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When did they rebrand common sense as cynicism, We are in the middle of the biggest transformation in human society ever.
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We are going to face problems, challenges, that we've never faced before I think the really interesting part of that fraud is how he was able to co-opt media and, basically lean, into the whole fraud, both before and after the fraud broke.
0:26
The traditional legacy media has lost every shred of trust I think the advice now is get into AI compliance, like, That, that is the job of the future.
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I worry that our government and our regulators are so far behind the curve in terms of what's actually going on.
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You can't take a single media source and look at it as a view of truth.
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If you're gonna get involved with a hype market like crypto, you have to look or is this actually real? Nullius in verba. Right?
0:58
Take no one's word for it. Well, hello everybody.
1:07
It's Jim O'Shaughnessy with yet another Infinite Loops.
1:07
Today, I have on a very...
1:16
I almost wanted to make him a mystery guest, but he's not going to be a mystery guest.
1:21
My guest today is Michael Breitenbach, great name, Bach being one of my favorite composers, who is an investment professional, used to be with the Bank of America, quant genius, which is why I like to talk to him.
1:36
We are actually talking about maybe collaborating on some stuff.
1:36
And by the way, he has a very well known par...
1:44
Do you call it a parody account on Twitter? Michael?
1:53
Michael Breitenbach: I don't even know what it is.
1:53
It just started off as a place for me to vent and it kind of turned at this giant thing and now I'm, weirdly, very famous in very small sections of the internet. I know.
2:01
Jim O’Shaughnessy: I love it.
2:06
We're going to get into whether you could steel man a case for getting rid of anon accounts.
2:13
But for now, and guys, gals, everyone listening, Michael is not Ramp Capital. He's been on my podcast.
2:23
As a matter of fact, Ramp was on the first Infinite Loops and one of the inspirations for starting it.
2:28
Michael is not Ramp but if you are in our little sector of fin twit, you know who Michael is and maybe we can all play a game and figure it out. Michael, welcome.
2:42
We have so much to talk about because you and I talk quite a bit, just privately, and we have pretty simpatico opinions on a lot of stuff going on.
2:49
But let's start with kind of the fucking crazy shit that's going on in traditional markets right now.
2:57
Everybody, of course, is going to immediately think FTX, and that's not, in my opinion, a traditional market.
3:04
But we were chatting before we started recording and there's a lot of weird stuff going on in ‘40 Act markets.
3:17
Please give us your take.
3:17
Michael Breitenbach: Yeah.
3:18
I think it's kind of interesting.
3:18
I think, particularly with FTX, the most interesting aspect of that fraud isn't even the Crypto angle.
3:25
I think the really interesting part of that fraud is how he was able to co-opt media, and basically PR into the lead in to the whole fraud, both before and after the fraud broke.
3:40
And also, complete elements of...
3:47
I guess you could call it regulatory capture, but almost kind of both ways.
3:47
I'm worried that some people are learning the wrong lessons from the FTX Ponzi or whatever you want to call it.
4:02
Maybe I'll be a little bit diplomatic because it's alleged at this point, but we all know.
4:08
Jim O’Shaughnessy: Allegedly.
4:08
Until he took to Twitter to make it not allegedly, where he called, "Oh, woke people? They're idiots. This is all a grift."
4:20
Michael Breitenbach: Yeah.
4:21
Jim O’Shaughnessy: But my question that I'd love your opinion on is, I've talked to a lot of people about this and it seems it's not evenly split. I want to get your take.
4:29
A lot of the people I talk to think that this is just a classic grifter tale.
4:36
Michael Breitenbach: Yes.
4:37
Jim O’Shaughnessy: Somebody who just happened to be pretty like Bernie Madoff 2.
4:38
0, I guess, because of the way he was able to capture the imagination of a lot of people through media, through all of that, but also fool a lot of super sophisticated investors.
4:53
We'll leave the names off, but there were a lot of really sophisticated people backing him.
4:59
Or the other side of this argument is, no, no, no, no, no, no, no. It's more than a grift.
5:06
This was systematic, systemic failure. Where do you come down?
5:12
Michael Breitenbach: I think there's a little bit of both.
5:14
I think, more, when he started off...
5:21
So Alameda started in 2017, I believe, FTX didn't launch until 2019.
5:21
I think when he started off, it was legitimate.
5:28
Okay, this is a kid that's well connected, his parents both law professors at Yale, he can raise capital quickly.
5:33
This huge arbs opened up and he's an arb guide doing market making at Jane Street and maybe has a little bit of shadiness in his kind of approach to things, is able to raise capital quickly and take advantage of these arbs and get the fund started up, but then there's alpha decay.
5:49
And there's some questionable elements in Crypto with the exchanges self-dealing as themselves.
5:55
I think a lot of Crypto insiders...
6:04
There was no kind of question that Sam was a little shady.
6:04
I think the extent of it that ended up being was a little surprising, but I don't think there were many people that didn't suspect.
6:16
There was some of the deals with Alameda having certain privileged rights, which all came to light as being true early on, where they had no leverage, liquidation and [inaudible] had priority flow, all that sort of thing, could see more information.
6:33
That stuff, I think, wasn't a surprise to a lot of people.
6:33
I think what a surprise to a lot of people was just how far things went.
6:37
And I think also, too, when the Terra Luna explosion happened, he was very effective at creating the illusion that he almost benefited from that.
6:53
A few people did, like Galois did, and then Galois lost half their capital and at FTX explosion and [inaudible].
6:59
So there's all kinds of insane things like that going on.
7:05
But yeah, things were definitely worse than a lot of people...
7:05
They are even kind of cynical about Sam.
7:11
That's how things played out.
7:11
The question is, at what point did things get really bad?
7:19
I think in the spring, would probably be my guess, but it's hard to say.
7:24
I think more will come out over time.
7:24
What I find interesting is that, over the same period that FTX has existed, there was two insane, extremely shady ‘40 Act regulated mutual funds that had massive frauds, mismarking derivatives, to the point where they're tinkering models and media relative attention is banned. Nothing.
7:48
In terms of systematic risk of the global financial system, ‘40 Act mutual funds are more important. And you should expect...
7:57
There's literally almost a hundred years of regulatory history there.
8:04
You should expect that to work.
8:12
If you're putting money on a Crypto exchange and you don't have any risk of it blowing up, I mean, you're just, frankly, an idiot.
8:16
I mean, these things that have hacked all, even if there's not a fraud, they get hacked every two years.
8:21
You should get your money if you want to do the money and trade out.
8:28
And now there's all sorts of on chain alternatives which, in many respects, are safer.
8:34
Uniswap's doing more volume than Coinbase right now.
8:34
The main reason they may be keeping capital on there is for collateral for derivatives, and that kind of really was FTX offshore shtick.
8:48
But I think people are looking at this, "Oh, Crypto, Crypto, Crypto," And not, "Media, media media."
8:53
And there's a lot of other stuff going on with the media right now, which I think, in terms of, what are reliable sources of truth.
8:58
And that sort of thing going on to keep an eye on, and this kind of plays into that.
9:03
And I think afterwards, it'd be very obvious to anyone with half a brain that this was a giant fraud.
9:08
The fact that they were still formerly reputable media sources kind of covering his ass was...
9:15
I'm cynical about these sort of things and it kind of blew my mind. Jim O’Shaughnessy: Yeah.
9:23
And I was just talking to Chris Denny-Brown who heads up our VC, Infinite Adventures.
9:23
And the thesis that I have is that, new media is just getting going, honestly.
9:35
People say it's saturated? No way.
9:42
And one of the reasons why is, the traditional legacy media has lost every shred of trust, any individual, however gullible...
9:52
Michael Breitenbach: Yes.
9:56
Jim O’Shaughnessy: Now, if you look at it as an S-curve adoption, we are now up here, where even the most gullible, whatever loyalty to whatever tribe, so MSNBC, if you're a liberal, FOX if you're a conservative, newspapers, Wall Street Journal if you're kind of in the middle of the road to conservative, New York Times, which has kind of become Pravda.
10:18
Even people who used to totally believe that they'd never get it wrong, they're always...
10:28
Now, even they are just like, "What is going on with these people?"
10:32
And again, you bring the point out really, really well. Obvious fraud.
10:42
He, himself, admits it in the text conversations he's having with friendly reporters that then go about not being so friendly by printing the whole thing.
10:51
But the point is that, there were still people clinging to that old narrative.
10:57
I mean, what is going on with that, in your opinion?
11:03
Michael Breitenbach: I mean, I think it is what it is.
11:03
I mean, you can't take a single media source and look at it as a view of truth.
11:09
I think that's why Twitter's very effective too, because you're getting the fire hose from all these different, as you would put it, reality tunnels, and you're able to synthesize between all of them to get a sense of truth.
11:22
It's actually to the point where I almost view like, if there's issues with Twitter, it could actually be almost like a systematic risk to certain industries like Crypto, in particular.
11:33
Even though Crypto is extremely active on Telegram and Discord, the common square element is there.
11:42
Now you're also seeing stuff like Twitter become battlegrounds for who can control censorship and whatnot.
11:48
I look at Twitter and the kind of war going on there, there's a big preview to where we're going to start seeing for...
11:53
Especially with the tech space AI models coming up.
11:53
When I was in an undergrad is when Arthur Anderson blew up and Ed Ron and all that, and everyone said, "If you want to get a good job for the next few years, switch your major to accounting."
12:13
I think the advice now is get into AI compliance.
12:13
That is the job of the future.
12:13
I was even seeing it at a B of A predictive analysis at the conferences for their AI and whatnot.
12:21
Because, I mean, they have so much customer data there and you see it in their sales side stuff being put out anonymized and properly and ethically and whatnot.
12:31
And you see it in congressional testimony and you even hear about it being whispered in the ear of the president.
12:44
There's a lot of model risk management, controls, things in loans like algo racism, and there's all kinds of ethical stuff.
12:52
And that's the old predictive stuff, that's not even getting into the new generative door, which is why things in the AI, been a big shift in the last year or so. Jim O’Shaughnessy: Yeah.
13:05
Well, as many of my listeners know, but I always like to disclose so they understand that I might be talking my book or have motivated reasoning.
13:11
I am both an investor in and chairman of the board of Stability AI, which is an open source AI platform.
13:18
And so, I kind of have a ringside seat into the things that you are talking about and you are absolutely right.
13:37
The size of this innovation, especially, as you point out well, with generative AI, very, very different, and we're not going to turn this into an AI seminar.
13:48
I have David Ha, our principal model architect who used to be the head of Google Brain in Tokyo and is considered one of the greatest AI model designers living today.
14:01
He's going to give us the masterclass in that.
14:07
But from a point of view of somebody who spent most of his career on Wall Street and has been deeply involved with compliance, it's easier, frankly, for Quants because we can just show, "Yeah, here's the model.
14:20
You want us to generate it as of whatever? You pick the date, Mr.
14:25
SEC examiner, you'll see that the stocks we ended up buying were the ones generated.
14:30
And we didn't use third party research."
14:30
We didn't use soft dollars at my old company so we were pretty clean in terms of compliance issues.
14:38
But now, man, you are right, because...
14:50
I'm talking to a bunch of people who are the pioneers of AI generated funds and the stuff that is going on there is both ridiculously fascinating to me because...
14:59
Michael, you should see some of these numbers they're putting up.
15:07
Michael Breitenbach: Yeah.
15:09
Jim O’Shaughnessy: One fund that I talked to, "How'd you do in March, 2020?"
15:10
"Oh yeah, we were up 30% in March, 2020."
15:15
And I said, because we let the model pick.
15:15
And so, got really sort of interested in that.
15:27
But in terms of the regulatory infrastructure, and let's keep it somewhat simple and just talk about financial markets for right now, right?
15:38
Michael Breitenbach: Yeah.
15:40
Jim O’Shaughnessy: I worry, and I brought this up in an earlier podcast, I worry that our government and our regulators are so far behind the curve, in terms of what's actually going on.
15:58
And as you yourself said, ‘40 ACT regulation has a nearly a hundred year history now, right?
16:04
Michael Breitenbach: Yeah.
16:04
Jim O’Shaughnessy: The SEC was created to address the pool concerns and grifters, right?
16:09
Joe Kennedy, FDR said, "Why'd you pick this criminal as your guy?
16:09
It takes crook to find a crook," Said FDR.
16:17
But what are your thoughts?
16:17
Do you think that the regulatory...
16:24
Because by the way, I am all in favor of sensible regulation.
16:24
It brings trust into markets.
16:24
It makes certain that there's some oversight and that people are actually paying attention to things.
16:37
So I'm not an anti-regulation guy at all.
16:37
What I am is skeptical that given the nuances and different types of models, multimodal models, does government have the bandwidth to regulate this?
16:57
Michael Breitenbach: I mean, they will.
16:57
It's a question if they do it well.
17:00
I mean, I think you have to look at different segments of the market and break it down.
17:05
My kind of view is that the banks of the United States, at this point, are kind of quasi nationalized and they get a kind of hall pass to take on a few risk activities.
17:18
And the skill of the CEO there is to manage that hall pass as well as possible.
17:18
And just with the experience of working at a large institution like that for over five years, I feel very safe with that.
17:35
I don't feel it's that very much systematic risk there, but I feel like there are some operational risks that are almost caused by excessive operational risk controls, if anything.
17:48
Jim O’Shaughnessy: Right.
17:48
Michael Breitenbach: I have a famous line there where I was considered this voodoo priest because I was able to get a SQL server so things could be taken off of access files on share drives.
18:02
And it's like, "What do you do here?" "Well, I did this." "Wow!"
18:02
And now I can do that in 10 seconds and have 8,000 Linux, whatever, and I can have Chat GBT write the code for me to do all that.
18:19
That's another thing you'll see with the AI stuff is just getting...
18:19
And we've talked about this before, about getting things on-prem and actually allowing large corporations to use this stuff.
18:31
Right now, there's some cell site analysts trying to use Chat GTP to write some letter and he's typing stuff into his phone and then going back and forth just because it's completely blocked.
18:44
That's a big theme you see right now is kind of the scale versus anti scale dynamic going on.
18:49
If you think about what Amazon does, or a lot of these large NASDAQ 100 names, what they do in the industries, they kind of rent scale to smaller companies.
18:55
That's in fact what the cloud is, right?
18:59
And you're going to start seeing some of that with AI coming forward.
19:06
And the other counter trend is the Crypto space where that's decentralization.
19:06
But then you're also seeing this whole OTC blow up where there's six firms all intertwined lending OTC to each other.
19:18
That all just completely exploded.
19:18
Like you were saying when we talked the other night, how AI is a tool, kind of the same thing with Crypto.
19:25
You can use it for a lot of different things.
19:32
I kind of view Bitcoin as separate from a lot of these Ethereum L2 platforms.
19:32
That's almost how a good litmus test if someone really gets what's going on there.
19:37
If they talk about, "Oh, I don't get Bitcoin."
19:42
Well, you don't get the space.
19:42
That's really more of a new type of precious metal, Total Addressable Market there, I think, is kind of smaller.
19:48
It doesn't really do that much.
19:54
I've always thought it was interesting.
19:54
I've always thought it had a lot of problems.
19:54
The Ethereum stuff, I think, is actually legitimate technology that's going to matter moving forward.
20:01
It doesn't have to displace the entire financial system.
20:01
A lot of these Crypto maxis will start talking crazy.
20:07
The way to approach Crypto, in my opinion, if you want to talk about Crypto for a little bit... Jim O’Shaughnessy: Sure.
20:13
Michael Breitenbach: A lot of people will have either an extremely bearish, or else it needs to be regulated.
20:14
These are all grift, this is all fraud view.
20:20
Or they'll be, "Oh, this is the future, privacy," Et cetera, et cetera.
20:25
There's not really any good tech now that can hide privacy on Crypto.
20:32
There's some things that are being worked on, think Secret Network, I'm not endorsing that, but some of the concepts they're working on are good.
20:42
There's a few other new startups that set some big rounds that are allowing stuff.
20:42
I mean, we talked about it the other day when we were talking about how people are pushing gaming as a great use case for Crypto.
20:53
And I think the line was, "Do you really want your grandkids to know all the things you did in Grand Theft Auto?"
21:00
Like, do you want that on the blockchain forever?
21:07
In 2009, in GTA four, you threw a Molotov cocktail at this prostitute.
21:07
It's like, you want that on the blockchain? Jim O’Shaughnessy: No.
21:15
Michael Breitenbach: Yes, no.
21:16
Jim O’Shaughnessy: And I'm the biggest offender because my son, Patrick, knew all the cheat codes for Grand Theft Auto and whenever I would go up to his room and take over the command from him, I went, "First off kid, put all the cheat codes in."
21:29
Michael Breitenbach: I want all the RPGs.
21:33
Jim O’Shaughnessy: Yeah, Michael Breitenbach: Yeah.
21:34
Jim O’Shaughnessy: Exactly.
21:35
I always thought how funny I thought it was when we were talking about it.
21:35
I think it's funny now, but it's true.
21:41
It's funny because it's true.
21:41
There is a lot of stuff you do not want on the blockchain.
21:46
Michael Breitenbach: And some of the use case for NFTs too, that's the kind of thing.
21:49
Now, some of these newer technologies are...
21:53
And I'm almost remiss to even bring these up because I don't want to draw regulatory attention to them till they get more mature.
21:58
And also, some of them, if designed properly, could also make for the most evil central bank digital currencies ever known to man. Which is another risk.
22:08
Even if you're into Crypto and bullish Crypto, there's a lot of systematic risks, there's a lot of societal risks that aren't being discussed.
22:12
I think they'll, eventually, more of a situation where you could have selective privacy, hopefully, if there's not a lot of regulatory crackdowns kind of stuff where I can prove I'm a credit investor with something like a zero knowledge of proof and I can prove to you that I'm in a country where I'm allowed to do business with you.
22:40
I don't tell you which one, give it my...
22:40
There's selective privacy.
22:44
If I own art, I can show it only to certain people or I could show the high-res file to certain people.
22:49
There's a lot of things like that, that could really solve a lot of problems.
22:54
If everything's NFT, do I want my airline things in one wallet with my art?
22:54
It's really problematic and there's a lot of issues with front running, copy trading.
23:02
Sometimes, you want to be able to advertise those too.
23:09
So I think that some of the stuff with blockchain, once it gets to that level, really takes things to the next level.
23:15
But also keep in mind, 2017, Crypto-Kitties was blowing up the Ethereum network.
23:21
No one was sure that any of this technology would work.
23:21
So Bitcoin was sort of working.
23:28
But then a lot of the issues I had with worrying about it working or going down down and the issue of Ethereum scaling as a kind of blockchain computer, was under question.
23:39
All those answers have really...
23:39
The scaling question's really been handled.
23:39
There's all these new bridging technologies and layer two's and networks are moving faster and proof of stake where you're not paying off all this yield to minors.
23:49
It's actually a yielding asset.
23:55
The fact that the Crypto ecosystem could actually support 40 billion Terra Luna blowup, in a weird way, is bullish.
24:03
The fact that it can support someone building a 10 billion scam on top of it, is kind of bullish technology.
24:12
Now the question is, we have this technology, the fact that we have automated market makers where I can just create a token and create an automatic market on it, a smart contract, and it will be there forever, and anyone can trade on it online on blockchain, instantly, without any exchange ever having been listed. That's amazing.
24:32
That happened way sooner than I would've expected because of the constant price function type market makers.
24:39
I thought we would've had gotten to the point where we had true order books, which is kind of what Uniswap V3 is getting to.
24:43
But all that's been, really, much more optimistic than I would've thought, from a technology perspective.
24:56
But still, there's a lot of issues.
24:56
A lot of regulatory bodies are reluctant to have real world assets on chain.
25:02
We're sort of gotten there with dollars and that's been the game changer with properly monitored off chain collateralized stable coins. That's huge.
25:12
But there's not US treasuries there yet.
25:19
Like make your dollars work on some stuff, some other things.
25:24
If Crypto's going to really grow, that kind of link between the real world and what the tech people would say is the meat space and the block space, has to have linkages that are legally robust.
25:35
Jim O’Shaughnessy: You made a lot of points there that I thought a lot about. Let's start with the...
25:46
What I agree with you is, to me, a black mirror scenario.
25:46
If we all of a sudden get a Fed coin.
25:53
Michael Breitenbach: Yes.
25:56
Jim O’Shaughnessy: Because, say goodbye to freedom. Say goodbye to...
25:57
If they get digital control of your money.
26:04
Michael Breitenbach: Yeah.
26:06
Jim O’Shaughnessy: That's game over.
26:06
I used to say to young people, I would tease them and I would pull out, usually, a 50 or a 100 because that's what the black market likes, a hundred dollar American bill.
26:16
And I would hold it like this and make it snap and I'd say, "Kiddos, you are looking at the original Bitcoin. In other words, cash. You couldn't trace it.
26:23
Why are all black markets priced in USD?"
26:31
Michael Breitenbach: Think of all the businesses the mafia used to own, right?
26:37
Jim O’Shaughnessy: Exactly.
26:37
Michael Breitenbach: Yes.
26:38
Jim O’Shaughnessy: Exactly. Exactly.
26:38
So, if I were an enterprising big government type and authoritarian, that's where I'd make all my cases. Just what you said.
26:53
The mafia used cash, they did that for horrible purposes like black markets.
26:53
Well, of course they're priced in dollars because they're off the book and a reasonable low information person who scans the news might look at that and think, "Oh, good for the feds.
27:11
They're finally addressing some of this shit."
27:11
But once that ship sails, say goodbye to any kind of financial freedom, unless you're willing to live as an exile in a barter economy.
27:30
Michael Breitenbach: Yeah.
27:30
I mean those are big meta trends to watch out for.
27:34
People have been so busy fighting over the ability to have reasonable free discourse online, that everyone's forgotten about the whole data privacy thing and the fact that everything you're doing online being scraped by governments and large corporations.
27:47
Every transaction you do...
27:51
Increasingly, cash is less and less. Everything's square.
27:51
Your taco truck, you're paying with credit card now.
27:57
There's less and less cash businesses.
28:01
Everything's being recorded by a...
28:01
You know, you go buy from that taco truck, your phone's with you, you Google knows where you are, it becomes an entry in a database.
28:06
Everything about you is being constantly recorded.
28:13
People worry about being micro-chipped.
28:13
The phone is the full on giant...
28:19
Jim O’Shaughnessy: It's your microchip.
28:19
Michael Breitenbach: Yeah.
28:19
It's the highest, craziest... It's a super computer. Yeah.
28:23
That's why I refuse to go for the Apple Watch.
28:23
I'm not giving my heart rate at the same time, you know?
28:30
Jim O’Shaughnessy: Same with me buddy.
28:33
My wife, my kids, they all swear by the Apple Watch.
28:33
And I said, "You know what, I'll do the Apple Watch when they can prove that it can save my life before...
28:45
Give me a heads up, "Get to the hospital, Jim, because you're about to have a massive heart attack."
28:50
Then you know what, then I might think about the Apple Watch.
28:50
But for right now, just to have all of that physical data going out and being collected?
28:55
I made a joke over the weekend about Twitter, where there's this exchange, where the person who begins the tweet is like, "Is there anyone hiring in tech?"
29:09
Asking for tens of thousands of people.
29:09
And so, the director of cyber crime for the NSA responds to the tweet and he says, "We're hiring."
29:17
And so it just keeps going.
29:27
And this guy gets the banter, gets the vibe of social media better than the marketing departments of the majority of for-profit companies.
29:35
Like, what the fuck is going on?
29:41
Michael Breitenbach: NSA spends more time there. Yeah. Jim O’Shaughnessy: True.
29:45
So he gets better just from practice. But the fact is... I did it as a joke.
29:45
I retweeted the thing saying, "Time to reevaluate when the man who's in charge of cyber-crime for the NSA is better at Twitter than half the brands out there."
30:03
Yes, he spends more time there.
30:03
This is a larger topic that I'm absolutely obsessed by.
30:13
As you know, I'm not shy about sharing my opinion that we are in the middle of the biggest transformation in human society, ever.
30:21
And, okay, you got to tune in to the fact that all the old models are collapsing, they're disappearing and they're being replaced with, in my estimation, better models, for the most part, more ability at...
30:46
We're going from mass markets to mass customization.
30:46
We did it with Canvas at OSAM.
30:55
It's why Franklin Templeton wanted to buy us because we had the tech that scaled, that allowed for one to one customization to Michael, right?
31:01
If you went to an advisor who used Canvas, literally, they could customize it just to you and they could eliminate holdings in your public portfolio that were your concentrator, right?
31:17
So, my point is that, I think that a lot of this is amazing and awe-inspiring and good for us as a society, but that, in no way, negates the fact that we are going to face problems, challenges, things that we've never faced before.
31:43
And we've got to have at least a thesis around, "Okay, how are we going to deal with these new and better problems?"
31:51
Let's stipulate, they're going to be better problems, but they're going to be massive problems. What are your thoughts?
31:56
Michael Breitenbach: I think about this a lot.
32:01
My daughter's eight now and I'm trying to start to now introduce certain ideas about data footprint.
32:06
Like, "Maybe we shouldn't put your name on the Disney plus account.
32:12
Let's just keep it under mine."
32:12
You can't really win the war, but you can kind of fight a guerrilla war where you're retreating and burning fields and can slow the spread of some of this bad stuff.
32:26
But I don't think it's a winnable war. I don't know.
32:26
It's like, I'm very skeptical of this stuff, but then I go on Chat GPT and it's like...
32:33
I was forced to use R at B of A just because it was very difficult to get packages and the area wasn't the bank.
32:43
So it's like, when I came in and I was doing all these transformation, it's like, "All right, we're going to do code.
32:52
A lot of stuff that done being done in VBA."
32:52
I took my boss in, I wrote up a quick program, I generated a million random integers and printed on the screen.
32:57
He's like, "Okay, we can do code."
33:02
But I couldn't do Python like I wanted so I've been trying to do R for five years.
33:02
So it's like, all right, now I should do proper Python like everyone else, right? The GTP...
33:13
Amazing, amazing for just learning over and just doing stuff with web gooeys I never really had a chance to do.
33:19
Like Flask and all these other different libraries.
33:26
A day, things that I've been meaning to do for five years, really effective.
33:32
But then, I also try to play with it and see if I can get it to do stuff.
33:32
You could even see, as they've released that model, they've put more and more handcuffs on it and the quality of the outputs for certain things have gone lower.
33:45
Code seems to be all right because code's...
33:51
There's only a few things where I've heard of the handcuffs going on there with people asking you to do SQL injection scripts and that kind of stuff.
33:56
But for the most part, that's kind of been all right.
34:02
I think open source opens up some doors for better or worse there where...
34:11
I've seen things like the GPT 4chan model where they took GPT JS and they fine tuned it on 4chan and then ran it and it invented some new things I didn't even know were horrible that it could do.
34:27
Jim O’Shaughnessy: New horrors.
34:28
Michael Breitenbach: Yeah.
34:28
Some of the responses are also really intriguing.
34:31
It was very interesting to watch just intellectually.
34:31
So I think open source and the ability to custom trade on data sets will be interesting.
34:38
I mean, this is space I've been watching for a while.
34:43
Even on image, Jim, like I was playing with Deep Dream generator from Google.
34:49
I'm grandfathered into the Patreon program for the extra compute time, which now has stable diffusion versus the old and new and a few other models too.
34:54
Which is kind of interesting because I can just take a few prompts and I can compare old Stable Diffusion, new Stable Diffusion and see what the particle collider comes up with.
35:04
It's really interesting to see how that works.
35:04
So I think a lot of those, in terms of the scale, anti-scale theme, I think a lot of this stuff going on with AI, really empowers a lot of these small companies that would maybe previously require a whole team to do code or write content.
35:25
Now you can run a boutique and it's a force multiplier.
35:31
And meanwhile, the larger corporations are going to be dealing with on-prem, off-prem issues and they're going to be spending...
35:38
I used to have a joke about the hundred thousand dollars spreadsheet.
35:42
Just getting certain data inputs moved around a large corporation will literally cost a hundred thousand dollars.
35:46
So small companies don't have to worry about that.
35:52
So in some respects, I think these small and more nimble, boutique-like companies now have a huge edge against larger corporations in some respects.
35:57
Jim O’Shaughnessy: Yeah, I agree.
36:00
And as a vertical, and O'Shaugnessy Ventures is our venture division, which we call Infinite Ad-Ventures, because that was the original term for venture capital, which I like very much.
36:14
The other one that I really like, that I just learned about a little while ago was, for a while, people were calling it liberation capital, which I love that.
36:21
And it was essentially because when it started to become a thing, it was because of the Traitorous Eight who left Shockley’s lab because he was such a megalo-maniacal power freak, micromanager, everything.
36:37
He was a narcissist and a genius, yes, but a horrible manager.
36:46
And all of his engineers loved working with each other, but they hated this guy.
36:56
And the thing that's interesting, they didn't even think of starting their own company.
37:02
Because that's how much the culture had changed from the robber barons, right?
37:08
Everyone's name was on the fucking company.
37:08
Carnegie Steele, JP Morgan, right?
37:08
Merrill, Lynch, Pierce, Fenner and Smith.
37:16
They even included the guys at the inn. And that was, again...
37:16
You put your name on the door, your reputation's on the line.
37:23
Not only is your cash on the line, your reputation's on the line.
37:28
I think there's a lot to recommend that.
37:28
But then we switched to the era of big government, big business, big labor, and the idea that these brilliant chip designers could go and form Fairchild or Intel or whatever, didn't even occur to them.
37:42
And then they ran into this guy who was like, "Why don't you guys just start your own company?" And they were like...
37:49
There's a great book, the Power Law, that covers this...
37:54
Michael Breitenbach: Yeah. Jim O’Shaughnessy: ... Happening.
37:58
It's just fascinating because you're reading it.
38:03
And that gets us back to reality tunnels.
38:03
The reality tunnel of that time was, "I can't start my own company because I need scale, I need all this."
38:13
That's why I'm intrigued by your thesis of scale versus anti scale.
38:21
It's like all the pitches we get right now are from the small companies who are lapping in a big company.
38:29
We're about to fund a very nascent startup, but essentially, they're giving tiny boutiques like a huge back office that allows them to reach, not just their little circle that used to encompass their target market for clients, they can now reach nationally and globally, and they couldn't afford to do it in the past.
38:55
Our tech genius kids have got it figured out.
39:02
And again, I love it when the market is the one that's giving the signal.
39:02
The line that they have of boutique retailers just here in New York, okay?
39:09
Just in New York City, they have over 500 on their waiting list to use this platform of tech.
39:17
And so, we're going to see that everywhere, I think.
39:26
Michael Breitenbach: Yeah.
39:26
The counter-argument to that, I think, is that you do run into some risk.
39:29
Like when Parler got shut down during all that insanity around the election is a good example where some of these centralized providers could shut down.
39:33
And I think that's to further bring in the Crypto angle.
39:39
The censorship resistance portion of that is kind of an answer to that, but it doesn't necessarily work in every situation.
39:46
So there's a lot of these common themes going on.
39:50
There's a natural tendency, I think, for these large corporations to...
39:57
Things like Cloud rent out scale, but then there's sort of a dependency on that.
39:57
So there's this tension between these two competing desires that I think are important to watch.
40:04
And this matters from investing too.
40:12
When you're looking at equity, you're looking at venture, we're looking at moats.
40:16
All this comes into play.
40:16
Jim O’Shaughnessy: One of the other things that we were chatting about, which, maybe some of our more clever listeners might be able to start to infer what big Twitter account you might be.
40:27
But the idea that I was fascinated by when you first sprang it on me is, cynicism can sometimes be a pretty big comparative advantage.
40:43
Expound on that a little bit.
40:50
Michael Breitenbach: Yeah, I mean I think you sometimes quote the author like, "Always keep buying."
40:58
I think that's kind of a...
40:58
Jim O’Shaughnessy: Nick Maggiulli.
41:00
Michael Breitenbach: Yeah. Right. Yeah.
41:00
So I think that's kind of a good base case.
41:00
You want to kind of be careful not to become a full on doomer.
41:07
But being cynical and being cautious and being responsible and being the adult in the room, especially in Crypto.
41:17
I mean Crypto, I described, this is like the double black diamond of behavioral economics.
41:21
I might put this out as a piece, just like, "20 rules for how to actually properly invest in Crypto."
41:28
Because there are huge advantages of it, especially in DeFi where there's...
41:32
That market closes, when the market open, there's zero duration yields, which are amazing, and are over collateralized.
41:41
And there's some risk there, it's not free.
41:41
There's smart contract risk, it's uncorrelated, there's a lot there that's really positive, that works really well in an overall portfolio.
41:52
But also, sometimes it sucks.
41:52
Like right now, there's some DeFi plays that are still viable but a lot of the Stablecoin stuff, especially with what the Fed's done, look, you want to be pulling that out into T-bills just because the way things work and Maxis aren't necessarily doing that.
42:13
So I think with something like Crypto, and maybe you could also extend this to equities, you want to feel under invested when the market is just shooting up and you want to feel smart enough that you have cash on the sidelines to buy when everyone's in a full-on panic and you can just be the kind of buyer of last resort. And this kind of works. I mean, NFTs...
42:31
It's kind of like, well, what a lot of people think Warren Buffet does, even though it's not what he really does. Jim O’Shaughnessy: No.
42:42
Michael Breitenbach: Yeah.
42:42
If you're going to get involved with a hypey market like Crypto, you have to look, "Well, all right, is this actually real?"
42:55
It's helpful if you're actually able to force yourself to be bearish on part of it because it prevents you from getting bubble brain.
42:58
You want to figure out which portion of this actually serve a societal purpose and isn't just crap, and you want to be under-allocated to it.
43:14
And also, if something has crazy draw-downs, same with equities.
43:14
It's like, "Why aren't you a hundred percent equities?"
43:19
Or, "Why aren't you a hundred percent Bitcoin?"
43:23
You just want to be smart about things.
43:23
And no one is having these common sense discussions about how to properly incorporate Crypto into traditional portfolios, what roles and advantages it can play.
43:38
Jim O’Shaughnessy: So as I listened to you, the reason that I enjoyed having that conversation is, I just keep hearing nullius in verba, right?
43:44
Take no one's word for it.
43:50
That is the motto of the royal society, which gave birth to the scientific method.
43:57
And it's just common sense, right?
43:57
Michael Breitenbach: Yeah.
44:02
Jim O’Shaughnessy: I think I might have said, when we were chatting about this originally, when did they rebrand common sense as cynicism?
44:09
Michael Breitenbach: I don't know.
44:15
But I think some people also, that are too cynical. Where they... "There's nothing there. This is all a scam."
44:20
And I think that is going too far as well.
44:20
I think it's like the Aristotle, virtue and moderation is the way to go on this one.
44:31
Jim O’Shaughnessy: Yeah, I agree.
44:31
But yeah, I'm not a binary thinking type person.
44:37
Everything is a continuum, everything should be either a yes, no, but the biggest category should be a maybe, right?
44:45
Michael Breitenbach: Yeah.
44:49
Jim O’Shaughnessy: And when you train yourself to think that way, it doesn't make you have an urge to be a maximalist or a complete troll and hater.
44:58
I think, frankly, I just think that is suboptimal thinking and that if you want to achieve your objectives and your goals, you're just doing yourself a massive disservice by being binary, being yes, no, zero, one.
45:16
It doesn't make a lot of sense to me.
45:23
Everything pretty much is a maybe.
45:23
Michael Breitenbach: Yeah.
45:27
The other thing is that in not helpful for, I think, the way a lot of people are thinking about Crypto, is it's increasingly become politicized and kind of a red/blue issue and kind of more...
45:33
Jim O’Shaughnessy: It's really weird. How did that happen?
45:35
Michael Breitenbach: Well, I'd actually say the one exception is, weirdly, the NFT communities, because it's filled with, quite frankly, a lot of artists, potheads and that type of...
45:45
It's more of a left leaning scene mixed in with hardcore libertarians, Jim O’Shaughnessy: Right.
45:52
Michael Breitenbach: The NFT community, I would say, is the one place in America right now, where there's people with that wide a political spectrum, actually just getting along and hanging out.
45:59
Like, we'll go to conferences and have awesome parties and all kinds of crazy stuff.
46:04
It's like a really, really interesting scene, the NFT scene.
46:11
I recommend people checking it out.
46:11
It's a good way to actually learn some of the blockchain tech in a very simple way.
46:19
But there's lots interesting characters involved there.
46:25
And there's only been one real, I think, political issue that crept up with something with the ENS.
46:30
One of the old tweets from one of the ENS founders, which is, if you ever see 'dot eth' Twitter handles, whatever, that's the servers that...
46:39
Jim O’Shaughnessy: Yep, yep.
46:40
Michael Breitenbach: That's the only example of any kind of stress, maybe, that kind of came up between the two.
46:45
But for the most part, it's actually kind of interesting to see all those different types of people, mostly, getting along.
46:53
Jim O’Shaughnessy: Yeah, that's interesting too because I think your comment about NFTs being an easier path to understanding the underlying structure of Crypto and Ethereum, I agree completely.
47:13
It certainly made it much easier for an old myself to figure out that market a little bit better.
47:22
It's really interesting that you say that because I am dismayed by this tribalism that, in network, out network, and it plays to one of our basic biases as domesticated primates, which is, you can randomly assign people to different groups.
47:44
So, you could build me a random number generator and I would say, "Okay, Michael's in group A, Jim is in group B, Tom's over with Michael," Et cetera, et cetera, just completely generated by random, complete randomization.
48:09
And yet, the behavior of the people in their group changes almost instantaneously and incredibly dramatically. Like, if you take...
48:17
"Here's a hundred grand Michael, you get to distribute it."
48:24
You know what, I'm not going to say it's you.
48:24
So Tom, who's also in your group, he gets that money, he just met you, he's two to three times as likely to give you a bunch of money and not give me any because I'm in the other group.
48:38
My current podcast that's up, is with a guy who wrote a book called The Great Redesign, and basically, he's talking about, he's a Star Trek guy and he loves that kind of abundance, which I love...
49:00
Michael Breitenbach: The only utopian sci-fi, everything else dystopian.
49:05
Jim O’Shaughnessy: Exactly. Exactly right.
49:05
But he made a point that, wouldn't it be cool if we could figure out how to figure out a way that, "Hey, we're team human race and we got a lot of shit we got to solve."
49:14
So we run snippets from the show and the one that we were running was that particular one.
49:24
And I looked it up because I remember humans share 99.
49:29
9% of our genes are the same.
49:29
Michael Breitenbach: Yeah. Jim O’Shaughnessy: 0. 01% is the difference.
49:35
Every time I see that, and that's from the department of whatever gene.
49:45
But the point is like, wow, that blows me away that we could sow all of this hatred, all of this 'us versus them' from 0. 01%, right?
49:54
Michael Breitenbach: Yeah.
50:02
Well, our society is evolving at a much faster pace than...
50:02
We're designed to be small tribes, spearing deer and cooking them over fire, at best.
50:08
Really, we're small monkeys on the ground scavenging.
50:15
But yeah, this is all Richard Dawkins stuff.
50:15
The society is growing at a way faster pace than our evolution.
50:23
And as you alluded to before, we're just chimpanzees that have the hydrogen bomb.
50:30
Jim O’Shaughnessy: But there's an alternate take on that, which I was just reading about last night, which I thought was pretty cool.
50:37
I'm not remembering who the thinker was, I'll put it in the show notes, but he did this...
50:44
How do we distinguish human beings, homo sapiens, from animals?
50:53
And what he alighted upon was, we are the only known species on this particular rock, that can have conversations across generations.
51:05
And he called it time binding.
51:05
Humans are the only creatures, that we know, who knows about the dolphins and the whales and crows.
51:13
Man, if you want to look into smart birds, look into crows.
51:19
Michael Breitenbach: Yeah, they can recognize your face and they're crazy.
51:24
There's great PBS documentary on this.
51:29
Jim O’Shaughnessy: Yeah, yeah. The whole thing.
51:32
I love those documentaries because they're super smart, but I really did think that was a really interesting point.
51:38
We are the only species that can communicate across generations, but also, can build a wealth of knowledge cumulative cultural evolution, which, by the way, is how we got those hydrogen bombs, right?
51:53
Michael Breitenbach: Yeah.
51:56
Jim O’Shaughnessy: It's how we got the iPhone.
51:56
It's how we got the Zoom that we're communicating over right now.
51:56
And the thing that's cool about it is, cumulative cultural evolution affects us physically.
52:11
The book, The Weirdest People In The World, about the West and why we're so rich versus other societies, kind of delves into, we're weird.
52:16
In other words, we think scientific method is a great way to come up with new stuff.
52:23
But one of the arresting parts of that book, which he hits you with right up front, which I thought was smart is, cultural evolution affects humans physically.
52:40
And the proof's thesis or proof that they offered there, is that when you take super fast FMRIs of the brain, the structure of a very highly literate person and then of an illiterate person, our brains are shaped differently.
53:04
Where did evolution, Mama Nature, take our ability to read?
53:04
Where did it put it in the brain?
53:04
It took space from the old hyper attenuated facial recognition part of our brain. Why did it do that?
53:24
Well, because back when we were killing those animals with our spears and cooking them over our newly discovered fire, it was really important for us to be able to recognize, at a distance, whether Grog coming through the bushes over there, was a friend or a foe.
53:36
So facial recognition was a big part of the brain.
53:45
And Mama Evolution was like, "Yeah, I don't need that anymore."
53:45
But the external stimuli, so Gutenberg and his press, right, changed our brains.
53:51
What do you think these things are doing to them?
54:00
Michael Breitenbach: Ugh, it's all sorts of stuff. Yeah.
54:03
There's another interesting study, it's kind of similar, where they looked at London cab drivers and just over time, their hippocampus...
54:11
Jim O’Shaughnessy: The information Michael Breitenbach: Memory had expanded. Yeah.
54:13
It's interesting because I hooked up an emulator to play Mario Kart with my kids, so I got some old school games from 92.
54:19
So I loaded up the Zelda game from the SNES, which came out in 92.
54:25
I haven't played this thing since 93, and I know every little spot in that map.
54:32
I didn't even play it a lot, but this is from when I'm like 12, you know what I mean? Or younger.
54:32
And it's like, "Wow, somewhere in the back of my brain that entire map is just still in there."
54:43
Jim O’Shaughnessy: There's a guy, Flynn, he died recently.
54:47
That was his life's work.
54:47
They call it the Flynn Effect, the fact that IQs from 1900 till, I can't remember when his research left off, I think it was late nineties or early aughts.
54:55
Anyway, he proved, after normalizing for all of the other extraneous factors, that IQs had gone up significantly.
55:08
And one of the reasons why he cited they had, was conceptual reasoning because of, wait for it, video games.
55:17
He's a really interesting dude, Google him, you'll find a bunch of YouTubes of him giving speech speeches.
55:26
Most people choose to root against, I look for things to root for. Yeah.
55:36
I'd rather be positive than negative.
55:36
It's not that I am positive about everything.
55:43
I'm negative about a lot of stuff, I just choose not to rant and troll and focus on it endlessly.
55:49
Michael Breitenbach: I contain it to my Twitter account, so I just vent there so I can keep happy here.
55:59
Jim O’Shaughnessy: Your therapy of your Twitter account was brilliant, I think.
56:03
When we first got to know each other.
56:03
I think that might have been one of the first things I said to you.
56:09
Your alter ego is amazing because you get to just like...
56:15
Michael Breitenbach: Yeah, I'm only doxed to a very small number of circles too. So you're in there.
56:19
Jim O’Shaughnessy: Well, that goes without saying.
56:23
Well, listen, this has been great.
56:23
I am going to ask you the question.
56:27
I am making you the Lord High Emperor of the world.
56:27
You cannot kill anybody, you can't put anyone in a reeducation camp, you can't do any of that stuff to them but I am going to hand you a magic microphone.
56:41
You're going to speak two things into that microphone and you are going to incept the entire world's population.
56:46
All 8 billion of us are going to wake up whenever our morning is, and we're going to say, "I just thought of the two greatest things.
56:52
I'm going to start doing them immediately, today." What you got for me.
56:59
Michael Breitenbach: See, a lot of people hop right into this, so I didn't really think about this too much, but I've thought about it in the past.
57:06
You know about a tail risk you're taking on with this?
57:13
Unintended second order effects.
57:13
I mean, you could really destroy humanity with this power.
57:17
Jim O’Shaughnessy: You could. And one of the things...
57:17
I love that you're giving that answer because the second in tertiary order effects of seemingly benign changes, can destroy humanity.
57:28
Michael Breitenbach: I say, just be excellent to each other.
57:34
That could set off world wars four through five.
57:38
Jim O’Shaughnessy: Right.
57:39
Michael Breitenbach: Yeah.
57:39
Maybe I'll go for something like super, super conservative, which will still probably set off a world war but we'll see.
57:50
Most people may construct portfolios, don't consider taxation.
57:50
Consider taxation, Canvas.
57:57
Best thing about it, taxes. Jim O’Shaughnessy: Yeah.
58:00
Michael Breitenbach: That's the real alpha there when you put your portfolio together.
58:00
Second is proper diversification.
58:05
True proper diversification.
58:05
So for everyone that's not investors in the world, I'm sorry.
58:11
I'm taking on the conservative approach on this, but that's my soapbox.
58:11
Large institutions have no conception of taxes. It's honestly obscene.
58:20
It's a really major systematic issue with the...
58:26
Or systemic issue, I should say, with the investment industry, just how little is paid against taxes.
58:33
And one of the great things, I think, about Canvas, is to incorporate that in an intelligent fashion.
58:37
Jim O’Shaughnessy: Thank you, and you're right.
58:39
And for much of my career, I tried to get people interested in looking at after inflation, which is a tax.
58:48
Michael Breitenbach: Yes.
58:53
Jim O’Shaughnessy: After inflation and after tax returns. And I got zero takers.
58:55
It's almost like we have this collective fantasy that, "Oh.
59:06
Well, everybody faces a different tax rate."
59:06
And I'm like, we have computers now.
59:15
We can tell you what your tax rate is and how much of it you are paying away.
59:21
And just like zero uptake...
59:21
Michael Breitenbach: It's a much more solvable problem than outperforming through stocks election, I'll put it that way.
59:28
Jim O’Shaughnessy: Totally, totally.
59:29
Tax self is a real thing.
59:29
Michael Breitenbach: Yeah.
59:34
Jim O’Shaughnessy: It's huge. And you can prove it.
59:35
Michael Breitenbach: It's measurable, demonstrable, I mean everything about it. Jim O’Shaughnessy: Yeah.
59:42
Michael Breitenbach: The other pet peeve is that no one looks at their mortgage as a part of their interest rate exposure.
59:45
So you've got 30 year fix.
59:45
That's another one where I think people, when they try to measure out their actual true risk profile.
59:49
If you have a 30 year fixed loan versus renting, I mean, your fixed income profile's entirely different.
1:00:01
Jim O’Shaughnessy: Totally. Totally.
1:00:03
Michael Breitenbach: Yes.
1:00:03
Jim O’Shaughnessy: Well, one of the reasons we became friends is because we love talking about this stuff.
1:00:09
Michael, thank you for coming on, for the first time, to Infinite Loops.