Before we tap this 2023 year-end on the rear end, I’d like to talk about Joe. No, no, no…Not Joe Biden as I promised you that I would seek to be apolitical in these letters and only stick to educational economic and investment matters. Who I want to talk about is Joseph Schumpeter, the well-regarded early 20th-century economist.
In his work from Austria, Germany, France, and then to the United States teaching at Harvard, Mr. Schumpeter represented broader economic philosophies than his erstwhile economic theory colleagues (John Maynard Keyes, David Ricardo, etc.). He challenged his compatriots claiming they dealt in elite (abstract) economic models that spoke mostly of national-level economics and that they held most variables constant so that they could get their models to work.
Joseph’s Economic Models
Joseph on the other hand, no doubt influenced by the loss of his father at age 4 who ran a factory, felt entrepreneurship could not be exactly modeled because it was messy in economic terms, with variables changing all over the place and at all times (competition, prices of inputs and outputs, innovation, etc. etc.). Though often incorrectly attributed to him solely, he is often credited with the term ‘creative destruction’. By that term, he meant the incessant battle in the marketplace where one firm is always seeking to unseat the other, or eliminate an old way of doing things (think cars versus horse carriages, thus the ‘horseless carriage’). These unrelenting and incremental steps and stresses at the street level — the entrepreneurial level — naturally improved the standard of living for mankind – though it inevitably ‘destroyed’ some existing businesses, jobs, products, and invested wealth in the process. Creative destruction does not occur in the government sector, per se, because the forces suppressing underperformance are not as dominant or are nonexistent.
Economic Theory in 2023
So what does all this economic theory have to do with 2023? I’d like to suggest we witnessed some ‘creative destruction’, and it occurred on a remarkable scale. Household names that were touted as brilliant and “before their time” – but instead blew up on a massive scale, costing billions of dollars and painful economic losses to many. Messy…you bet. But, if these entities were supported by meeting customer needs or replacing antiquated ways, they’d still be thriving. Let’s just review a few that fell short;
- The first part of the year saw Silicon Valley Bank implode, the 2nd largest bank failure in U.S. history.1 Banking isn’t ‘new’ but offering sweetheart home mortgage loans and promoting high interest-bearing accounts at a time when interest rates were low…and then investing SVB’s tremendous new depositor growth in long-term government bonds just before inflation turned up proved disastrous. Poor executive management is solely to blame for the downfall of this $16 Billion firm, and the market simply makes you pay. Result: Bankruptcy.
- WeWork, the new-age office space leasing company, was at one time valued at nearly $50 Billion and attracted some of the most sophisticated investors in the world. Adam Neumann, WeWork’s energetic Founder and CEO, secured long-term space from landlords and rented those spaces out to short-term and mobile office renters. It was all very hip and modern…and they expanded rapidly…and then COVID hit. The model promoted by Neumann would have always had risk in appropriately matching hard liabilities to flexible income, but as Warren Buffet often says: “When the tide goes out, you get to see who’s swimming naked”. Neumann was ousted as CEO after the IPO (Initial Public Offering), but the company couldn’t hold on. Result: Bankruptcy.
- Samuel Bankman-Fried was the largest fish in the crypto-currency pond, founding both the largest crypto exchange firm FTX ($32 Billion capitalization2) and crypto investment firm Alameda Research. FTX attacked and secured large amounts of financing from some of the world’s premier venture capital companies (Lightspeed Venture Partners and Sequoia Capital) who were dazzled by this youthful shaggy-haired prodigy. When the first signs of cracks were appearing in the empire, Mr. Bankman-Fried took to Twitter on Monday, November 7th, 2022 to reassure his investors: “FTX is fine. Assets are fine3”. On Friday, November 11th, a mere 4 days later, FTX filed for bankruptcy. A fraud trial ensued. Result; On November 11th, 2023, exactly 1 year later, a jury found Mr. Bankman-Fried guilty of seven counts of fraud and conspiracy4.
All the hype and political donations in the world can’t cover weak business plans and extravagant spending. Why? Because creative destruction always comes to roost. The current hype is all about Artificial Intelligence, which has also attracted outsized attention, money, and futuristic promises. I think it’s fair to say caution is warranted yet pushing the envelope is what the entrepreneurial side will naturally do – and society will benefit from this work in ways we haven’t conceived today – though winners and losers will naturally occur. In the 1950s Dinah Washington sang a soulful ballad called ‘What A Difference A Day Makes’ winning her a grammy and interestingly giving insight into the varied ride that our economic (it won her a Grammy see https://www.youtube.com/watch?v=BlwpatfvrGA). As we approach 2024, I reflect on what a difference a year makes…and keeping your head when everyone else is losing theirs is the greatest sign of investment wisdom that you can exhibit to secure the long-term returns the market must deliver.
While considering the financial struggles, wild economic turns, and changes in our market, should you find yourselves needing some guidance, my team and I are here to assist you. Reach out to Wellspring Financial for help at any time.
It remains my deep and distinct honor to serve you well.
1 “Silicon Valley ranks as the 2nd-biggest bank failure ever” (Harry Terris and Zuhaib Gull, S&P Global Market
Intelligence, March 10, 2023)
2 “Cryptocurrency exchange FTX hits $32 billion valuation despite bear market fears” (Ryan Browne, CNBC
Technology, January 31, 2022)
3 “Embattled Crypto Exchange FTX Files for Bankruptcy” (David Yaffe-Bellany, New York Times, November 11, 2022)
4 “Sam Bankman-Fried Could Get 100 Years in Prison. What Is Fair?” (Ephrat Livni and Bernhard Warner, New York
Times, November 11, 2023)
