The (betting) law of demand and supply: More demand lowers prices rather than raising them.

Even the briefest introduction to economics will describe the Law of Supply and Demand which says that when demand for something goes up (or supply shrinks) that the price will rise until the demand and supply match up again. More demand leads to higher prices.

This law is true only in the short term. In fact, it may be better to understand the reverse of this law:

As demand for a good increases, that drives increase in supply, and the price drops, sometimes greatly.

In other words, in the long term, more demand leads to lower prices.

This principle is not a "law" that always happens, but history shows it's the way to bet. And many people know this principle in different forms, but it is very often ignored. Often to serious consequences.

Quite simply, as demand increases, innovation is funded to make it cheaper, and also to increase supply, which also makes it cheaper.

Predictions of shortages and doom are common in history. Centuries ago, Malthus gave a warning on overpopulation that turned out to be completely wrong, and even so it is still repeated. The reality is that running out of "stuff" almost never happens in the long term. In 1972, it was chic to accept the predictions of a book called The Limits to Growth from the Club of Rome, none of which came true. In 2002, we saw a wave of predictions of Peak Oil which were followed by major expansions of the supply of oil and gas. (More on that later.)

The greatest example of this reverse law is the transistor, as part of the computer integrated circuit, or chip. As demand has grown for computers and the transistors that make them up, the cost of transistors has gone down a trillionfold. Consider that number again. It certainly didn't go up, or just go down. It effectively disappeared. There are many others stories like this, though perhaps none quite as dramatic.

What is the "good" that gets cheaper?

The key to understanding how this law works is to think carefully about what the "good" is that is in demand, and gets cheaper. People often mistake it for a particular raw material or natural resource. It is possible to have a shortage of a raw material -- though that turns out to happen less often than people think. But nobody generally directly wants a raw material. They want something made from it or some use of it. There is no demand for oil, there is demand for dense, portable energy -- or rather, what that energy does for us, like heat our homes or transportation.

When demand for some true good rises, with a temporary rise in prices, this triggers investment in better ways to provide that true good. Sometimes that investment is simple and around better ways to produce the existing solution. Often it's around ways to produce better ways to meet the demand that may have nothing to do with the original underlying commodity we're afraid of running short of.

The people building computers out of vacuum tubes would have easily predicted they would always be expensive. The idea they could cost a trillionfold less (or much more when it comes to tubes) just would never have entered their brains. But as soon as companies saw that the computers were useful and there would be demand, effort continued to find ways to do it better and cheaper, with incredible success that has endured for 8 decades. (Even inside the industry, people have routinely declared the death of this march of progress, and they are doing so today, but they have always been not just wrong, but really badly wrong.)

If the true good involves technology and human ingenuity, the principle above is pretty close to a law. If physics allows a solution, then with enough demand it will very likely be found. It will not always be easy, and there will be exceptions, but it's pretty likely. It may not always be wise to bet your business on the breakthrough, but it has definitely been unwise in history to bet your business on everything staying the same.

Natural resources

As noted, the first step to understanding demand and supply is to realize that the thing demanded is almost never a raw material or natural resource. Even so, we have had surprising success in that area. While it is often predicted that the world will run out of some resource, it almost never actually happens, though sometimes it is avoided by changing what resource we use or finding ways to use the same resource more efficiently.

We probably would reach "Peak Oil" if we kept using oil the way we did in the past, but we're not going to. Raise the price and we'll find a way to not use it. What we've never done is just stop doing the thing that we did with the resource. We're not good at conserving through reduction of our desires and activities, as much as we might like to be. We can be very good at conserving through increasing efficiency, though.

A decade ago, there was major concern over the supply of oil and gas. This led to improvement in both technologies to find new reserves of these in the ground, and also fracking which, for better or worse, increased our ability to extract the gas. While there are many concerns about the environmental consequences of fracking, the new lower cost of natural gas had a marvelous result -- it greatly reduced the burning of coal for electrical power. It wasn't any shortage of coal that did it.

Today a war has raised the price of gas, and that is causing stress, but it will be a blip. In fact, the high prices due to this war are hastening the real journey, to get off of these fossil fuels. This will become easier, because today, if you are somewhere reasonably sunny, it is cheaper to get power by building a solar farm than it costs for the coal to put into an existing coal plant. We're going to shut down those coal plants because they are not economic, not due to any shortage. That's because the real good was electricity (and the things we do with it) and not the coal, oil or gas.

Batteries and storage

Today's big area of poor assumptions around demand and supply is in the transition to renewable energy, including the resources for electric cars. Today's EV batteries all use lithium, and so there's a lot of debate about how to get that lithium and whether we will run out, or see the price rise, or get destructive in our quest to mine it. (That latter one is less avoided by the "law.")

Once again, lithium is not the good we seek. At the first order, it's batteries, and at the highest order it's transportation. In the middle it's best stated as an energy storage technology, which meets various requirements for vehicles -- low weight, low volume, low cost, low fire, long lifetime, high power in/out, etc.

People are putting this focus on lithium for a few reasons. The most valid one is something that is unique about lithium -- it is the lightest metal and physics says we won't find a lighter one. Our current thinking about batteries suggest a light metal is essential, but that does not preclude many solutions to our actual problem that don't demand the lightest metal. Indeed, there is already a lot of promise in the lab of using lithium's heavier cousin sodium, which is extremely common and cheap. We're never running out of sodium. Key to this is the realization that while our current battery designs love a lithium cathode, it is not just the weight of the lithium that dictates the weight of the battery, it's the whole chemistry. Thus we've seen sodium batteries just a bit less dense than the lithium ones.

Of course, most things in the lab never make it to production at scale. But they tell us that the physics allows things, and with enough demand, which means with enough research money, we are very likely to find what is possible and make it work. Not always, but it's the way to bet.

What about when it doesn't work?

Of course, there are exceptions. People are still pounding away at controlled fusion for energy after many decades. Helium, though super abundant in space, is only plentiful because we take it out of the huge volumes of natural gas we're going to stop extracting, and it has some properties physics says nothing else will replace.

Land is an interesting one, which certainly goes up in price with demand. At the same time, we keep increasing the supply of "developed land" and the cost in constant dollars has been fairly stable. When land is scarce we build up so we can have more living space (the real good) on the same land, and it's laws, not economics that stop this and keep land scarce. The main thing that makes land go up in price is human tastes -- places that are cool to live are expensive -- though a few things, like beachfront real estate near a cool city have fixed supply for now. We have turned half the habitable land to agriculture, but 3/4 of that is for meat -- and technology is now working to make substitutes for meat that don't need that land. We'll see how that goes. Shortages of food have almost entirely been caused by politics, and over time the food supply has grown to more than meet the growth in population -- and food has become cheaper, as the law of demand and supply predicts.

Specialized human services can become scarce (though usually not for long) but there are lots of artificial scarcities which these principles can't touch. NFTs are a recent example, but signed/numbered prints long predate them, and of course they go up in price as demand increases, just like the works of dead artists do.

As with all bets, one will sometimes do some hedging, and be ready for both outcome. You don't want to be ruined by either outcome, but you will tolerate more pain in the the event of the less-likely outcome in order to avoid missing out on the more likely outcome. Predicting the future is rarely done well, so the best strategy is often to try to delay decisions, where you can, and then decide later when you know more about what's happening.

If you are drawn to bet that the status quo will continue, and we'll run out of some key resource and face ruin, be sure you've analysed what the real demand is for, and have an argument why physics says we won't do better. Even then, a lot of those arguments have ended wrong because of immature or poorly formed physics. It will be frustrating, knowing that somebody who bets on a future that doesn't exist yet will end up winning, even though we don't know enough to know which. The bet from "Shakespeare in Love" that "It all turns out well. I don't know, it's a mystery" is more true than its fictional origins.


The price of light over time is an example of how the price of the good (not just the source material) can get dramatically cheaper over time:

new european union rules requiring sustainability reporting will be hugely inflationary

Corporate Sustainability Reporting Directive
50,000 companies – all large companies and listed small and medium-sized firms – will have to make such disclosures, up from 11,700 large companies and public entities with more than 500 employees mandated under existing legislation. Auditing of the disclosures will be mandatory.

Brad's entire essay is about the impossibly of predicting how technological progress will unfold even in the short term. It is crazy to think that there are people who believe they know what is sustainable for 50, 100, 1000 years and are capable of planning for it.

The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent jpmorgan, citi or BankofAmerica acquiring SVB before the open on Monday, a prospect I believe to be unlikely, or the gov’t guaranteeing all of SVB’s deposits, the giant sucking sound you will hear will be the withdrawal of substantially all uninsured deposits from all but the ‘systemically important banks’ (SIBs). These funds will be transferred to the SIBs, US Treasury (UST) money market funds and short-term UST. There is already pressure to transfer cash to short-term UST and UST money market accounts due to the substantially higher yields available on risk-free UST vs. bank deposits. These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions. The increased demand for short-term UST will drive short rates lower complicating the
federalreserve’s efforts to raise rates to slow the economy. Already thousands of the fastest growing, most innovative venture-backed companies in the U.S. will begin to fail to make payroll next week. Had the gov’t stepped in on Friday to guarantee SVB’s deposits (in exchange for penny warrants which would have wiped out the substantial majority of its equity value) this could have been avoided and SVB’s 40-year franchise value could have been preserved and transferred to a new owner in exchange for an equity injection. We would have been open to participating. This approach would have minimized the risk of any gov’t losses, and created the potential for substantial profits from the rescue. Instead, I think it is now unlikely any buyer will emerge to acquire the failed bank. The gov’t’s approach has guaranteed that more risk will be concentrated in the SIBs at the expense of other banks, which itself creates more systemic risk. For those who make the case that depositors be damned as it would create moral hazard to save them, consider the feasibility of a world where each depositor must do their own credit assessment of the bank they choose to bank with. I am a pretty sophisticated financial analyst and I find most banks to be a black box despite the 1,000s of pages of
SECGov filings available on each bank. SVB’s senior management made a basic mistake. They invested short-term deposits in longer-term, fixed-rate assets. Thereafter short-term rates went up and a bank run ensued. Senior management screwed up and they should lose their jobs. The
FDICgov and OCC also screwed up. It is their job to monitor our banking system for risk and SVB should have been high on their watch list with more than $200B of assets and $170B of deposits from business borrowers in effectively the same industry. The FDIC’s and OCC’s failure to do their jobs should not be allowed to cause the destruction of 1,000s of our nation’s highest potential and highest growth businesses (and the resulting losses of 10s of 1,000s of jobs for some of our most talented younger generation) while also permanently impairing our community and regional banks’ access to low-cost deposits. This administration is particularly opposed to concentrations of power. Ironically, its approach to SVB’s failure guarantees duopolistic banking risk concentration in a handful of SIBs. My back-of-the envelope review of SVB’s balance sheet suggests that even in a liquidation, depositors should eventually get back about 98% of their deposits, but eventually is too long when you have payroll to meet next week. So even without assigning any franchise value to SVB, the cost of a gov’t guarantee of SVB deposits would be minimal. On the other hand, the unintended consequences of the gov’t’s failure to guarantee SVB deposits are vast and profound and need to be considered and addressed before Monday. Otherwise, watch out below.

What should the FDIC do?

FDIC to guarantee all bank deposits by Sunday night before Asia open and call a time out. Run a process to recapitalize SVB_Financial while managing liquidation of UST and MBS portfolios to be reinvested in short term UST. Determine the capital hole and raise a ‘fortress’ amount of capital from investors co-led by
generalatlantic, sequoia, etc. and smart financial investors to recap bank. Need a balance between sophisticated VCs and risk-adverse financial investors. Replace senior management and board. Equity holders pre-recap are wiped out, bond holders are protected. FDICgov to receive penny warrants on recapped bank as compensation for its backstop guarantee. FDIC develops a new guarantee regime where large dollar deposit insurance is made available up to sensible limits per account to accommodate business borrowers while 100 percent guarantee remains in place. Once new deposit insurance regime is employed, 100 percent guarantee is removed.
4:16 PM Mar 11, 2023

Rescue solution coming

1:00pm Sunday meeting

37,000 customers accounted for nearly $157 billion or 74% of the bank’s assets with an average account size of over $4 million

finance dot yahoo dot com/amphtml/news/silicon-valley-bank-short-seller-215643348 dot html

So the real issue was the executive management team at SVB. This will never make the news. Neither will similiar analysis of SVB over the past several months, including Moodys who 2 weeks ago discreetly contacted SVB.

fortune dot com/2023/03/10/silicon-valley-bank-svb-short-seller-william-martin-twitter-2-months/amp/

the blame lies with executive management (lack of risk management).

"We estimate that Apple accepted $242 billion of payments via its own channels in 2022 (i.e., as merchant of record). The App Store is Apple's most lucrative fintech platform. We estimate that the App Store processed $100 billion of payments in 2022, generating $25 billion of revenue for Apple (assuming an average commission rate of 25%)."

"Apple is clearly focused on building out their portfolio of consumer services including Apple Pay Later (slated for launch in 2023), savings accounts (recently announced as an add-on to the Goldman Sachs issued Apple Card). We anticipate that Apple will continue to add banking services including digital bank accounts, plastic debit cards, and other products and services. Across this full range of consumer products, we project today’s $30 billion of annual volumes to grow at high rates to $350 billion by 2030."

"Apple controlled an estimated $800 billion of payment flows in 2022. We estimate Apple’s total fintech ecosystem flows to grow to $3.2 trillion by 2030. Apple, with its rich and expanding portfolio of unique fintech services, is a key actor in developing the global fintech industry. We are excited to see the developments to come out of Apple in the coming years … but also hope that Apple eventually publishes some data on its fintech franchise!"

Flagship Advisory Partners

Hobart writes The Diff newsletter, which Armstrong stated “pretty much every VC I know reads.”

Hobart’s tweet on Feb. 23 read: “Also in today’s newsletter: Silicon Valley Bank was, based on the market value of their assets, technically insolvent last quarter and is now levered 185:1.” He included in the tweet a few paragraphs from the newsletter.

S&P Global: Over 300 Trillion in sovereign debt worldwide will collapse as the real sector and the finance sector begin to conflict.

call it over-consumption. call it a rebalance.

Math: $18 trillion in deposits, $125 billion in the deposit insurance fund.

"just a small mathematical impossibility"

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