch. Dividend or no dividend. Why? I don't know. But it just does.

To be clear, I’m not smearing tech stocks; I’m using them as demonstrable evidence that governance tokens are in fact valuable. I own them myself (long NET and NVDA, in fact). Be aware of what you own, and don't be hypocritical bashing one thing but not the other when they're functionally the same.

Footnote: I’m aware NVDA pays like a 0.03% dividend, which is useless. As a shareholder I'd rather the money be in Jensen's hands than mine, where it's far more valuable. Nobody owns Nvidia for the dividend.

Sub to blog so we can discuss more stuff together (remove 7s):

backthebunny.subs77tack.77com/p/on-governance-tokens-and-tech-stocks
Looks like about half the Nasdaq doesn't pay a dividend.

Nasdaq 100 Stocks (101 total)

Number of Stocks with Non-Zero Dividend Yields: 55

Number Stocks with Zero Dividends: 46

h/t @SAlexanderLegge for sharing this data

To understand interest rates, it’s critical to see both what informs them and what they represent. Once properly appreciated as complex adaptive system outputs, the Fed becomes an afterthought.

How do yield curves predict recessions? View interest rates as futures for dollars 🧵 This is going to focus on rate conceptualization and why yield curve inversion is a recession indicator. There isn't much else to cover on Fed monetary operations and their lack of control over rates.

I’ve covered it in autistic detail in The Fed part 4 & 5, linked at the end.

Biofoundationalism and Moral Foundations Utility Theory: Cthulhu Swims Left, Because He Has Nowhere Else To Go

This is a 6-part series of essays on why I believe the well-known political cycles of nations occur.

Part 1: Moral Foundations and Hypermoralization

ABSTRACT

There are moral genotypes and political phenotypes. Your moral foundations are rooted in your temperament, and your temperament is biologically derived. Biological traits that inform temperaments are evenly distributed across society, but rarely evenly expressed. Whether they can be fully expressed depends on the prosperity of the nation.

Societies begin at conservative moral foundations out of necessity, then drift inexorably to liberal ones as resources and luxuries accrue. This drift is initially rooted in utility and is healthy. This produces the well-known leftward collective shift in a nation’s values over time. This eventually degrades into entropic collective behavior and then resets.

MORAL FOUNDATIONS AND TOXIC OVEREMPHASIS: HYPERMORALIZATION

There is objective truth in STEM, and competing moral foundations talking past each other for most else. These are the moral foundations and their conservatives vs liberal emphasis, taken from Jon Haidt’s The Righteous Mind, a book I highly recommend.

All of these moral foundations are important; there is embedded evolutionary wisdom as to why humans and society advocate them. Ideally, a healthy society will have an equal expression of them. When certain ones are militantly emphasized over others, an unhealthy one takes shape.

Toxic moral overemphasis, what I’m calling “hypermoralization”, entails holding one or two moral foundations above all else and injecting them into apolitical things. Everything is about equality and fairness, everything about sanctity and loyalty, etc.. Obvious signs include Disney, corporations, and the like politicizing their movies and marketing with the same obnoxious moralizing messaging.

This is toxic moral-foundations overemphasis: hypermoralization.

During toxic hypermoralization periods, government institutions, corporations, and media have an obsession with just one or two moral foundations, and disregard the others. This marks the onset of a political environment where you won’t convince anyone of anything if they don’t fundamentally value the same things as you.

Hypermoralization only occurs during economic extremes: hard times elicit conservative hypermoralization, and decadent times foster liberal hypermoralization. We are currently in the decadent times.

The spectrum of wealth in between these two poles informs the evenness of moral emphasis across a society.

There becomes decreasing political solutions to hypermoralization. Opposing political factions begin to essentially speak different languages: two different moral codes talking past each other. Both accusing the other of being heartless, radical, imbecilic, etc..

Radicalness on one end begets radicalness on the other. When you view the world through only one moral lens, political communication breaks down. I can’t convince you of anything, you can’t convince me of anything.

This goes on until it can’t.
Part 2 of 6: Biofoundationalism

Your political views are directly derived from, and an expression of, your moral foundations. This is why political and social “truths” are inherently subjective, because they’re fundamentally moral value expressions. And we all don’t value the same things. Because we all don’t have the same temperaments. Because we all don’t have the same biology.

Temperament: an animal’s innate predisposition, inherent behavioral, and emotional patterns. It's an individual's natural and enduring personality traits and tendencies. Temperament encompasses various aspects of emotional, social, and behavioral responses to stimuli and situations.

Your personality and beliefs have biological basis: influenced by genetic, neurobiological, and physiological factors.

You do not control these, they control you. You do not create these, they create you.

This is not a postmodern “truth is relative” thing. A man’s interpretation of truth is downstream of his moral foundations, and his morals are downstream of his temperament, and his temperament is biologically imposed.

I view a cultural breakdown of political communication as unwitting biotribalism, manifesting as militant political views. You have more in common with your political allies than you think….

To conclude this, I take Jon Haidt's moral foundations work and view them in context with other hard biological realities. It paints a harsh, but accurate, depiction of political decision making and how it’s a byproduct of how your brain processes information. I believe it compellingly illustrates these moral differences are innate, for example:

- The amygdala is larger in conservatives

- The anterior cingulate cortex (ACC) is bigger in liberals

- Conservatives have higher threat sensitivity

- By disabling the posterior medial frontal cortex, you can change views towards immigration, religion, etc..

- Disgust sensitivity tells you a whole lot about other things

- There are others

Even how you react to my theory will inform much about your temperament. To suggest immutable biological differences and innate political thinking is to suggest inherent human biovariation. Which is to imply a whole gamut of other things.

Your temperament will in large part inform if you'll even entertain my theory, or runaway from it on sight. Which is to say your reaction to this thesis on political thinking and biology will probably inform on your biology.

I bet based on your receptiveness to what I just said, in a couple years AI could extrapolate biotraits like amygdala size, disgust sensitivities, ACC, etc..

And thus logically, with just information on your ACC, amygdala, and other biotraits… AI could infer your political compass, which is to say your moral foundations.

Moral genotypes and political phenotypes = Biofoundationalism.

THE PATTERN GOD KNOWS

I think AI will validate this, someday. It can already tell people’s races from pixelated x-rays, reconstruct faces from just voices(!). Brain scans will be low-hanging fruit, so long as the safety brigade doesn’t lobotomize it because some science is scary. AI will find other unsettling things too, in patterns.

Patterns and biology can’t be hidden from AI, because intelligence is fundamentally pattern matching, and AI is a pattern god.

I believe a holistic assessment of a person with AI that includes brain scans, synapse count/quality, and other biological/physiological traits will almost certainly be able to determine what your political views are before you’re even aware you have them (among other things).

The US dollar isn't backed by nothing, it’s a Proof of Violence (PoV) network.

PoV doesn’t need to show proof often, just once in resounding fashion can last quite a while.

PoV allowed the US to set up the entire financial system as the rails for its hegemony. It's decaying 🧵

https://twitter.com/BackTheBunny/status/1709899882813911450

PoV from WW2 allowed the US to establish influence and soft violence. Like dollar diplomacy and sanctions, effected via “international” institutions like the World Bank and IMF, and banking pipelines beholden to SWIFT.

These let the US exert influence without drawing blood.

Warfare is a leading indicator for adversarial domains like business.

DeFi will continue to be attacked by the US, and the right way to understand this conflict is as low-intensity war, centered around control.

Part 4: On political formulas and dominant motivations 🧵 Generations of War, Crypto, And Business Part 4 (5th in series):

- What is a political formula

- What will be the political formula against DeFi

- Why a motivation can be considered dominant and a major competitive advantage

Economics isn't a zero-sum game, but power is.

Crypto is a disintermediation of state control of financial infrastructure. Separating money and state. This is a big deal.

DeFi will be attacked. It's going to get worse.

But our victory is inevitable. The Vietnam Thesis 🧵 This series focuses on war as a leading indicator for adversarial domains and extrapolates application for DeFi.

But podcasts I've been on and a presentation I'll be doing made me realize I haven't cogently summarized why this is a war in the first place.

This is my thesis.

Prime brokers and perpetuals aggregators.

Seems like an odd pairing, but perps aggregators may be the prime brokers of crypto.

Comparing and contrasting this TradFi concept and applying it to DeFi 🧵 What’s a prime broker (PB):

a PB is a brokerage relationship with a client, typically an institutional one, hedge fund, etc..

The client sends trades to the PB, the PB sends them to an exchange, and the client gets their fill.

AI is not a young technology. It’s an ancient one.

AI is more appropriately understood as superhistory, not superintelligence

This has application beyond AI. It changed how I view myself and those around me. You are a centaur 🧵 This idea came from one of the most influential essays I’ve ever read: Superhistory, Not Superintelligence, by Venkatesh Rao @vgr

This is a homage to his work. I want to increase the surface area of his brilliant conceptualization. I’ll share the original piece at the end.

https://twitter.com/BackTheBunny/status/1664050317644955648

The Federal Reserve does not control interest rates

It’s one of the most powerful, manipulative lies that exists. Recognizing it will be both uncomfortable and liberating.

Fed control is a mass delusion. You’ve never inspected any of their claims, have you?

Let's do that 🧵 Thus far, this series has focused on the Fed’s asset-swapping programs, namely QE.

None of them actually create new assets, they’re simply optics games that distort M2 charts and bank balance sheets.

Read Part Zero, 1, 2, and 3 after this to understand why (linked at end)

https://twitter.com/BackTheBunny/status/1636766538446540800

The below wasn’t a joke. I really lost millions this way over 8 months.

My wealth was a low-interest-rate phenomenon. I lived the wisdom “some lessons must be experienced”. It made me recalibrate my identity.

I'm glad it happened. On devastating losses & what you get to keep 🧵 https://t.co/RfnIpWzPT9

https://twitter.com/BackTheBunny/status/1590580285942685696

I went from thinking I was essentially retired to realizing how painfully naive I was.

I made a lot of it in SaaS stocks. Even adjusting out leverage, I still outperformed $QQQ and $WCLD (tech indexes).

Doesn't matter though, because I massively underperformed on the way down.

“Commoditize your complement”: this is a business strategy worth being familiar with.

ChatGPT and LLMs just commoditized the complement of data: software.

This increases the value of data, but mainly drives value accrual to the new scarce complement: semiconductors 🧵 Complementary products (CPs) are ones that feed off each other. Many products have complements.

With CPs, more of one means relative scarcity for the other. The more relative scarcity a product has the more value it typically accrues in the complementary relationship.

One of my favorite pieces of wisdom: “Companies get the shareholders they deserve”.

What management and the board emphasize and cater to is responsible for the type of person the company attracts as investors.

This applies equally to DeFi projects and their tokenholders 🧵 If you run your business for the long-term, you attract long-term thinkers. If you run it for quarter-over-quarter (QoQ) metrics and hyped forward guidance… you attract short-term speculators.

Which way, western man?
(eastern too, but you know how the meme goes).

AI amplifies you, but also dilutes you. As AI's presence increases, yours fades...

I've seen “here’s how to use AI” stuff, I haven’t seen any “here’s when NOT to use AI”.

There's a Laffer Curve for AI, and more is not more.

There are 3 types of writing, LLMs can only do 2 🧵 Drawing delineations around optimal AI use is important.

LLMs should not be used to manufacture insights and creative ideas, because the nature of how they’re trained precludes it.

They are not designed to produce novel output. They are designed to produce predictable ones.