Season 2 - Episode 02

https://embed.acast.com/64100857ec4117001165ea90/648c1bd6f0f1d4001145d6f9

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Episode co-sponsors: dYdX - https://dydx.exchange/r/VYTGEKOW, The most powerful open trading platform for crypto assets and derivatives, and Truflation at https://truflation.com.

Stefan and Omar talk about an article that deals with a new type of inflation, greedflation.

Article:

https://www.noahpinion.blog/p/price-controls-too-early-for-a-victory

Follow Stefan on Twitter: https://twitter.com/srust99

Follow Omar on Twitter: https://twitter.com/0xomaryehia

Transcript (AI Generated):

Stefan Rust (00:01.912) Hey everybody back again, season two, episode two, huh? Two and two. And this time we're gonna go deep on a specific topic again. So we started this for season two to go deeper and get specialized around a core topic. And today's topic is really something that Omar shared and I thought was super interesting given where we're at now in terms of.

right after the inflation numbers announcements from Jerome Powell, FOMC meeting from Jerome Powell, sorry, and the BLS inflation numbers in the US, how inflation is slowly coming down, they seem to have a grip on it. And so one of the big things that Omar shared was, yeah, the thing price controls too early for a victory lap by Noah Smith. So greed, inflation, here we go.

So I thought, yeah, no, I just thought it was really interesting, right? How they sort of come out and sort of provide insights in terms of, oh, look, we can actually control supply. We can actually manage pricing and cap pricing, as you would experience as if you went to a China or a communist country and thereby,

Omar (00:56.785) So go ahead.

Stefan Rust (01:23.388) sort of squashing profits, controlling profits and controlling price increases and inflation. And it turns out that actually that's not what's actually happening. What's actually happening is the taxpayer continues to pay the original fee through subsidies that's being paid through your tax payments. And that's then used as a check to subsidize your energy costs.

Omar (01:49.426) In this instance, Stefan is referring to German energy costs. He's referring to a very specific instance, which we won't refer to everything specifically here. You can go read the article, which we'll post in the show notes. So we'll assume that you have read it and we'll discuss it in some detail. The author basically makes the distinction between all of these three things that you mentioned. Controlling supply, that means something. It does not mean price control. Controlling supply just means controlling supply.

Controlling profits also means something else. And then controlling the actual price, that is what price control is. It's sort of, it's self-evident. When I say price control, it means you impose limitations on how the price can change. If you like in the United States where facing higher prices of barrels of oil, you as the government of the United States decide, again, using taxpayers' money, because the government of the United States

own any private enterprise for all intents and purposes, the majority of its revenue comes from taxes. If you decide to go into your strategic reserve in the United States and in most countries around the world, the government has many physical locations that it just stores oil for, it's called strategic reserve, again self-evident. If you decide to go in and start selling these at a discount, this is not what price controls are. Okay? This is exactly how the strategic reserve was designed.

Stefan Rust (03:03.522) Oh, yo.

Omar (03:16.658) It was designed that you would use taxpayers money and you would buy the oil cheap and then you would sell it at perhaps a discount or at cost when it is expensive. That is not price control. That is the nature of supply and demand. That's how markets work. That is completely acceptable.

Stefan Rust (03:29.032) What do they call it buffer supply, right? So to build that buffer, right?

Omar (03:34.238) Yeah, but I don't think it needs a special term. Like what happened in the 1970s, I think it was the 70s, when the, either the 70s or the 80s, when the Hunt brothers from the Hunt, from the oil dynasty, when they tried to corner the silver market and silver went to whatever 80 bucks an ounce, what did people do? People started rating their addicts to find their silverware, no seriously, and sell it, right? It was, I mean, your silverware is now worth a material amount. And so people started to sell their silverware.

That is completely acceptable and within the confines of the plan, there are in no ways this price controls. That's one thing. The other consideration, he talks about this idea of subsidies and in the case of the German energy crisis, again, it's in many ways, it's very similar to the strategic reserve because they collect taxes at nominally lower energy levels and then they basically reimburse. I mean, I tax you and I take $10 from you.

and I basically hold it in a box. And when you need those $10 back, I give them back to you, of course, minus fees, minus a lot of fees, but I give some of it back to you. And again, this has nothing to do with price controls. This is just a savings vehicle. The government basically forced you to save for a rainy day when that rainy day came, it gave you the money back in the terms of subsidies. Of course, they didn't give you the whole amount, they gave you some of it. Again, that is not what price controls are. Price controls are exactly what they sound like. You walk into a store and say, how much is a...

there's a bottle of water cost and you say one dollar and you say, okay, if you raise the price above one dollar, you're going to jail. That is what price controls look like. Okay.

Stefan Rust (05:08.024) One thing in the argument, just coming back to the whole supply element in the article, they refer to, or he refers to the G7, the pricing after the G7 agreed to sanction Russian oil. That reduces the amount of supply into the market because Russia can no longer deliver to a lot of the countries that it inherently has been delivering to. Then number two is obviously gas supply can increase into Germany, which happened.

But I didn't understand how by putting sanctions onto Russia and reducing the supply from Russia, how that reduced the influence and the power of OPEC to keep oil prices high. Number one, I'm taking supply out. OPEC said they would reduce supply as well and the prices come down. How has that happened? I didn't understand the reference to that in the article.

Omar (06:03.23) I think you're talking about two different events. I think they didn't happen simultaneously. So basically all he was saying there is that, OPEC has a particular target supply rate and you've messed with that. Yeah, yeah.

Stefan Rust (06:04.92) Okay, yeah.

Okay. And is, and Russia is a part of the OPEC. Is that right? Or not.

Omar (06:19.606) Yes. Yes, yes, yes. Of course.

Stefan Rust (06:22.224) It is. Well.

Yeah, that to me was, I didn't know. So that makes a lot more sense then.

Omar (06:26.404) Um...

When he was referring to the G7 in general, he was contrasting this with what happened after World War II. He was talking about how, or during World War II rather, he was talking about how that is exactly what price controls look like. The United States had, I think it was like the Office of Strategic Prices or Administrative Prices or something like that. It was basically responsible for determining, get this, and I mean some people are still alive from that, that office was responsible.

Stefan Rust (06:51.184) Yeah, exactly. Something like that. Yeah.

Omar (06:59.406) for dictating the price of every single good and service besides agricultural commodities. Can you believe that? Literally, they had thousands of thousands of lists with the prices of stuff, okay? That is what price control looks like.

Stefan Rust (07:03.163) I don't know.

Yeah. Office of price administration, right? It's like, that's what it was. But it's not too dissimilar. Look, I mean, we launched, I, one of my first startups was a, my second startup was a mobile network in China. And China had the, the Chinese planet, the central planning commission, all pricing, um, for energy, for rice, for, um,

Omar (07:17.11) That's right. Yeah.

Stefan Rust (07:41.144) uh, for mobile telecommunications, fixed line communications, all had to be submitted and were banned, you know, were capped at the, uh, by the CPC at the time. And so you couldn't price anything. The maximum price you could charge per minute per phone call roaming, no roaming, nothing was 40, 40 miles, you know, sort of 40 cents, right. And there was like.

in China, that was it, right? That's all we could charge. So no matter how you try to increase prices or add value added services, you know, it's like, it was really, you had to hide it into the value added services, like voicemail and things like that, but nobody used voicemail. And so it was just like, yeah. So it was like all controlled and it was very, yeah, you had to build a business model around that and then ultimately became, came down to volume and adoption.

Omar (08:31.15) That's right. Well, and he, the article mentions the best example of price controls in modern history, which is completely disastrous, that of Venezuela. In Venezuela, they literally enshrined in law, they made it illegal for anyone to raise prices of anything. Okay. So of course, what did that lead to? Like, you know, supply and demand 101, econ 101. What happens when you impose a price that's below the market clearing price? You have a shortage. And so what did people do?

Stefan Rust (08:42.205) Yeah.

Omar (09:01.598) from apples to bananas to barrels of oil to bags to whatever exactly they hoarded the hell out of the stuff. And what did that do? That drove all of the producers, that drove them into the red and all of a sudden they stopped. So that amplified the shortage because now you no longer, it's no longer even profitable. So I'm having, stuff is flying off the shelf. I'm selling them at a loss. So I'd rather just stop selling them if I'm selling them at a loss.

And what did that mean? That means that the prices of the stuff that's circulating in the secondary market is extremely high because you don't have a primary market to issue any supply. So not only did it not work, it made it worse.

Stefan Rust (09:35.824) Yep, exactly. Exactly.

And so you

Yeah. So you're creating a bubble economy. You're creating an artificial economy that anytime there's a leak in that bubble, things will come in, things will come out, there'll be an immense trade to take advantage of that arbitrage. And, and, and to me, yeah, it just, yeah, it just, it's, you can just tell that, you know, it's, it's written up by bureaucrats that actually

You know, are not really taking into account the basic needs and, and nature of, of humans, right. And the competitive nature of society.

Omar (10:20.694) basic incentives. Also apparently they're just not very literate because they cite articles, a research study that was done by the Dallas Fed, whom by the way Tracy, who used to be on the board of the Dallas Fed that we had a separate conversation with, he was part of that. They published a study showing that the

Stefan Rust (10:28.38) Yep. Tracy's a part of it.

Omar (10:43.126) or arguing rather that there is no empirical evidence that any of the Inflation was actually caused by some sort of price gouging. In fact, it was the opposite So here's how price gouging works if anybody doesn't know and again, it's econ 101 Let's say we have three stores They both that all three of them sell the same thing. They all sell apples Okay for some reason and they're completely commoditized Apple the apples are identical for some reason for brand value for you know Advertising whatever

some of them are more popular than the other. The first store only sells X amount, the second store sells two X the amount, the third sells three X the amount, or at least the demand for it is much higher. What happens when demand overall increases? Well, you should expect it to be weighted towards the stores that have higher demand. So the stores that do have higher demand should expect a proportionately increase in prices, because that's what you're saying that people are doing. That's what price gouging is.

you had five people show up your door and ask for your apples, now you have 10 people show up to your door. So you'd expect to increase the prices. This is not what they found. They found that basically all three stores raised the same price by exactly the same amount. And so it's like, okay, so they were not price gouging. So what were they doing? Well, it turns out they saw that the price of everything was going up, including their costs of goods and services. So what do they do in anticipation of further increases in their costs? They just increase the aggregate level of price? Of course, of course that's how it works, right?

Omar (12:13.975) If you have costs that are completely external to you, they're exogenous, you have no control over and they've doubled, well, for all intents and purposes, for this to be business as usual, you're going to have to double the price to maintain a profit margin, the same profit margin that you had before. First of all, there's a lot that we need to say here. Producers don't owe anybody anything. If you're not taking government subsidies.

And if you're a completely private company, you don't owe anybody anything. You can charge whatever profit margin that you that you or whatever price, at least whatever profit margin you want. If people don't want it, well, they don't want it. You don't owe them anything. And so and most governments around the world, this is unacceptable to them because they don't want this idea of people starving, basically. They don't want food producers saying, you know, we're going to double our prices overnight. You're going to have to figure it out.

Stefan Rust (12:47.067) it can accept.

Omar (13:09.002) That's just a bad, from an optics perspective, it's terrible. And so they tend to have a very heavy hand on absolute consumer necessities. But things like cars, nobody's going to Ferrari and saying, you know, you're increasing the price of your car. I mean, actually, I wasn't even thinking of this, but now that we mention it. Ferraris, if you ever tried to buy one, it is an extraordinarily complicated process. You don't just walk into a store and buy a Ferrari. Anyone who...

tried I can't suspect as well as well as crypto you never know maybe a lot of people to never know yeah there's that you can't walk into a store

Stefan Rust (13:40.404) You never know, right? No, they all go to buy Lamborghinis, they don't buy Ferraris anymore.

Omar (13:46.13) Yeah, yeah, Lambo you can pick up, you can pick up from any car lot. They sell like hotcakes. Ferrari's turns out it's not like that. You need the due diligence that they do on the purchaser of the Ferrari is so much higher than you'd think. I mean, you're literally showing up to their door trying to give them money and they will refuse to take it from you. Yes, there's a queue. There's a queue because they want to maintain a certain brand and they want to maintain a certain clientele.

Stefan Rust (14:09.728) Yeah? Why is that?

Omar (14:15.454) And so they won't sell a Ferrari to you. If you just had a bag of cash and you walked into a Ferrari dealer and asked for a car, very likely, very likely they won't give it to you. Yeah. And you'll be put on a queue. And there's a reason. They're like the reason why Ferrari, I mean, first of all, people aren't buying Ferraris so that they can, you know, they can extract some sort of economic value from it in the sense that, oh, I can get to work faster or, oh, I can do, that's not what you buy Ferraris, right? Ferrari is, for all intents and purposes, a complete luxury good, okay?

Stefan Rust (14:21.492) and they wouldn't give it to you.

Omar (14:44.866) What do our luxury goods synonymous with? They're synonymous with brand value, a certain type of clientele. And so they know that if they just sell a Ferrari to every Tom Dickens area that shows up with a million dollars in cash, they dilute that brand. And at some point, they will not be able to sell it for a million dollars because nobody will want them. And so they want to maintain a very specific brand image. Nobody goes after Ferrari and says, no, you can't do that. Or poor you, you can't buy a Ferrari. What happened to the...

clientele that now you know can't get I have a million dollars on to go by far they won't let me why isn't the government protecting me of course it's a complete facetious argument whose government's gonna be like well you don't need a Ferrari well who says who says who what if it's my life and big what if all I wanted from life is to buy a bloody Ferrari I mean says who right so it's just it's sort of nonsensical this idea of dictating the kind of profit margin that people can get

Stefan Rust (15:38.484) But it comes back to sort of one of the other arguments in, I mean, when reading the article that comes to mind and when you're talking now is, on the one hand, it's sort of a bit of a monopoly situation, right? Monopoly oligopoly in markets, right? And I think one of the big threats, at least if you look at what's happened across most industries, there's been a consolidation in the automotive industry. So you've only got three or four car makers. In the food industry.

four or five brands that really own maybe 80% of all the consumer brands that you then purchase. And if you look at then the tech industry, you've got the big tech companies, I would argue they're very competitive against each other. But ultimately, the idea is that then these entities, when they see an opportunity, will start

raising their prices immediately as high as they can. And in a way, drug companies, we have the same, right? I mean, how many drug companies are there around the world? Maybe, I don't know, the big companies that own maybe 80% of the drugs that are consumed on a day-to-day basis.

Omar (16:49.658) Let's actually leave drugs out of it just for this particular example, only because it is so heavily intertwined with government regulation, the FDA and mandates and things like that, that it's a whole mess. And insurance schemes, it's a whole mess. I'm talking about pricing in pharma. So let's keep it out, even though whatever conclusion that you're going to reach is also true. But continue with the telecom industry, for example.

Stefan Rust (16:54.116) Yep. Okay.

Yep. Yeah.

Stefan Rust (17:14.896) Yeah, so I mean, telecom is also highly regulated, right? Because you're using government spectrum, you have to license the spectrum. It's not in perpetuity, but...

Omar (17:21.546) Yeah, but this is sort of, you know, you buy it, whatever. Let's just say we're talking about some sort of oligopoly. Okay. Continue with your argument.

Stefan Rust (17:27.256) Exactly. So I'm buying, I mean, even Apple is a monopoly. It's like, you know, from, you know, from nowhere they came and their whole ambition was to own 1% of market share and now they have, I don't know how much, what the Apple market share is of mobile phones, but it's got to be.

Omar (17:40.962) So hold on. So how do we define a monopoly? Is it by market share?

Stefan Rust (17:45.148) That's, I mean, there is, there is a definition in terms of market share and in terms of, of revenue, in terms of revenue per industry vertical. That's how I think the EU, I remember studying in economics, there was a clear definition of what is a monopoly.

Omar (18:02.858) There is, and it turns out a big part of that definition is the ability to price other competitors out. That's the idea of monopolistic practice, right? The Sherman antitrust law in the United States was tailor crafted to prevent John Rockefeller in Standard Oil from...

Stefan Rust (18:10.428) actually is the abuse, the abuse of your monopoly situation.

Omar (18:27.982) pricing out competitors. So not only do they not want you to be a monopoly, they don't want you to engage in monopolistic practices. The problem is, you have to now, this is the great problem, you now have to prove men's rare. You have to prove the guilty mind. You have to prove that John Rockefeller was really trying to price people out versus his cost of goods and services just went up or the price of oil just went up.

Stefan Rust (18:37.104) behavior exactly and so yeah and then talking about my life yeah

Omar (18:57.622) whatever. So that's actually at the crux of it, is where do you draw the line? And the problem is you can't draw the line because there is no such thing as there is a cap on what you can take home, right? I think it's Stephen Schwarzman from Blackstone. I think it's Blackstone, yes. He takes, last year he took home in dividends, a billion dollars in dividends. Yes?

Stefan Rust (19:20.489) Yeah, I know.

Yeah, yeah. Yeah, yeah. That was huge. It was huge. It was actually, I think it was more than a billion. I think it was like, yeah, it was huge.

Omar (19:28.543) I don't... Where do we...

I think it was around that number, it was like a billion dollars. Okay, so of course that's the problem in general with trying to draw the line. You now have to go into the mind of the producer and decide that they were happy enough with their profits and they wanted to be greedy and so they wanted to price out their competitors. It's really a philosophical problem. It's not a mechanical problem. Because from a...

price, I mean, a monopoly, all it affords to do, it basically controlled the price with impunity, okay? This is what microeconomics theory tells you, that a monopoly basically does whatever it wants, but the prices people will sort of buy it anyway. And the ability to use that to price out their competitors is what defines a monopoly. And when you have an oligopoly, there's an incentive to cheat, there's an incentive to collude rather.

Stefan Rust (20:21.032) competitors. And then how

Omar (20:29.894) in order to maintain an elevated price level.

Stefan Rust (20:32.456) Yeah. Anyway, I mean, to me it was, you know, I mean, yeah. And ultimately when the markets are in a certain flux or a certain situation and your product is in super high demand or the type of products that you produce can fulfill a huge market need is that you then push up the price significantly. And you've seen Biden complain about that all the time. Oh, the oil manufacturers, they're charging more at the pump, right?

They should, and the gas station should keep the prices low, right? So asking them to actually keep their prices low because he felt that they were abusing their position in the market. But, you know, just talking about monopolies, and I remember when Microsoft and Bill Gates had to go in front of hearings in the U S and, you know, actually, he actually cried on stage because all he wanted to do was compete and win.

Right. And he used all the capabilities within Microsoft to win. It was all about winning and that was not what, um, governments wanted. And they tried to, and they abused, they really took him apart by bundling services. Right. So with the windows OS, you bundled your internet Explorer, you bundled your windows media player, right. And so killed pretty much real video, uh, Mozilla browser. I mean, and it wasn't Mozilla at the time. It was called Firefox.

Omar (21:58.678) Firefox, well, it became Mozilla Firefox. Yeah.

Stefan Rust (21:59.04) Um, was it, no, it was, no, it was Mozilla and then it became Firefox, right? Um, yeah. And so literally took all the market share away from those brands, uh, by bundling it. And that, that abuse of bundling, you can only, you know, you're not allowed to preload as a, as a PC manufacturer, you're not allowed to preload these apps. Right. And, um, that's sort of how they got torn apart. And it's interesting that Microsoft is back in the monopoly situation with. Yeah, exactly. Right. So.

Omar (22:23.885) the bundling business.

Stefan Rust (22:27.016) They're now so big again. Yes, suing them.

Omar (22:28.327) Speaking of, the FTC is now going after them for trying to block the Activision acquisition.

Stefan Rust (22:36.849) And if you think about it, the ATVR Activision price is $50. The premium on a cash basis that Microsoft wants to pay is $95. It's enormous. I mean, the wealth alone, just the risk factor, you can double your money if the acquisition happens. I mean, it's like...

Omar (22:49.528) Enormous.

Stefan Rust (23:00.128) And then the FTC is coming in, oh, stop it, stop it, no more, we don't want any more innovation in a market where hyper competitive from decentralized nature, the metaverse players, et cetera, et cetera. Right. So it's like interesting how, again, a whole different sector and that same company again is being blocked from enough monopolistic behavior in an industry that is actually super competitive.

Omar (23:23.246) Hyper, hyper competitive. Okay, I mean, if you don't believe me, look at what happened to Intel. Intel was literally, I mean, the giant, like I think Intel and Nokia have to be, and BlackBerry maybe for a couple of years, have to be the best examples of people pointing to it, saying, oh, and General Electric, General Electric as well. So I mean, we have, there's a household of, like,

Stefan Rust (23:30.044) Yes, exactly.

Yeah. The best examples of... No, yeah.

Stefan Rust (23:44.244) companies.

Omar (23:51.326) an entire zoo of household American names that people, oh, it's a monopoly. The government has to step in and guess what happened? Pan Am, CWA, yep. And the government didn't need to be involved. The market took care of it. Right. So let's just do a like a good banking experiment here. Imagine there's no influence of government at all. Imagine I just have producers and consumers. OK, when I say there should be price controls as

Stefan Rust (23:56.66) Pan Am airline, TWA.

Omar (24:20.314) there is a finite profit margin that the producer can take above which it is no longer fair or no longer just. What I'm saying is there is a maximum utility that a producer can get. The consumer obviously has unlimited utility. Why? Because of course the producer can just sell the item at zero cost and so assuming there's an infinite supply of them then the user in principle has an infinite, the consumer has an infinite utility.

That asymmetry itself, it doesn't result from anything besides the fact that there are more consumers than there are producers. So it really brings you back the argument of it's just there's a lot of people who want something and there's a small amount of people who want the opposite and the large amount of people, because they form the constituency, because they are the electorate, they somehow are favored in that regard. But producers are people too. They have kids to feed too.

Stefan Rust (25:16.624) Yeah, yeah, totally, totally. But I think there's, there's another argument there. I think, you know, there's also a whole area today where I think people don't even know what they want tomorrow.

Omar (25:19.616) And so.

Of course.

Stefan Rust (25:31.976) So, you know, like I look at, I came up through the mobile era, right? I mean, the amount of criticism we got from mobile phones, like, what do you need a mobile phone for? It's so rude walking around with a mobile phone, right? You don't need that. I have a calendar, I have a diary and I have my fixed phone there. I do not need one of these phones. Right. And today you couldn't imagine living without it. So that flexibility and the evolution that happened in mobile just accelerated because of the competition.

of the innovation that took place in a whole new mobility environment that led to companies like Uber growing out of it, right? And look at the land phones. I have no landline in my whole office other than the internet, right? So how that whole thing has evolved from fixed a phone line and dial the number or even has gone away to, you know, it's like amazing that and that all priced itself in

per unit because of that has come down significantly. And technology has gone through other than certain brands that have managed to retain and hold or increase pricing. Technology historically has just driven down unit costs of development, increased productivity significantly, et cetera, right? And if it weren't for that drive, that innovation, that continuous movement forward, I mean, inflation would be

astronomical, right?

Omar (26:59.786) Well, not only would you have inflation, you would just not have a new generation of these things. These things would stall. And there are plenty of examples of things that have just stalled, haven't really gone anywhere because the government decided to intervene and say something about the nature of the market. Things just die.

Stefan Rust (27:05.648) Yeah, that's right.

Yeah.

Yeah. I mean, but, but that also, I think in the article was really interesting is the shift away from goods to services, right? Inflation is no longer in the actual goods. And we're seeing that at truflation.com as well, where we actually see in good, the services elements in all of the items and the categories that we have is what's holding and pushing the prices upwards, right? It's the head count. It's the cost. It's the wraparound. It's the, you know, the layer on top, right?

is super cheap, but if you package the data properly, if you integrate it with AI, all of a sudden it becomes super valuable, right?

Omar (27:57.21) Because services are, it's really a transparency problem and not that there's somebody hiding this, but rather it's very difficult to assign the price of a service if you move away from the labor theory of value kind of pricing, which is like, oh, if I'm giving you a haircut,

the alternative, the opportunity cost would be me moving rocks in a quarry and that I can earn $5 an hour moving rocks in a quarry and therefore I'm not doing that and so I'm going to charge you marginally higher. That's not how services are priced. When you call your lawyer to get you out of trouble and they're charging you $1,000 an hour, there's no other environment in which they can be earning $1,000 an hour, right? This is not an opportunity costing, right? So we're not even close. Okay, most of these are sort of... So the pricing of these things, of course there's a reason for it.

It comes from the fact that they work at a partnership and so on and so forth. And there are costs associated with that. But the pricing of service, they are. And that's exactly, that's exactly the problem. Whereas if I'm talking about the cost of goods, it's actually relatively transparent to determine the cost to produce it. And then it's understood what the sort of premium associated with that is. And it's rarely, you know, many multiples, many, many multiples of the cost of production, as you would expect from a service relative to, you know, the opportunity cost of

Stefan Rust (28:54.644) But those are just layers, right? Those are layers in the decision making. Yeah. Sorry.

Omar (29:18.698) you know, working at a rock quarry kind of thing. There has to be like this reference.

Stefan Rust (29:23.632) And that's what to me there was in big companies, they have these divisions, right? They have the sourcing department or the pricing department or the purchasing departments, right? As they call them. And these are people that try to break down each of the elements from a supplier to then be able to comparatively compare the price of one hour to one hour. Right. And, and it always breaks down in the services. Right. So.

And the value of that service, of the end product, right? You can't determine the value based on the end product. If I deliver you a white paper or a report or a presentation, it's going to be very different to if, if my son delivers you a, maybe his is better, but, but yeah, it'll be very different, the outcome and the pricing, you can't put that on a paper before I deliver it to you to compare the pricing.

And you as the purchaser, I want Stefan's opinion. No, no, I don't want Stefan. I want Neo's opinion. Neo's got much better idea. He's, he's got the wacky ideas and his presentation are super shit. They're just written in words, but the content and the mindset and the creativity is how, how do you value that?

Omar (30:35.458) That's a beautiful exaggeration and it's exactly why we let market forces determine prices. We let bidders and askers, people that bid and people that have a bidding price and asking price, come in and meet. And that's it. And they assess it at the margin. That is the beauty of marginal pricing. They come in. It doesn't matter what the global price is. I need this thing and I'm willing to pay up to this much for it, above which it's not bringing me extra value.

Stefan Rust (30:49.205) Yeah. I don't...

Yeah.

Stefan Rust (30:58.94) Yeah, exactly.

Omar (31:06.126) and you find a supplier who's willing to sell you that thing. It's the beauty of marginal pricing.

Stefan Rust (31:11.76) I mean, I guess, you know, if I'm playing devil's advocate and I'm speaking on behalf of a big company, I want to avoid the back-handers or I want to avoid, you know, sort of, um, uh, you know, you're, you're buying Neo service and Neo is giving you a kickback or something like that. So I do get the reason why you've set up sort of these purchasing departments to try and have some sort of consistency and bandwidths across your suppliers.

But then on the flip side, to your point, you know, you get sub par quality in some cases, right? You're not getting the end result. I remember just as you bring that up now, I remember I was so envious at the time. You know, I had a friend who was in the ad agency. He was a big, really creative mind and he would just get paid 20,000 pounds a month for just having lunch once a month with his client. That's all, but the ideas that he would exchange at that time.

must have been so valuable that, you know, I just can't see. Yeah.

Omar (32:11.144) And yet, if he went to the person sitting at the table next to them and offered them the same idea, the guy wouldn't even buy him a drink.

Stefan Rust (32:15.432) Yeah.

No, exactly, exactly. Yeah, totally.

Omar (32:22.83) Because at the margin, it was not worth anything to that guy, but it was certainly worth a lot more to their client. This is the simple water in the desert pricing theory, right? I mean, here's a bottle of water. It only costs a dollar if you go get it at your local shops. If you're stuck in the desert and you don't have any water, well, guess what? This now costs 100 bucks. In fact, it might cost a lot more. So it's, again, the ability to...

Stefan Rust (32:45.108) Yeah.

Omar (32:50.702) price at the margin, but then have a lot of people do it is how you get deeply liquid markets. That's how you have prices. When people talk about the idea of price discovery and the importance of liquidity for price discovery, that is exactly what they're referring to. They want to make sure that there's not, you know, Stefan in the desert and then Omar is in this city and then some person's on the moon. And so if you try and aggregate what the price of water is for the economic planning problem, if you're trying to produce water

You'd be like, well, these are wildly disparate values. And so that's why having a lot of buyers and sellers at any given point determines the marginal price and fundamentally solves the economic planning problem. Or at least contributes to the solution of the problem. That is how markets work. And it's strange that we have to describe this from first principles. But we've basically arrived at why people price things at the margin as opposed to on an aggregate level.

Stefan Rust (33:47.036) Yeah. And that's why it's really important for startups to really just hone in on a niche, identify the core need of that user base, and then build and identify the pricing for that user base. Cause then you can scale. It's the hardest thing I think in, in startup or, or for any new product is to find the price and what's the market fit and the pricing fit is for that.

Omar (34:14.442) more importantly is to do enough of these examinations in order to accurately assess what the true market size is. Your friend, I assure you, he could not scale his business. It's not as if, oh, I had lunch once a month with this client, I'm making 20,000 pounds a month. Oh, that's great. I can do 100 lunches a month. That's not how that works because there's going to be a long tail of customers that won't pay you anything at all. That is the key insight. So...

Stefan Rust (34:37.212) Yeah, that's all right. Exactly, that's good. Yep, yep, yep.

Omar (34:43.334) In fact, I would say the opposite, be weary of the initial price signals that you get as a startup founder because they might be way too high and they also might be way too low. This is the same in venture capital markets. If you think about early stage startups as just a product or to good that venture capitalists compete over, in the age of abundant liquidity and low cost of capital, this seems like it's very coveted.

So people are willing to pay lots of money for it. You say, okay, I'm going to quit my job and I'm going to do a startup. And the Fed comes in and raises the cost of capital. And you realize that appetite's not there anymore. So you have to really understand what the core value of the enterprise that you're trying to build is and is going to be. And then you can have a reasonable discussion about what the valuation of the enterprise is.

Stefan Rust (35:35.124) Yeah. Um, I think the scaling is, is a big, you know, sort of, yeah. How do you scale services? And if we're seeing, uh, an increase inflation around services, does that mean we're going to have a lot more businesses just wrap their products into service type models so that I can then start having a premium and I'll have, because I can charge a premium associated with that service.

my market becomes a lot smaller. That means that there has to be hundreds of more small businesses to meet the market requirements around a specific offering.

Omar (36:13.314) But again, we've seen that time and time again, specifically after the dot-com bubble. What did we get from, what is the solution to bundle the high prices? Startups that came in to unbundle it.

Stefan Rust (36:25.792) unbundling. It's the bundling unbundled story, right? Yeah, it's the hand harmonica, right? It's like I'm con- the accordion, sorry.

Omar (36:29.695) It's the circle of life.

Exactly. They realize, I mean, you come here, you find an entrepreneur that works at, you know, company X, they're bundling servers, they're selling it this much. They're like, wait, I know that it doesn't cost as much to produce. I can just go and start a company that sells this specific tar. I mean, you want to hear a crazy, crazy example. It's the, I think it was Adenza, the M&A that was just announced. Yeah, Adenza M&A by the Nasdaq. The Nasdaq?

purchased for $10 billion, 50-50 in cash and equity from Tomo Bravo, that they purchased an accounting and compliance company. It turns out Nasdaq, one of the biggest exchanges in the world, and they're responsible for facilitating billions of dollars of value being transacted all the time.

of their revenue was coming from their accounting services and compliance and third party vendor software. 30% was only coming from trading. And so what they realize is that like the NASDAQ is not really an exchange. It's actually just a third party software vendor. If you just look at it in terms of what defines a company, the majority of stuff that makes this money, well, it turns out it's not trading.

Stefan Rust (38:02.052) Interesting. What I mean, what would you so you look at NASDAQ, right? NASDAQ had a big, has a, I mean, it's the technology platform for trading, right? But not anymore is what you're saying. Yeah, exactly. Right. And the funny thing is, I just had a meeting yesterday, I was in the building. And guess who's at the building is Refinitiv, right? So Refinitiv, of course, I'm interested. Oh,

Omar (38:13.546) Not anymore. No.

Stefan Rust (38:25.876) And I thought they were always a part of Reuters, right? But no, no longer, right? They got spun off by Reuters. They were an independent entity and the London stock exchange comes in and buys them. So now the LSE owns Refinitiv. And I look at CME, they provide all the news with all the commodity pricing and commodity information. And I look at NASDAQ with Adenza now, they're a financial system company, whatever that means. I don't know what that means, but you know, yeah.

Omar (38:55.254) Picks and shovels, it's picks and shovels. They realized instead of selling people gold, they're just gonna sell picks and shovels.

But it was astonishing to me. I mean, if you say the word NASDAQ, it's synonymous with trading. But it's pound for pound, not a trading, like it is not, like if they cease trading tomorrow, they would very likely still be a profitable company.

Stefan Rust (39:06.023) Yeah.

Stefan Rust (39:18.8) And how do these companies not have any monopolistic situations or are not confronted by the FTC for monopolistic positioning in the market? I mean, how many different trading platforms are there? I mean, the LSE, there's CME, NASDAQ, S&P, and it's like, that's it, right?

Omar (39:33.181) There's plenty.

There were hundreds, but then during the 70s and the 80s and the different crashes, you had a lot of aggregation and consolidation. Same with bank. Before the 08 banking crisis, you had hundreds of different banks. Then you basically came out with the big four or the big five.

Stefan Rust (39:56.656) Yeah. And so the consolidation, right. And then we come. Yeah.

Omar (39:58.383) And then in fact, they get the opposite. They become systemically important. It's the opposite.

Stefan Rust (40:05.236) But yeah, how systemically important is Microsoft to the US economy? Right? I mean, I would say pretty, I mean, in any economy, I mean, look at all the cloud, all the enterprise businesses, they're all glued into Microsoft, their Azure platform. And so them shifting into the gaming industry, I mean, is that really, I guess they do own Minecraft, they do own, you know, sort of a whole bunch of other properties underneath that.

Stefan Rust (40:35.507) It's an interesting evolution that's taking place on the planet right now.

Omar (40:42.216) As always, I think we should leave it here. This is going to be very hard for me, but I will leave it at... I'm not saying price controls don't work, but there is clearly no empirical evidence to suggest that they do. And that's basically the takeaway. I won't go as far as saying they absolutely don't work.

Stefan Rust (41:00.124) Yep.

Omar (41:05.75) But I will at least leave it at they certainly there's no evidence that they do work. The idea that there's a central planning, all knowing entity that has prescience and has the ability to predict the future with infinite precision and decide the direct, you know, who would have predicted that the NASDAQ would no longer be a trading company? Who would have predicted that Amazon would not be selling books anymore? Who could have predicted, you know, that Microsoft is basically a big AI company now.

Stefan Rust (41:09.876) But I love... Yep.

And to your point right at the beginning, right? I mean, you know, when everybody thought Intel was the Kahuna and nobody could ever touch Intel today, AMD's number, no, not even AMD, AMD's not even here anymore. Right? It's like, we've got a whole new company. It's now, I mean, AMD, the biggest competitor at the time is gone and it's Nvidia now. Right? I mean, it's like, um, you know, and by the way, if we think, yeah, exactly. Exactly.

Omar (41:44.658) Yes, Nvidia.

Dude, Nvidia just two years ago was a dog, right? Nvidia was an absolute dog.

Stefan Rust (42:01.316) And thanks to Bitcoin, actually, when it started, they're building out these huge processing capabilities. Yeah. But, but then also, I mean, don't think Amazon, Amazon's got, it's got people chasing after, I mean, look at Shopify, Shopify's come out, they started with unbundling and aggregating the unbundled, right? And so.

Omar (42:05.662) Oh, Ethereum then. Then it was Ethereum after GPU mining. Yeah. So...

Aggregating the unbundled, it just doesn't end. It does not end.

Stefan Rust (42:27.056) But I love your point, right? And I always, I think this is the best argument ever. And it comes down to incentives. It's just actually, it's as simple as that. How do we align incentives for what the objective is? Where is the incentive around managing and controlling pricing? How do I incentivize that? And that's by incentivizing alternative offerings, right?

Omar (42:35.214) as per usual.

Stefan Rust (42:54.52) If oil prices are high, how do I incentivize and give credit to everybody who to consume gas or whatever the other elements are? And it's not by, yeah, anyway. So I think that's the element. And you're seeing that in labor force, the acquisition of talent, you know, why is everybody going to UAE? Why is everybody going to Dubai? Right. You know, it's like, yeah, I mean, there are reasons why Lisbon was extremely popular. There are reasons why Dublin.

is a famous corporate hub, right? I mean, et cetera, et cetera. Yeah.

Omar (43:27.15) For Apple, yeah.

Stefan Rust (43:31.996) Um, yeah, exciting topic. Um, and we'll have more in store for you on a specific area with some interesting guests coming in the next couple of weeks. And we'll share with you what we're talking about next week in episode three. You'll have to stay tuned and find out. Thank you. Always great. And we now need to make the incentive work for the uncut show.

Omar (43:52.206) Show me the incentive and I'll show you the outcome. See you later. I've got a few aces up my sleeve. See you later.

Stefan Rust (44:06.279) Adios.