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Episode: The Stories of 2023

Author: TED Audio Collective / Youngme Moon, Mihir Desai, & Felix Oberholzer-Gee
Duration: 00:52:26

Episode Shownotes

Felix and Mihir reflect on the most important stories of 2023 including the remarkable rise of AI, the revolution in life sciences, the rising power of employees, the trial of SBF, how product market strategies are reflecting shifting financial logics, the reasons for increased warfare, the disjunction between financial markets

and the real economy, the shocking rise of school absenteeism and the wonder of Simone Biles. Hosted on Acast. See acast.com/privacy for more information.

Full Transcript

00:00:10 Speaker_03
Hello, everyone. You're listening to After Hours. I'm Felix. I'm Mir.

00:00:14 Speaker_00
And it's our year-end episode. Yes, one of my favorite ones. Time for us to look back and think about what happened.

00:00:20 Speaker_03
The best stories of the year. Maybe some things that didn't work out so well.

00:00:25 Speaker_00
Indeed. Well, I can tell you already who the winner is. What do you mean? Like the best story? No, no, the more important competition, which is, it's actually a three-way tie.

00:00:35 Speaker_00
There was the parsnip hummus, there was the brioche sauvignon, and there were the rum cookies. So all three of those from the annual Felix and Lisa Schindig, which was last night, were amazing.

00:00:51 Speaker_03
Oh, thank you. And you know, it's the first time that I made the parsnip hummus, which

00:00:57 Speaker_03
I guess it's a contradiction in terms because hummus is chickpeas and so it doesn't have chickpeas but if anyone ever wants to try that you boil the parsnips and then they substitute for the chickpeas and it's quite amazing.

00:01:12 Speaker_00
And the other part of it that I loved was I have now come to your annual shindig several years in a row and the great thing about these kinds of parties is I meet some of your friends, but I don't meet them otherwise.

00:01:24 Speaker_00
Meaning this party becomes the occasion to spend time with these people and hear what they've been up to. So that is the other wonderful thing about these annual holiday parties, Felix. You and Lisa do it remarkably well.

00:01:35 Speaker_00
I think the rest of 2023 and all of 2024 is just going to be downhill from that party.

00:01:40 Speaker_03
I hope not. So before we do that, let's remember some of the great stories that we have for 2023. Let's do it.

00:01:53 Speaker_00
All right, Felix, I am delighted to have you start, but I have to say there's always this weird fear in these episodes that we're going to pick the same topic and that somehow your idea will get snatched.

00:02:05 Speaker_00
So let me just say two words before you say your first topic. Okay. Which are Taylor Swift.

00:02:14 Speaker_02
You are totally safe. I was not going to talk about Taylor Swift.

00:02:18 Speaker_00
Okay. Actually, I don't particularly want to either, but I did need to say those two words first in any year-end episode so that they get said and I get credit for saying that.

00:02:26 Speaker_03
My response is what you always wanted to hear. Taylor Swift is all yours.

00:02:34 Speaker_00
It's really just what my daughters want to hear. But anyway, okay, good. So what's your first big story, Felix?

00:02:40 Speaker_03
I think the story of artificial intelligence is one, at least, of the most important stories of 2023. And it's interesting to me because when you think about what is actually new in AI, because this has been going on for such a long time,

00:02:57 Speaker_03
AI in one form or another was in our lives. If you talk to Alexa or any one of your devices, of course those devices were AI powered, but it didn't really feel like we were using AI. Maybe it didn't help that Alexa wasn't that great at responding.

00:03:14 Speaker_03
But now this has really changed and I can think of three things that are different.

00:03:19 Speaker_03
The first is just this democratization that now in the context of chatbots at least everyone gets to experience AI and the power of AI and these models have become much better. So that's maybe one dimension. A second is

00:03:35 Speaker_03
The multimodality, I think that is really impressive. So from text to images, from images to sounds, it is quite remarkable what the models now can do.

00:03:47 Speaker_03
And maybe the third thing that I've mostly seen on the corporate side, because you can now combine these large language models with corporate data that you have, There's this universe of opportunity, so many possibilities.

00:04:03 Speaker_03
We've known from research for a very long time that every company has a lot of data. Most companies are not very good at using the data that they have.

00:04:12 Speaker_03
And so that seems a third frontier that is now moving very quickly and gives many people lots of optimism about the effects of AI, both on productivity and then ultimately on profitability as well.

00:04:25 Speaker_00
Yeah, that just strikes me as clearly the most important story of the year in many ways.

00:04:30 Speaker_00
But also, Felix, of your three versions, I'm particularly interested in that third version, the interactivity with artificial intelligence in order to process your unique proprietary data. That strikes me as just being

00:04:44 Speaker_00
absolutely transformative for productivity and all kinds of things. And so in some sense, the first two are a little bit more of the shiny new toys, but the third one is the more interesting one.

00:04:56 Speaker_00
And the reason that's important is because I do feel like we're living through this fourth version of some kind of a hype cycle or fifth version of some kind of a hype cycle that has come to dominate the economy.

00:05:05 Speaker_00
So the VC world and the equity markets have gotten so good at hyping things like blockchain and crypto and web 3.0 and the metaverse.

00:05:15 Speaker_00
And the issue is that in many ways, we know that for those hype cycles, the ratio of hype to reality was something like 20 or 30 to one. Now with AI, it's not 20 to one. The reality is really, really big.

00:05:29 Speaker_00
And what I'm not entirely clear about is, is the ratio one to one, roughly speaking, the hype is appropriate for the reality. Or is it like 2 to 1 or 3 to 1? Even if it's 3 to 1, it's amazing. But it's definitely not 20 to 1.

00:05:42 Speaker_00
So trying to understand what the hype is and what the reality is, given these cycles that we've been through, I think has been some of the hardest part of understanding this. That's completely fascinating me here.

00:05:54 Speaker_03
And I think there is a little bit of that in AI as well, because when you think about the chatbot environment, what is this really? Well, you know, it's glorified autocomplete.

00:06:06 Speaker_03
And you autocomplete two or three words in an email, that's mildly useful, but nothing really that miraculous.

00:06:14 Speaker_03
And then even summarization, yes, it's helpful, it's probably going to change consumer behavior in some ways, but is it going to make lives much better? Is it really going to move the needle?

00:06:27 Speaker_03
So, so much attention is on chatbots, but I actually think the most promising opportunities are elsewhere. So, think about DeepMind's AlphaFold.

00:06:39 Speaker_03
AI that predicts the shape of proteins and how proteins fold in particular, which happens to be absolutely critical for new drug development. We already have two new malaria drugs that are now in in-person testing as a result of these advances.

00:06:57 Speaker_03
And so what I like about your observation is, yes, it's less hype relative to real opportunities, but the hype is directed at something that is

00:07:08 Speaker_03
maybe already embedded in products, maybe easier to monetize, but it's not where the big change will come from.

00:07:15 Speaker_00
Yeah, it is really interesting. I think that's the next wave of this, is to try to understand where the substance is.

00:07:22 Speaker_00
So one way I've thought about this is with financial markets, because I think in many ways financial markets are the canary in the coal mine.

00:07:29 Speaker_00
which is we've lived through a decade of financial markets being transformed by artificial intelligence and machine learning because of quantitative trading, algorithmic trading, and that has been transformational for the behavior of financial markets, but also for who wins and loses.

00:07:45 Speaker_00
But then there are other parts of financial markets that haven't changed. And I think the answer is, what is the dimensionality of the information problem? So in quantitative trading and in high-frequency trading, there's a lot of information.

00:07:57 Speaker_00
It's coming at you all the time. You have to process it very quickly. There, it matters. And then there's other parts of the world where the dimensionality of the information problem is just not that fast-changing and not that complex.

00:08:11 Speaker_00
Protein folding is an example of a really hard problem. So I think in some ways, finance kind of tells us about how AI and ML will work more broadly.

00:08:20 Speaker_00
But what we really have to discover is the parts of the economy and the productivity driven tasks that AI and ML will really drive through. And that I think is the next leg of this revolution.

00:08:31 Speaker_03
Yeah. And as you talk about it, even in finance, obviously eking out these small information advantages is incredibly valuable.

00:08:41 Speaker_03
But then if we step back and we think about the big picture implications, how much did it really improve the allocation of capital in the world? Probably not that much.

00:08:51 Speaker_00
And maybe even worse. Individual actors get smarter, meaning they're able to eat out these returns. but the world gets a little dumber because prices start to reflect these short-term trends.

00:09:01 Speaker_00
Now, I don't think that's going to be true in protein folding because that is really all upside.

00:09:05 Speaker_00
But this is the part of AI that we have to really figure out how to marshal that stuff and how to pay attention to the stuff that really matters as opposed to maybe some of these more glistening things on the side.

00:09:15 Speaker_03
Great. So what is your story after year, Mihir? What do you see when you think of 2023?

00:09:22 Speaker_00
For many years on this podcast, I've really tried to champion life sciences, because I just think they are so important. And I think I'm going to just stay with that horse, which is, I think this is the year of life sciences.

00:09:34 Speaker_00
And in particular, of course, we had Lily and Novo Nordisk deliver Ozempic and Manjari and these drugs that have very quickly come to be shown to do dramatic things, to be widely adopted and really transform healthcare and our lives.

00:09:51 Speaker_00
And it's not just them. Vertex and CRISPR have come out with a remarkable technology for sickle cell, which is a really important disease for an underserved population. There's going to be new stuff on diabetes. So life sciences is really kicking in.

00:10:04 Speaker_00
And the interesting thing to me about it is First, while the hype cycle in tech is huge, I think in some sense the hype cycle in life sciences is under hyped. And so we are coming to terms with how transformative it can be.

00:10:17 Speaker_00
And then it's not really some sexy new approach to drug development, like there's going to be a platform Ginkgo Bioworks company that's gonna change pharma discovery into software.

00:10:29 Speaker_00
It's actually traditional drug discovery in really powerful, fascinating ways. And it just happens to pay off. And so I love this story because I think it's truly transformational. I think we'll be talking about these GLP-1 inhibitors for a long time.

00:10:43 Speaker_00
People's lives are changing today because of these things. And I think it's just the beginning. And I think that is really exciting.

00:10:51 Speaker_03
And a newfound strength is this multitude of approaches.

00:10:56 Speaker_03
So you have the big pharmaceutical companies doing fairly traditional research, you have the mRNA platform, and then of course that gets taken over a little by COVID because COVID is both such a big business opportunity but also was so important to get done in a short period of time that

00:11:15 Speaker_03
We don't quite know yet at this point in time how promising it will be, for instance, in oncology, but so far the signs are pretty positive.

00:11:24 Speaker_03
And then this advance in the processing of information, making better predictions, that powers companies who play across both of these fields.

00:11:35 Speaker_03
If you look at the product pipelines now at Pfizer and Merck and Eli Lilly, the next couple of years will really be quite astounding. The number of drugs, the kinds of diseases that we can now tackle, hopefully effectively,

00:11:53 Speaker_03
It will, of course, generate huge questions about the financing of healthcare, how we deal with all of a sudden much more rapid innovation as a society. But all in all, boy, I couldn't agree more with you.

00:12:06 Speaker_03
It is incredibly promising, incredibly exciting to see what happens in this sector.

00:12:11 Speaker_00
And I think it's striking that you talked about these three modalities, traditional drug discovery, the mRNA platforms, and then of course AI and ML. And I think the real winners are people who can make those combine. Those are not parallel paths.

00:12:26 Speaker_00
I think the real power is coming from the self-reinforcing nature of those three trends. And so that is why this is so exciting. And that is why I think it's got longer legs than just a one-off Ozempic kind of story.

00:12:40 Speaker_00
I think the lesson is broader, which is AI, ML may be a new path towards technological change, but I think it's much more likely to be something that reinforces traditional paths in interesting ways.

00:12:54 Speaker_00
And so we should understand it as something that is going to amplify things as opposed to something that is in and of itself, something remarkable. And that doesn't mean it's not super powerful.

00:13:05 Speaker_00
It just is a different way to understand why I think it's powerful. Yeah. Okay. So Felix, what else has been on your mind?

00:13:12 Speaker_03
I think 2023 is also the year of the employee, the year of the worker. And you see it across many different sectors of the economy, you see it in many different phenomena.

00:13:25 Speaker_03
For instance, we had many more strikes than we traditionally have a couple of years ago, so there were more than 30 strikes involving more than a thousand workers.

00:13:34 Speaker_03
It's not completely unusual, we saw similar levels of strike activity in 2000 and 2001 for instance, and of course it's much much smaller, so if you go all the way back to the 50s and the 60s, we used to have 300, 400, 500 strikes or so, but still the direction I think tells us something.

00:13:54 Speaker_03
deep and profound about this reorientation.

00:13:58 Speaker_03
And maybe I want to call it a reorientation away from customer primacy to now thinking more holistically about where both the financial firepower, but then also just the value creation opportunities, where do these really come from?

00:14:14 Speaker_03
We used to be somehow very lopsided in focusing on customers so much and forgetting a little bit about that competition for employees is at least as important.

00:14:26 Speaker_03
Now, you can look at it and you can think, okay, this is just going to be completely transitory. We went through COVID, people were reluctant to come back, so we had to raise wages, people eventually came back.

00:14:36 Speaker_03
Now, unemployment is super, super low, and as a result, we have to dish out the goodies to attract more people. But I actually don't think that's a very good description of what is happening.

00:14:47 Speaker_03
And in part, it's because I see so many companies that have started thinking about ways to attract and retain workers in much more creative ways than I would have observed five or ten years ago.

00:15:03 Speaker_03
There's this measure called the American Opportunity Index which tries to think about which companies are really good at providing mobility inside their organizations for workers. And there you see really interesting trends.

00:15:18 Speaker_03
For instance, companies that do this really really well, they hire three times as many people who don't have a college degree. Companies that excel at this opportunity index, they hire four times as many workers at the entry level.

00:15:33 Speaker_03
and then develop them inside the organization. They have many more internal promotions and so on and so on. And then you look at the names and you see those same names that are incredibly successful financially.

00:15:46 Speaker_03
So ServiceNow is probably the company across all of these different categories. They're just doing an amazing job. And that points to a moment that is much longer than we happen to be in a situation where the labor market is tight.

00:16:02 Speaker_00
I think this is just a great story, Felix. And I think you're right to kind of place it in the context of the pandemic and we'll wait, maybe it's all just a temporary shift in bargaining power towards workers.

00:16:13 Speaker_00
And I think you're absolutely right to think about it as a longer term secular movement. I always think of you when I think about this shift from customer primacy to employees and thinking about employees because you've thought really hard about this.

00:16:25 Speaker_00
The thing I love about this story is maybe twofold. First, it's really a story about the bottom half of the income distribution, maybe more than the top half.

00:16:34 Speaker_00
It's nice if a software engineer gets paid a little bit more, but it's hard to get excited about. That much.

00:16:39 Speaker_00
This is really about folks at the lower end of the income distribution getting both wage gains and then getting flexibility in the nature of their employment contracts. And I think that is really exciting.

00:16:50 Speaker_00
And of course, that's what's been missing in many ways from labor markets for a long time. The other thing that strikes me about it is there are all these weird consequences and interactions that happen. So I was recently talking to this entrepreneur

00:17:03 Speaker_00
who is interested in earned wage access, a fintech company that's trying to get people earned wage access. And it turns out the game changer in that industry was Uber, who moved to Instapay for their drivers.

00:17:17 Speaker_00
So you could get paid right away and access your earnings right away. And the reason, of course, that's so powerful is because in this labor pool, what's happening at the end of the month?

00:17:28 Speaker_00
You're trading off your ability to supply labor with immediate spending needs.

00:17:33 Speaker_00
And so what employers are finding is that, well, if they can shift to Uber to get paid right away, then that has consequences for everybody, which is you actually have to follow and you have to innovate in the way that Uber innovated on Instapay.

00:17:46 Speaker_00
And it's not then just about wages. It's about this whole heterogeneous set of responses that employers can use.

00:17:53 Speaker_00
In many ways, I think about this as making the nature of a contract with an employee much richer and much more widespread and many more dimensions.

00:18:01 Speaker_00
And when you do that, of course you get better matching, you get better employee satisfaction, you get so many things. So we have so uniquely focused on wage that one manifestation of it may be rising wages.

00:18:13 Speaker_00
But that may not be the most important manifestation, and it may actually be quite multi-layered in interesting ways.

00:18:18 Speaker_03
I love that observation we hear. And the second reason why I think it's not temporary is more on the corporate side.

00:18:26 Speaker_03
So, say you take in people who don't have a college degree, which maybe a couple of years ago you wouldn't have done because you were not sure how productive can these people be, how expensive is it going to be to train them.

00:18:38 Speaker_03
And now you discover, oh my god, they're amazingly productive, the expenses to train them are not extraordinary. That will not go away when the next recession comes along.

00:18:48 Speaker_03
These discoveries that we make in competitions, it's competition for one, but then also what we learn in competition, those insights will stay with companies.

00:18:57 Speaker_03
And I think they will produce a different kind of labor market compared to what we used to have.

00:19:03 Speaker_00
In a way, it's a manifestation of how the pandemic shook the economy and it shook it in a way that made people try new things. And actually some of it is long lasting. It's not just a temporary thing because we got used to doing things certain ways.

00:19:18 Speaker_00
And then the second thing is there are these broader trends about demographics and about the age structure of the population and about immigration that make one think hard about labor markets as being structurally different.

00:19:32 Speaker_00
maybe going forward, which I think is the other piece of this that can actually really be important. So in many ways, a really great news story, Felix.

00:19:39 Speaker_03
Yeah, I think so. You have another story for us here.

00:19:43 Speaker_00
Yeah, it doesn't sound like a great news story, but I think it might be. So sometimes something happens and you don't even notice it. And I don't think we even talked about it during the whole year, but it's really quite remarkable.

00:19:54 Speaker_00
So roughly 12 months ago, Sam Bankman-Fried was a free man in the Bahamas. 18 months ago, he was arguably the most important person in financial markets. And today he is in jail and he's about to get sentenced for what may be several decades.

00:20:13 Speaker_00
And it is just a remarkable thing that has happened and remarkable for several reasons. One is the swiftness with which justice was served here. I kind of am a big believer in a justice delayed is justice denied. And with remarkable speed,

00:20:29 Speaker_00
somebody who was at the center of the world is now going to jail. That is a remarkable. Second, it's kind of remarkable that this was delivered by the justice system as opposed to legislators or regulators.

00:20:42 Speaker_00
And this kind of goes back to our conversation about brokers and understanding how the justice system can very quickly rewrite the rules of behavior and make people think hard about what they're doing.

00:20:54 Speaker_00
And the final thing that strikes me about this is, over the last several years, I got quite concerned that the grift that is important to capitalism, the grift is always there, the con is always there, but it usually operates on the periphery of capitalism.

00:21:06 Speaker_00
And I had gotten worried that it had moved to the core of capitalism. And I think we had to really remedy that. And watching somebody go to jail for decades is maybe a really important part of that.

00:21:18 Speaker_00
I think this story in some ways happened without us even knowing that it happened.

00:21:23 Speaker_03
One facet that's so interesting to me is the lack of regulatory action, at least so far, when you compare it to other episodes. So say, think Enron.

00:21:34 Speaker_03
that then produces this big regulatory response that of course makes it much more difficult to do the kinds of damage that they have done to the economy, but also at remarkable costs to everyone else, because dealing with regulations is often very expensive.

00:21:52 Speaker_03
Here it strikes me maybe because we have this theory at the center of a story is a person without morals, a person who didn't care about the legality, success was everything that interested him.

00:22:09 Speaker_03
It makes it more personal and as a result you have less pressure to think about what's wrong with the world, that this was possible, that this happened, that we didn't or couldn't prevent it.

00:22:21 Speaker_03
If in fact the regulatory response remains what it is today, other than the collapse of the company itself, of course, the collateral damage might actually be much smaller compared to other previous scandals.

00:22:34 Speaker_00
you're raising an important point, which is the disjunction between the legal solution and the regulatory solution. And back in the early 2000s, the regulatory apparatus went to work in a big way. And that does not appear to be happening here.

00:22:47 Speaker_00
And I'm not sure why that is, but one possibility is that there's a genuine problem here where we're trying to separate out the wheat from the chaff. meaning there is something that is worthwhile. About crypto. About crypto.

00:23:00 Speaker_00
And we still may not know what it is, but there's something. Now, with Jeff Skilling and Andy Fastow and WorldCom and all those people, there was no wheat. It was just all chaff. It was just really, really bad behavior.

00:23:10 Speaker_00
So maybe part of what is happening here is that regulators are being more cautious about addressing something because they want to preserve whatever that value is. That would be a good news version of it. The bad news version of it is

00:23:22 Speaker_00
Sorry to be cynical, but they maybe have been bought and sold and they're not willing to make those kinds of changes that maybe we actually do need.

00:23:30 Speaker_01
Yeah.

00:23:30 Speaker_00
I'm not sure which of those is true, but that maybe can help explain the disjunction. And the last thing I want to say about this is the reason I think it's important is because many young people take their cue from iconic people in the economy.

00:23:46 Speaker_00
And SPF was an iconic person in the economy. And that is also not true in scaling and fast out. Yeah, much less so. You have to address that swiftly. Because otherwise, there's a generation of people who are taking their cues from those people.

00:23:59 Speaker_00
And that is why I think in a way, this story is so important.

00:24:02 Speaker_03
Yeah. And that might be another reason why we don't get the wide regulatory pushback. Because it's not as though hundreds and hundreds of people have tried what the few important people in crypto have tried with sometimes questionable results. Yeah.

00:24:27 Speaker_03
What else happened in 2023, we hear?

00:24:30 Speaker_00
Well, I'm somewhat obsessed, as you know, about the connection between financial markets and the real economy. And I'm also a little bit obsessed and have been obsessed with pricing.

00:24:39 Speaker_00
And I think those two things have really come together in an interesting way in 2023. So obviously, pricing got very complex because of inflation and then rising prices and then decelerating inflation.

00:24:49 Speaker_00
But the other thing that has happened, and this was provoked by a conversation with one of my daughters who noticed that this editing software they were using is no longer free.

00:24:59 Speaker_00
And I think what is going on and has gone on and will continue to go on is

00:25:04 Speaker_00
The pressure in financial markets for young companies and in the venture world to focus on profitability and cash flow and more traditional metrics is changing business models. And that, in turn, is changing pricing.

00:25:16 Speaker_00
And that, in turn, is impacting people all through the economy. So I think there is this sense in which we are noticing things. I'll give you some obvious examples.

00:25:26 Speaker_00
So Netflix is changing pricing and they are changing shared subscriptions and they are changing their content. And it's a manifestation of these pressures. You see this in the way Snowflake is pricing some of their enterprise software.

00:25:40 Speaker_00
You see this in which cybersecurity is being pricing their contracts. And it's happening to my daughter who's having her editing software change. So consumers are now being faced

00:25:52 Speaker_00
with the impact of all of these changes in financial markets, and it's migrating all the way through to the way we experience products. And I think that is a really fascinating part of what has happened in 2023.

00:26:05 Speaker_03
Yeah, super interesting.

00:26:07 Speaker_03
Other than your daughter needing more pocket money, I still think it's largely a good news story because the super low interest rates that we had so long that took just pressure off of companies, we don't usually think it that way but one implication is of course that many people stuck to business models, stuck to business ideas that didn't really have a future except

00:26:32 Speaker_03
The future didn't matter all that much and so you spent a year, two years, three years doing something when in fact you could have worked on your next venture, you could have worked on a more promising business idea.

00:26:44 Speaker_03
So overall this weeding out of the strong and the weaker efforts at building companies, I think it's a really great new story. The part that is most fascinating to me about the pricing side is there's two reasons now to raise prices.

00:27:03 Speaker_03
One is just the business pressures and I agree that's by and large a good thing. As consumers we should get the right signals about what we do when we use a particular set of services. But of course it's also true that pricing often happens in herds.

00:27:18 Speaker_03
And so one of the concerns that I have is with these big swings in pricing models, that some companies have all the right reasons to raise prices and maybe other companies not so much, but since everybody does it, I might as well raise my prices as well.

00:27:34 Speaker_03
And so it'll be fascinating to see which prices are ultimately unsustainable because they don't really reflect competitive advantages.

00:27:45 Speaker_03
I price my product the same as yours because you just raise prices but really my product is just not quite as good as yours and shouldn't have the same price.

00:27:53 Speaker_03
And that I think we will probably learn over the next year or two just seeing who just floated along with everyone else. And who actually had good solid value creation based reasons to raise their prices?

00:28:08 Speaker_00
I think that's interesting for many reasons Felix. First, I think you're right, which is in some sense we're reacting against this crazy period and it could be good for this behavior to happen.

00:28:18 Speaker_00
But then the really interesting part is you're raising is actually, but there's maybe a different effect, which is companies kind of overlearn their lesson and then they overshoot.

00:28:27 Speaker_00
And of course, the reason that's problematic is because pricing is complex and it's a little asymmetric, which is it's hard to reduce prices.

00:28:34 Speaker_00
And so there is certainly a scenario here where we, in some sense, learn the lesson of the last decade too well, and then it has its own consequences. And the other thing I think that you raised is I don't think we've fully come to terms.

00:28:47 Speaker_00
It's not just product markets that were infected by these financial markets, but it's labor markets. Do you go choose to pursue that startup or do you go choose to join that company? There's a lot of decisions that got twisted.

00:28:59 Speaker_00
Consumer decisions are one, but there's also labor market and it's all kind of unraveling. And that I think is super interesting and to the good, hopefully, as long as there isn't that kind of overcorrection that you're pointing to.

00:29:09 Speaker_03
Yeah. And we have something similar in the conversation around the Fed and inflation expectations. Our focus is so much on how did inflation rates change in the last quarter or so, or maybe a year or so.

00:29:24 Speaker_03
And that's very quick and very important to measure the response of the economy to the pressures that the Fed brings to bear. But of course it has very little to do with the long run ideas and experiences of consumers, frankly.

00:29:41 Speaker_03
Like when I go to a restaurant, even now, I know I shouldn't be surprised. I know when I sit down, I will see prices in, I don't know, their 20s, their 30s or so. But every time I go to a restaurant, oh my God, it's gotten really expensive.

00:29:57 Speaker_03
It's not new, I shouldn't really respond to it and yet somehow there is this distinction that you point to between what happens in financial markets and then how we incorporate those experiences and the news and our understanding of financial markets into everyday lives.

00:30:16 Speaker_03
That's just complicated and I'm not very good at it.

00:30:20 Speaker_00
Well, I'm so glad you said that because I have felt the same way.

00:30:22 Speaker_00
And the way I have thought about it is if I am that confused about inflation and then about what it means for inflation to have happened and for it to get reduced, but not to go to zero. And I'm still suffering from those kind of shocks.

00:30:37 Speaker_00
Imagine what we expect people who are not economists to understand about inflation. And it's so absurd when you think about it that way. So true. So, Felix, what else about 2023 really struck you?

00:30:49 Speaker_03
There's one observation that I think is much more troublesome than what we spoke about so far. And that is, we have a resurgence in the number of armed conflicts.

00:31:02 Speaker_03
So after 30 years of relative calm, all of a sudden, the number of armed conflicts now has risen quite dramatically. So these are both wars, but these are also sometimes non-state actors.

00:31:16 Speaker_03
that act against the police, the army, civilians and our attention of course is on the big three roughly, it's the war in Ukraine, it's the Middle East and then it's Sudan, but below that level the world has gotten much less safe.

00:31:36 Speaker_03
So we're not even at the end of the year and more than 200,000 people have died as a result of armed conflict. And it's interesting and worrisome to me because if you look over the longer term, there are these condensed periods of intense violence.

00:31:54 Speaker_03
So for instance, you have it in the late 1960s and early 1970s and then it dies down. And then it comes back in the mid-1980s when all of a sudden the number of conflicts and The number of people who die in wars shoots up dramatically.

00:32:11 Speaker_03
I don't really understand why we get this bunching in time. I don't really understand what's driving it. Is it migration related to climate change?

00:32:22 Speaker_03
I don't really know, but seeing it research worries me quite a bit, in particular knowing about these historical patterns.

00:32:32 Speaker_00
Felix, you're right to bring this up and it is obviously remarkably depressing and very true and unfortunately something that I don't think is a one year off kind of a thing.

00:32:42 Speaker_00
I'm kind of fascinated by your question about why and I don't know if I have good answers but I'll give you a couple of theories. So the first is maybe what has happened recently is the ability of political leaders

00:32:55 Speaker_00
to mobilize people based on their anxieties and on their discomfort has become greater because of technology. So social media, you can mobilize people in a new way.

00:33:06 Speaker_00
Maybe the second is there are more actors in the world who want to create trouble and they're powerful and they're able to create trouble.

00:33:14 Speaker_00
That could be what's kind of going on, meaning intervening in various conflicts around the world and exacerbating them. And then the final possibility is

00:33:22 Speaker_00
there has been this sense that populism is spreading and populism reflects some underlying deep disappointment with the nature of what is going on in the world. Some people think about it as the revolution of rising expectations.

00:33:36 Speaker_00
I'm constantly feeling grievance because I'm not getting my fair share. And that of course then gets mobilized by these leaders through these technologies and by these foreign actors who kind of put it all together.

00:33:49 Speaker_00
I don't know if that knits together the three episodes you're talking about, but it kind of knits together I think what is happening today.

00:33:54 Speaker_03
Yeah, populism in particular is connected in interesting ways to polarization. So in the United States, obviously the two go hand in hand, so we have increases in polarization Which, by the way, interestingly precedes the rise of social media.

00:34:12 Speaker_03
So, Americans did not really see eye to eye even before we had social media and then definitely the influence of social media was not a positive. But it's not true everywhere.

00:34:22 Speaker_03
You have populist movements in Europe, for instance, where we have no polarization. What does strike me as right is that the sense that I'm getting less than I'm entitled to.

00:34:37 Speaker_03
I should somehow be better off and it's the fault of someone who prevents me from getting ahead. That strikes me as remarkably similar across many of these contexts.

00:34:50 Speaker_03
Sometimes between groups in the population, sometimes it's class I think also that plays a big role here, but a general grievance culture. The part that puzzles me is, I am sure if we went out and we carefully collected data through the years,

00:35:10 Speaker_03
We could always find people who think they're getting much less than what they deserve. And it doesn't always spill over into armed conflict and now all of a sudden it does.

00:35:22 Speaker_03
Given that we have these long-standing grievances, what's changed now that makes it much more prevalent?

00:35:28 Speaker_00
Yeah, I don't know. That is totally fascinating. In stitching together those three, I'll offer you one theory, which is the 60s and 70s, as you mentioned, is kind of the decline of imperial power and the colonization project.

00:35:40 Speaker_00
So it's a shift in the nature of order. And when the nature of order changes, disruptions happen. And of course, the 80s was the decline of the bipolar world which held together and suppressed conflicts.

00:35:55 Speaker_00
And then today, maybe it's the end of the unipolar world of the US as a hegemon. And that is now being manifest in conflicts around the world as other powers rise and then seed conflict. And then that is maybe part of what's going on.

00:36:09 Speaker_00
But I confess, this is really troubling. I'm afraid it may not be the worst of it in 2023. And that I think is really important to think about as we go forward. And even more stories from 2023 we hear.

00:36:24 Speaker_00
Yeah, so I think one of the striking things about 2023 has been the economy and financial markets writ large. So what have we observed? the US economy certainly is chugging along. And in fact is doing what it did for the last couple of years.

00:36:41 Speaker_00
And there haven't been big changes. At the same time, financial markets have just been remarkably violent. So 2022 equity markets were down 25 to 30%, bond markets were down 20 to 25%. And then what happens in 2023?

00:36:57 Speaker_00
Well, first equity markets are remarkably up and then down. And then again, remarkably quickly up.

00:37:05 Speaker_00
And of course, bond markets, we did an episode about when rates touched 5% and lo and behold, a month later, six weeks later, they're back at four and below.

00:37:15 Speaker_00
So we have this remarkably violent set of moves in financial markets and remarkably steady economic reality.

00:37:24 Speaker_00
Now, of course, you'd expect financial markets to be more violent than economic fundamentals because financial markets try to look forward and they capitalize all that. forward looking stuff into prices today.

00:37:35 Speaker_00
But just the degree to which that divorce between economic fundamentals and financial markets has happened is really striking to me.

00:37:42 Speaker_00
And I think part of it reflects a little bit of what you mentioned earlier, which is, in some sense, it's all become about inflation and interest rates. and everybody is keying off of that.

00:37:53 Speaker_00
So all that really matters has been, well, what is going on in the bond market? And then everything else is just a manifestation of that as opposed to economic fundamentals really dominating the way financial markets move.

00:38:05 Speaker_03
Yeah, so interest rates definitely are this really big force. I do see very similar movements with specific companies. So remember Tesla in 2022, the company lost 70% of its value. I'd be the first one to say Tesla was overvalued to begin with.

00:38:24 Speaker_03
But what happened? All of a sudden, the company is 70% less valuable than it used to be not so long ago. That's ridiculous. Or think about on the positive side, Microsoft. Yes, of course, there's this collaboration with OpenAI. That's very smart.

00:38:40 Speaker_03
The Activision Blizzard deal finally went through. But really, you're telling me this monster of a company, this huge company is now 50% more valuable than it used to be at the beginning of the year. It's just unreasonable.

00:38:55 Speaker_03
So somehow, uncertainties or stories, or maybe this is sort of a broader meme stock phenomenon that now plays out not only among companies where, say, some individual investors and some hedge funds have different ideas, but maybe it's much broader.

00:39:15 Speaker_03
where being on the right train at the right time is everything and underlying values or maybe to some extent even the influence of interest rates just does not matter that much.

00:39:29 Speaker_00
We used to think about the meme stock thing as again operating on the margins and not being terribly central but there is a way to understand the last 12 months as those basic dynamics

00:39:42 Speaker_00
coming into the largest companies, the so-called Magnificent Seven, that have come to dominate markets. And if that's true, that's really crazy. And that, I think, is what we're going to have to find out, because otherwise it's hard to make sense.

00:39:54 Speaker_00
Now, of course, there is an alternative narrative, which is AI is going to be so powerful and is going to drive so much change and is going to drive so much productivity and the big players win.

00:40:02 Speaker_00
And that can make everything make sense, which is what's so much fun about finance, because you can tell a different story. But I think those competing narratives, to use your language, I think have been fascinating this year.

00:40:15 Speaker_00
And we will see how that shakes out in 2024. I think one of two things, either you're going to believe that positive story or there's going to be the comeuppance of that negative story going forward.

00:40:25 Speaker_03
Yeah, the question as always is, how long are you going to hold on to your investments, given that in the very short run, we're just unlikely to see the kinds of changes that prices would lead us to believe are in the works.

00:40:41 Speaker_03
Yeah, well, we'll find out.

00:40:43 Speaker_02
That'll be something to watch. For better or worse.

00:40:45 Speaker_00
You know, I have a small one and a little negative one. It's not as negative as yours, Felix, but I just wanted to raise this because I've kind of become obsessed with this, which is about school absences.

00:40:58 Speaker_00
So it turns out school absenteeism has absolutely skyrocketed in the US, in the UK, and in a lot of places. And it's deeply troubling on its own, but I think it's deeply troubling in a larger sense.

00:41:13 Speaker_00
So just to give you some sense, pre-pandemic levels of absenteeism, and particularly chronic absenteeism, was something like 10, 15%. And in some districts, it's rising to 30% to 40%.

00:41:26 Speaker_00
And it's particularly in low-income districts, where it's even higher. So obviously, that has remarkable consequences for human capital development, which was already sabotaged by the pandemic.

00:41:37 Speaker_00
So one narrative is that kids are more anxious and they're more anxious about going to school. And so that anxiety is rippling into lower attendance.

00:41:46 Speaker_00
The alternative explanation is actually that parents are now working more remotely and are more willing to pull kids from school, for example, to take a midweek vacation. But we really don't know.

00:41:59 Speaker_00
The reason I think it's interesting to me, especially if that first story is true, is the pandemic had these remarkable effects on us. And of course, we think of 2021 and 2020 as manifesting those effects.

00:42:13 Speaker_00
But there are these longer run effects of the pandemic on our mental health and on basic practices and norms that I think are still working themselves out. And I think school absenteeism is one such version of it. So we don't understand it fully.

00:42:30 Speaker_00
So that's interesting. But I do think of it as a manifestation of I don't want to use the language of a long tail, but it is a little bit of that long tail of societal changes.

00:42:41 Speaker_00
We talked about the labor market as being maybe a good version of that, but I'm worried that there are these less good versions of it and school absenteeism is one version of it.

00:42:48 Speaker_03
Yeah, I didn't know these numbers and frankly I'm a little shocked it was 10-15% even before the pandemic. Indeed. That seems inexplicably high if it really describes chronic forms of absenteeism.

00:43:06 Speaker_03
It makes me wonder about whether the small, small tinkering that we often do in schools, you know, have slightly better textbooks, better forms of pedagogy, whether there isn't really something that is a much bigger and much more important target.

00:43:24 Speaker_03
If we have 10 or 15% of kids, or now, of course, even worse, if we now have 30% of kids, who often don't show up, that's terrible. Because we know so much of what you learn builds on what you should have learned last year.

00:43:40 Speaker_03
So say you miss the entry into reading or you miss the entry into doing math, how can you ever recover because those tools are going to be present in every single lesson that you will have going forward.

00:43:56 Speaker_03
So it strikes me as a huge challenge and really worrisome that perhaps even parents are part of the reason why it's happening.

00:44:06 Speaker_00
I'm reminded of this remarkable work in India where school performance is really dictated by absenteeism. And we think of it as a developing country problem and a low-income country problem. There, in some ways, the problem is different.

00:44:20 Speaker_00
It's about teacher absenteeism.

00:44:21 Speaker_03
Teachers don't show up.

00:44:23 Speaker_00
Yeah, that's what happens in village schools. It's very difficult to get teachers to show up. And so you have to figure that problem out. It becomes a monitoring problem.

00:44:31 Speaker_00
This is, in a way, a much harder problem because it's a cultural problem, conceivably, where you really have parents and children changing their behavior. And by the way, we also know homeschooling has gone way, way up. Now, that could be good.

00:44:42 Speaker_00
It could be bad. It's harder to say something about.

00:44:45 Speaker_03
And it reminds me of a story that I heard from a friend who's a principal at an elementary school, and they banned phones in their school. And they weren't super sure what it would do. Would the kids rebel?

00:45:03 Speaker_03
Would it actually lead to the gains that the research says you would gain? And the experience has been overwhelmingly positive. Problem number one, parents.

00:45:15 Speaker_03
Parents have gotten so used to being able to be in touch with their kids at any moment in time, that this idea that they're not reachable, now is the single biggest problem for this school.

00:45:28 Speaker_03
When in fact, on every dimension, no phones, no electronics in the classroom has been just about the best thing that happened on that campus in a long period of time.

00:45:41 Speaker_03
And then you have, oh, now we have to deal with the parents who apparently absolutely need to be able to text their kid that they will be five minutes early to pick him up.

00:45:52 Speaker_00
This, by the way, is a very good news story about education, which is I think we've turned the corner on. thinking that digital devices are great for kids. Now, you're absolutely right to point out that the obstacle seems to be the parents.

00:46:06 Speaker_00
But I think that is a good news story in education, which is I think we've turned that corner where 10 years ago, it was all about more digital devices in school all the time.

00:46:15 Speaker_00
I think we've really figured out that that was wrong, and hopefully we'll follow through on that in years to come. Okay, Felix, one last one.

00:46:23 Speaker_03
Yes, of course we have to talk about the comeback of the year. And no, it's not Taylor Swift. She's been on the roll for quite some time. It's Simone Biles.

00:46:36 Speaker_03
Already, the courage that she had during the Tokyo Olympics to talk about mental health and talking about, what did she say, the weight of the world on her shoulders and how it's very hard to perform under those circumstances.

00:46:50 Speaker_03
But then frankly also just to see her come back and perform at that level, like walk away with four gold medals at the World Gymnastics Championship.

00:47:02 Speaker_03
It's one of these moments where you so hope that someone will win and then she does it and it's just the best story ever.

00:47:10 Speaker_00
I totally agree. First off, the level at which she is performing has been performing historically and again is performing at. We're not talking just at the top of her game. She was like one of the greatest athletes of all time.

00:47:23 Speaker_00
And then the magnitude of what she has gone through in public is just terrible. I mean, this obviously relates to sexual abuse scandals that happened within the gymnastics world and her ability to persevere. I totally agree, Felix.

00:47:38 Speaker_00
What a great final story. And honestly, not getting the attention it deserves. What a remarkably great story.

00:47:44 Speaker_03
And that continued engagement now, how she talks about foster care and foster families and her experiences. She's just amazing. Like she can do it all.

00:47:54 Speaker_00
Yeah. Biles for president 2024. And we have recommendations. Mihir, what do you have for us? Well, so I don't know how useful this will be in the short run, but maybe it'll be useful long run. So I do all my Christmas shopping late.

00:48:20 Speaker_00
And so I have just done some Christmas shopping. And I had two retail experiences that I think were just really wonderful and I encourage people to do.

00:48:29 Speaker_00
So the first is, you know, when you walk into a store and you're just shocked by how much stuff you really love. Okay. That's an infrequent feeling for me. Let me put it that way. And I had two recent experiences.

00:48:40 Speaker_00
The first is the MoMA design store is such a spectacular retail establishment. And maybe that's partly my aesthetic, but you go into that store, you find stuff at different price points. That's wonderful. And it's just so bankable.

00:48:56 Speaker_00
And then the second and related one I had is if you love bookstores,

00:49:01 Speaker_00
We've talked in the past about Barnes & Noble and its revitalization, but I gotta tell you, I went to the new flagship McNally Jackson store in Midtown Manhattan, and man, is that a beautiful bookstore.

00:49:13 Speaker_03
Oh, really?

00:49:13 Speaker_00
Yeah, I haven't been. The kinds of bookstores that exist, frankly, in the UK, in Japan, in India, there are some beautiful bookstores in those countries, at least that I know. I haven't walked into a US bookstore and felt that sense of wonder and awe

00:49:28 Speaker_00
The way there are books everywhere, but they're organized really well. The way that the employees are enthusiastic and people who you want to talk to. And it's operating at scale. It's not like some nichey little location. This is like a big footprint.

00:49:43 Speaker_00
It was just so wonderful to see someone do retail of books and to do this kind of design retail so well. So my recommendations are McNally Jackson and MoMA Design Stores for shopping.

00:49:56 Speaker_00
I know that's not that useful because you're probably already done with all your shopping, but maybe after Christmas sales, you should go and figure those two out. Wonderful. And what do you have, Felix?

00:50:05 Speaker_03
I wanted to recommend a YouTube video by Andrej Karpathy. He's at OpenAI. And he has this roughly one hour long lecture on large language models. I think it's called Intro to Large Language Models. And it's the best thing I've seen so far.

00:50:26 Speaker_03
In part, it's good not only because you can tell, oh, here is someone who has actually looked under the hood of large language models and understands how they're constructed and where they come from, but also it's just technical enough

00:50:41 Speaker_03
that you can get an intuitive sense of what's involved, what the issues are with some of these models, how they actually work. Like when we say, oh, people are working on large language models. What does this really mean?

00:50:56 Speaker_03
And interestingly, he uses one of Meta's models. And the reason is that Meta, unlike almost everyone else, has put theirs in the public domain.

00:51:08 Speaker_03
So we actually know the code, we know how it works, and we can talk a little bit about some of the things that are easy to understand, and then some of the puzzles also.

00:51:17 Speaker_03
So why is it that you type into a large language model the same query twice, and the answer is not the same? How can that be?

00:51:27 Speaker_03
And so if you're interested in a little more than just knowing roughly, it spits out predictions about what world is likely going to follow another world, his lecture is really quite nice.

00:51:40 Speaker_00
It's such a great recommendation because we need explicators at this time. We need people who can explain things deeply and profoundly. My version of that is the substack by Timothy Lee, who also does, I think, a great job explaining AI.

00:51:54 Speaker_00
But it's the same principle. I look forward to this video. That sounds like a great pick.

00:51:57 Speaker_03
And this is it for tonight. Thank you everyone for listening. This was After Hours from the TEDxAudio Collective.