Audio Length: 00:52:48

This week, Felix Salmon, Emily Peck and Ranjan Roy of Margins talk about the death of ZIRP (a zero-interest rate policy) and what that means for the future; Felix’s glee about the sale of Citi Bank’s Mexican unit, Banamex; and the puzzle game sweeping the Internet.

In the Plus segment: Ken Griffin’s Citadel Securities gets big investment from crypto.

Transcript:

S1: Hello and welcome to the. And my lollipop episode of Slate Money. Your guide to the business and finance news of the week. I’m Felix Salmon Zirp Axios. I’m here with Emily Peck, also of Axios. Hello.

S2: Hi.

S1: Hello. Emily We have an awesome special guest here.

S2: I agree.

S1: Ranjan Roy. Introduce yourself. Who are you?

S3: Hi, I’m Ranjan Roy. I write the margins newsletter on Substack, where we talk about technology and business.

S1: And you had a neo liberal man crush on Bob Rubin in the early 2000s.

S3: We are going to admit that in today’s episode, I am ashamed to say it.

S1: We’re going to talk about that. We’re going to talk about Robert Rubin and his $12 billion acquisition of Banamex in Mexico and what became of that. We are going to talk about Wordle because of course, we’re going to talk about Wordle. Everyone is talking about Wordle and it’s awesome. We are going to have a slate plus where we talk about Citadel and how it’s going to become crypto ified, but mainly we are going to talk about initially, at least we’re going to talk about zirp and the end thereof. And is this the end of Zirp? It’s a big thing. It’s a fun thing. You should listen to it and it’s all coming up on slate money. I really want to talk about viral gaming, because this is going to be a fun episode, Ranjan, but we have to start with the end of the world as we know it because, you know, when the end of the world as we know it happens, that’s something we should probably cover on slate money. So tell us about this. Basically, the world as we know it is named Zirp and now Zirp has died. Is that it?

S3: Zirp is dead. Felix Zirp is dead. Emily I’m sorry, it’s gone.

S1: I was enjoying zirp. Zirp was firm.

S3: Zirp was fun, but but for for context, Zirp is zero interest rate policy. It’s the Federal Reserve’s no or low interest rate policy that’s driven the past decade, and there’s plenty of debate over how much its effect on financial markets. Overheating has been the case, but whatever it is, Zirp is gone. CPI is at seven percent. Jerome Powell is retired. The word transitory. The Federal Reserve will be hiking rates some amount of times this year. There is even an op ed in Bloomberg yesterday saying there should be an emergency 50 basis point hike. So, so zirp has gone low. Interest rates are gone. So what’s that going to do to the risk?

S1: Let me push back on this a little bit. For one thing, even an emergency 50 basis point hike would take interest rates to 50 basis points, which is nothing which is to a first approximation zero. So in that sense, interest rates are still at zero. But more importantly, as you said, inflation is at seven percent, which means that real interest rates are like minus seven percent. You can. The Fed could hike all the way to one percent, two percent whenever, and we would still have massively negative real rates. Is that not still deep, deep into zirp territory?

S3: I mean, tell that to the markets that are down as we’re speaking, I believe another percent or two. I mean, what we’ve seen over the last week because it’s psychological. What’s driven the last decade is the Powell put its bets fed by the f ing dip. It’s it’s the idea that interest rates will always be low enough that it will encourage risk taking and there will always be buyers on the back end ready to kind of step in and take whatever you’ve bought and buy it at a higher price. And I do think there’s there’s plenty of debate over around the natural rate of interest and real rates of interest in what where they would actually stabilize and kind of create a sound economy. But I think at the core, for the last five years, if you’re running a business and you’re doing some kind of discounted cash flow analysis or trying to clear a hurdle rate for an investment, whether it’s zero or I agree 25 basis points or 50 basis points isn’t going to make your decision really over whether you invest in a factory or whether you invest more money. It’s everyone has just been, you know, taking as much risk as possible, buying back shares. Just there’s so much capital in the markets, it’s looking for somewhere to go and that’s going to change. That’s that mentality that that assurance that it will always be there, I think is going to be gone.

S2: But I mean, the markets did go a little crazy, like you said, Ranjan, but I feel like everyone was expecting Powell to say the trend. You know, Powell to try to signal he would raise rates and and all that’s been sort of priced in at this point, like how much more of that drop off are we really going to see it? Like, people now know, OK, the Fed’s going to raise rates a little bit this year, not a ton. It’s still going to be relatively low rate environment. So I mean, like, is it going to go? Are things are going to get much worse? I mean, of course we don’t know.

S1: But yeah, Ranjan what’s going to happen to every single asset class over the course of 2022? We think we need like full on forecasting. No, I mean, I think the big picture is not like, what did the markets do over the first week and a half of 2020 to like? I think the big picture is what’s happened to the sort of insatiable, infinite risk appetite that has characterized basically everything that we talked about with Joe Weisenthal a couple of weeks ago, right? Which which is like just put everything you have into the riskiest possible assets and they will go up, whether that’s crypto, whether that’s, you know, even like weird things like people keep on emailing me about wine investment platform. People are going crazy about investing in cars, you know, like secondhand cars are going up for reasons. But then really second hand cars there is like desirable, you know, a friend of mine was talking about these like vintage Ford Explorers going for $100000 and this kind of stuff and like nothing makes any sense anymore. Does the whole like money has no meaning because money is. We. Mindset, has that come to an end? I’m I’m not entirely sure I can, I can see an argument on both sides.

S3: well, that I like insatiable, infinite risk appetite. I do think is going to go away because I mean, it’s all this sounds complicated, but at the core level, it’s low. Interest rates move people up the risk curve as an individual. There was a day when you if you had a chunk of cash, you could put it in a savings account and get three or four or five percent or even more. Imagine nowadays, if you’re at zero percent on your savings account, maybe you buy equities and next thing you know your YOLO and GameStop options like like it forces everyone to move down, and that’s what it’s supposed to do. And now money has value again. The more we start hiking rates, the more you know your savings account will yield some kind of percentage.

S1: When you say money has value, are you saying that like there will be meaningful interest rates on savings accounts? Yes.

S3: Yeah. Risk free assets money can be in a safe place, not actively pushing some kind of other asset and inflating it in any way. And you will receive some yield, whether it’s a savings account or a certificate of deposit, or everything starts moving a little higher and you don’t have to be out in the equity market buying whatever.

S1: I’m going to take the other side of that. I think that’s false. I think that, you know, this is where people really do care about real yields rather than nominal. And if you have inflation above five percent, then being able to get half a percent or one percent on your savings account is you’re not going to be happy with that because you’re just going to be seeing four percent of your four or five percent of your money just like evaporate every year. You’re going to want to put that money into something that can at least keep pace with keep pace with inflation. And historically speaking, stocks have been a relatively good way, a relatively good inflation hedge. Just because you know what these companies do that you’re buying when you buy into the stock market is they sell things and the things that they’re selling are rising in price with inflation. And so generally, the amount of money they make is going up with inflation. So while there’s no perfect inflation hedge, the stock market isn’t a bad inflation hedge. And so I don’t really buy this thesis that people are going to pull their money out of the stock market in an inflationary environment and put it into a guaranteed loss in real terms in a savings account.

S3: But stocks, but inflation is not good for stocks over the long run over, you know, 10, 20 year horizon. I’m sure we could. It’ll all even out. But but in the short term, I mean, inflation is not going to be good for the stock market. So I can’t look at the micro level, someone thinking, All right, I’ll just move my money into an index fund because I feel the Dow will, you know, give me my seven percent to match inflation when they’re seeing the market come down on a daily basis. I don’t think it it’ll correlate as easily as at again over the long run.

S1: Yeah, I think, yeah, there’s two different things going on here, right? One is like, is inflation good for corporate earnings in nominal terms? Yes, absolutely. You know, corporates are selling widgets and the widgets are going up in price and the corporate corporations are making more money. The second question is, is it good for stocks? And that’s where you start going into questions of discounted cash flows and discount rates. And if you’re basically buying earnings in 10 years time or in 20 years time and you’re discounting those earnings at a higher interest rate than the value of those earnings is lower and therefore the stock price is lower. So you can you can make an argument in both directions for, you know, is inflation good for stocks earnings? It’s inflation bad for stocks. But I feel like we have the tiebreaker here. Emily x Axios Market’s headed to Emily. Peck is going to tie break and say like there’s a small increase in interest rates really mark the end of an entire era of risk-taking and free money,

S3: insatiable an infinite risk appetite.

S2: I think a few things I think maybe the signals the end of like crazy crypto prices or crazy wine stock plays or art share start ups, but probably a little rate increase isn’t going to have a huge effect on the stock market. The other thing I worry about maybe more with the Fed sort of like tightening back up is when the labor markets running really hot, it has really good downstream effects for the people. In the U.S. and around the world that are like on the margins, like African-American workers, for example, and their unemployment rates are still like twice that of the overall unemployment rate. And now if where if the Fed is going to start tightening back up, maybe some of that progress is halted. Maybe some of that is kind of halted. And that’s not so great for those for those workers on the margins. When the Fed is run again, like running the economy hot, it’s it’s really good for for those people, those workers, and that that’s kind of what I’m going to keep my eye on, I think.

S3: I do think that’s that’s the most important question here is will the Fed hiking and being almost trying to be preemptive about inflation and end up genuinely hurting any portion of the labor market? And obviously, kind of conventional economics always tells us that higher rates will necessarily lead to increased unemployment. But I can’t imagine right now when large corporations can easily borrow money to simply buy back shares or again, that any kind of investment allocation manager has really been making core business investment decisions not related to assets in stocks and other types of financial assets. Whether again, if it’s zero or 50 basis points, their hiring will change. Now, clearly again, if it if it affects the overall market, which it very well could or it could not, then maybe there’s downstream effects. But but there’s this there’s this almost weird way of a Jerome Powell or other people on the Federal Reserve always trying to talk about equity being equitable in the labor market and, you know, the labor market participation of underrepresented groups. But meanwhile, their actions are just fueling financial asset bubbles, and they’re trying to use one to cover the other. At least it’s felt like that over the last few years because they haven’t made a big dent in solving those problems. Well, they’ve

S1: been a decent dent. I mean, unemployment among, you know, black Americans and other marginalized groups. Yes, it’s higher than among whites, but it’s come down a lot, and the sheer number of job openings remains vastly higher than the number of job seekers. And I don’t think that a series of rate hikes is going to change that calculus in the foreseeable future. I think the labor market is going to be tight even after a whole series of rate hikes. I can’t see anything that would change that dynamic. Emily had a fantastic piece in Axios about the flywheel of doom, which is basically the, you know, the suit, the structural shortage of workers in the American economy. And as long as there’s a structural shortage of workers in the American economy, I think that most everyone who can, you know, who wants a job can find one. We have unemployment at 3.9 percent, you know, I don’t see that changing that soon. So that’s that’s kind of the positive thing here about the Fed. They have this dual mandate of full employment and low inflation, or two percent inflation, we should say. And historically, that’s been considered to be a trade off right there. Like if we want to bring inflation down, then what we’re going to wind up doing is hurting employment. In this case, I don’t think that’s the trade off in this case. I think that they can raise rates without worrying too much about what it’s going to do to employment.

S3: Yeah, I completely agree. And I do think the dual mandate is the classic notion of what the Fed is supposed to be pursuing. But the correlation or the connection between interest rates and employment we’ve already seen broken over the last year and a half again. Rates are low, but as we said, there’s massive gaps between jobs needing to be filled and jobs being filled, and we realize that it’s not just monetary policy that can solve it. It’s, you know, any other type of policy. The virus is controlling the labor market as much as Jerome Powell right now. So this idea that they have the magic spigot that can make job creation go up and down. I think that connection broke a while ago. So the idea that they are very heavily and publicly factoring that into the way they’re communicating their decisions. Again, I don’t think is the kind of the most, most appropriate way to approach this.

S1: Let’s talk about Banamex, because I can’t not talk about Banamex,

S2: you guys, can I just tell the listeners?

S1: Yes, you can tell them. You can tell them what I did.

S2: So Felix is allegedly on book leave, and it’s late. Later in the evening, and I’m new in this job and there’s a flurry of messages on the Axios slack because Felix is so excited that Citi Bank’s is selling its Mexican consumer banking division called Banamex, which it bought 20 years ago. He is so excited he’s jumping in the slack, giving his hot take. And the next thing I know, I’m told you better write about, not better. You should write about this tomorrow and I’m like, Cool. So I can explain this. I think a little bit to you all. But Felix, I’ll let you take it from here. Since you’re so excited about this, you had to leave.

S1: I’m excited about this. This is this is my this is my. I remember vividly when it happened and Ranjan. You remember this too, right? I mean, this is like we are all like, you know, old people around these parts who who remember. The NAFTA’s dream, right? The Citi spending $12 billion acquiring Banco Nacional de Mexico was like the apotheosis of everything, like what you had with Bob Rubin, who had been at Treasury and with one of the architects of NAFTA, then moving over to this important vice chairman position at Citigroup, where he was making $10 million a year. And the one thing he does is then as he gets there, as he spends $12 billion and buys a Mexican bank and we’re bringing Mexico and the United States together in, there’s going to be free flowing capital back and forth in the Banamex rand is going to be really powerful among the Mexican community in America. And this is like globalism, probably the height of the sort of globalist ideals. And financially, it worked out quite well. For Citigroup, it was a good acquisition. They made a lot of money. Banamex was a very profitable business, and especially after the financial crisis in 2008, the extra stream of earnings they had from Banamex was extremely valuable to them, and they and that kind of diversification they had was was great. Banamex was also probably the best run consumer bank they had in the world, suddenly better run than the American bank, which you know everyone loves to call Citibank. They had one other one in Poland called Hand Laue, which is also well-run, but like this was a place they could learn how to run the consumer bank. It was part of their global ambitions. They’ve been a very global bank for over 100 years. And so this was a very natural progression for Citi and then Mexico being Mexico, everything blew up. There was a bunch of scandals, there was money laundering, there was corruption. Banamex was always the sort of in-house bank of the Mexican government and the elites and the, you know, the president’s brother and all of this kind of stuff doing dodgy stuff and. And so then that yeah, then the guy who is basically in charge of Banamex and actually at one point in charge of all of Citigroup’s consumer banking globally, Manuel Medina Mora gets pushed out this woman, Jane Fraser, gets pulled into in Latin America. She’s like, We need to get a grip on this. We can’t let it be its own fiefdom anymore. So she reran Citi Banamex, you makes it more Citi Bank’s ish. She eventually becomes CEO. She’s now the CEO and CEO. She’s just like, You know what? Let’s just we’re selling off all of the consumer banks. We’re not really a consumer bank. We’re basically a corporate bank. So let’s sell off this one as well. We can probably get a good price for it.

S3: Few I I don’t know if I’m as excited by Felix by the news, but I will say I agree. I think it’s it’s pretty representative of where the world is now versus where it was in 2001, when Citigroup bought Banamex and Felix mentioned Bob Rubin. I will admit I had a bit of a neoliberal mentor crush on Bob Rubin circa 2003 2004. I was I was working at Bank of America on the emerging markets desk. So in kind of the hotbed of globalized globalization dreams and an American bank is going to go global and the emerging markets as an asset class are going to become the future. And Bob Rubin was kind of this perfect emblem of he worked under his secretary, Treasury Secretary of the Treasury, under Clinton, vice chairman of Citigroup, pushing globalization to the entire world. And remember, that was when globalization could do no wrong. Cheyna enter the WTO. Everything was Win-Win. Trade is good for all parties involved. And I think it’s kind of interesting that now it just quietly dies off to the side. And in a press release that only Felix cares about that. That globalization dream is no more and an international and emerging markets for Bank’s is just not that exciting anymore.

S1: So Emily, you tell me about your thesis because you had a great piece about how this isn’t just about Citi. It’s like every bank has has pulled back from this.

S2: Yeah, it’s basically the end of an era for the dream of global consumer banking. It’s just not a good business for these big banks. To be in a country to country like banking for consumers is kind of like a mom and pop enterprise, like you go to the bank that’s closest to your house in a lot of ways, that’s changing with online making. To be sure, but it is the sort of like mom and pop business. And for a global bank like a Citibank or whatever to open all these little branches around the world, it’s not as easy as like opening a bunch of Walmarts around the world. It’s more complicated. The regulations are more complicated, and they just it was too that they couldn’t make it work really well like they got. So they’re getting out. And it’s not. And yeah, it’s not just Citi.

S1: It is. It’s funny. You should mention Walmart (WMT) because they are one of Banamex biggest competitors in Mexico. Wal-Mart says it has a big, a big and successful bank in Mexico because they’re allowed to. They want to have a bank in the United States, but they’re not allowed to, so they don’t. But it’s going to be absolutely fascinating to see who buys it. The two Mexican billionaires on everyone’s lips. Ricardo Salinas and Carlos Slim, both of whom own smaller Mexican banks. They’re probably interested. There’s a lot of sort of patriotic fervor going on because the big three Mexican banks are all owned by foreigners Santander, BBVA and in Citi. And now they’re like, we can get one of them back and make it Mexican again. There will be non-Mexicans bidding for it. I think everyone expects Scotiabank. The Canadians are still into the whole naphtha thing, even if the Americans are not. So Scotiabank is going to be interested. I think the Brazilians might be interested. Like Banco A, it’s a uni banco is a huge Brazilian bank, which has to want to be interested in that. Maybe even and this is the crazy one. The The Big Fintech Unicorn success story of the moment, which is New Bank, which is the online bank in Mexico in Brazil rather would be might be interested in this ancient kludgy bricks and mortar albatross just to get itself like 10 percent of the Mexican market at a at a stroke, at a relatively cheap price. People are saying. Well, people told you Emily like five to $8 billion, they’ll go for this, I think it’s going to go for significantly more than that.

S2: Yeah, that’s what the analyst estimates were. But I mean, who knows things? It is still a zirp world. A little bit right Ranjan. It’s still a

S1: little bit

S3: different for today.

S1: For the one thing I think we should we should mention is that, you know, if Citibank bought it for $12 and even if it sells it for like eight billion, that doesn’t mean they’ve lost money. They have extracted a lot of profits out of Banamex over the past 20 years and more to the point they have built up a huge corporate banking franchise in Mexico that they could never have done otherwise. And they’re going to keep that, and that’s probably worth 12 billion to them right there. So selling the consumer bank for less than they quote unquote bought it for does not mean it was a bad investment. It’s all. I think it really was a good investment.

S3: But if you’re a bank today, do you focus on international as a vector of growth or given you can go into climate finance or crypto or any other kind of like digital finance? And you know, there’s any other number of avenues for growth these days? If you’re a bank, do you? Is that again? Because as we said 2001, this was the dream that you’ll go into every new market and take over and offer any number of new products? Is it just a lot easier? And are there other ways to grow nowadays that you don’t need to get yourself tied up into?

S2: Well, I think Citi would tell you that there are still going to serve rich people around the world and the institutional banking. So few is giving up on the dream of consumers around the world, but like ultra wealthy people as fine institutions are fine.

S1: Everything you talked about, whether it’s climate or crypto or anything else, is global, right? The corporate banking is global. Corporations are global. If you want to bank the biggest companies in the world, you have to bank them globally. So it’s not that you you’re retreating from having a global footprint, but what you’re doing and even like the ultra rich, are global. And Citi loves to say that they want to bank lots of very rich folks who who jet around the world like the Citi private bank of, you know, private banking is. Yeah, it’s not like there’s no way they’re competing with the big private banks like the big Swiss guys, you know, or even the like, I’m not taking that part of their rhetoric too seriously, but for the corporations that they’re a real player. And then the question is, do you do you have like that physical visible branch network globally? I’m like, I used to travel around the world and basically every single Citi I went to in the world had a Citibank in it. And it was like, this is like a global brand that is no longer going to be the case. The other big bank that really wanted that global footprint was HSBC. It had a big global ad campaign saying, like, we are everywhere, wherever you want to be, we are going to be there. They’ve kind of pulled back there like a shadow of that. Now Standard Chartered is big in Africa, but it’s not really global. Santander is probably the closest to a global bank, but that’s mainly just Iberia and the yeah, they’re still trying to be global. But like, I think Santander is the last one standing.

S2: I just got this weird theory. Can I can I say it? And then we can decide, Yeah,

S1: I love we’re there,

S2: please. So I think bank branches themselves are at this stage 2021, mostly like a marketing move. Like just like you said Felix, you go around the world, you see cities everywhere. It’s like really great marketing for the bank more than anything. Well, I mean, they make money fine, but it’s a marketing move. But like today in the in 2021 in the COVID world, being out in the physical world and having a marketing presence in the physical world is maybe less important than it has ever been. So the value of that, like brick and mortar type marketing is much lower and it’s better to like spin it forward and see what you can do with like fintech or all the other things. Ranjan mentioned and do more marketing and a diverse global way, and maybe a lot of it on apps or the internet or whatnot. It’s just not as important to have that physical footprint.

S1: Just think how many, how many TikToks you could make if you like with the money you save on branch opening.

S3: Yeah, exactly. If I’m hearing Emily correctly, branches in the metaverse, is that where we’re trying to go?

S2: Maybe that’s what I’m going to Bank’s anymore. I mean, I know I just said, I’m like, You can get me for inconsistency in the segment, but no one really needs bank branches anymore. I do all my banking, you know, on my app, on my phone. Most people do like no one’s going. I used to go with my father every week to get his cash for the week at the bank and my lollipop. But like, literally, no one does that anymore. Like, we don’t we don’t need these branches anymore at all. So why would they need branches globally where it’s kind of like a pain to manage

S1: and you run into every, you know, periodic corruption scandals?

S2: Yeah. And periodic corruption scandals and money laundering?

S3: Never good. Never good.

S1: Let’s talk about Wordle, this is all I’ve really wanted to talk about. So I get to talk about Wordle now I am obsessed. You have no idea how many text threads, group chats, various different sets of people I’ve been talking about Wordle to in various degrees of granularity. I have a friend who, you know, actually has created his own Wordle clone so that we can now play two different worlds. And his Wordle clone has a larger number of possible answers than the actual Wordle, which only have like two and a half thousand answers. It’s it’s a total thing. It’s one of the few sort of unabashedly unalloyed good things of 2020 to everyone can be happy about, except for maybe a handful of English people who got very upset about an Americanism this week.

S2: For those of listeners who aren’t on your threads, on your text chains or on Twitter, we probably should tell them what Wordle is right.

S1: We should should get that. All right. Emily bring what is Wordle?

S2: Wordle is a word game created by a dude in Brooklyn called Josh Wordle, and it is a word game that there’s only one puzzle every day and you basically get six chances to figure out what the six-letter word is that day. Five-letter word and five letter word. Sorry, six chances, though still. And so you guess the letters and then Wordle tells you if you got the letter right or and the position of the letter right, and you keep guessing until you get the word. And I am of middling skill at this, but people are very into it. It’s like one of these things that have taken over Twitter. If you go there, everyone, it seems like I follow, but maybe this is like a New York media thing are all posting their Wordle scores kind of like how they used to post their spelling bee scores in 2020. But now it’s Wordle

S1: and it’s and it’s a it’s a wonderful, it’s pure and it’s pure like it only happens once a day is not trying to. It’s not trying to drag you into some ecosystem. It’s not trying to sell you anything. There’s no upsell, there’s no ads. There’s no well, there’s some some terrible person created Wordle app and called it Wordle because there’s no IP. There’s no copyright. Do not download the Wordle app. Do not give that man your money because that is a horrible copyright and there are now. It is so easy and all of the code is right there on the page. You just download it. It runs in your web browser, so it’s very easy to copy and paste and create clones if that’s what you want to do. So now I have friends who are doing it in Italian, who are doing it in Spanish, you know, because people are creating all of these, you know, foreign language versions because it’s really easy to do that. And and it’s just like this wonderful feeling that the whole world has found this fun thing that it can do in a pure and good way. So now Ranjan, you’re going to tell me why it’s all evil, right?

S3: No, no. I think I genuinely think Wordle the game. I think part of the joy of it is, is it kind of represents that utopian internet that the web one is it or Web two. I’ve lost count that we were all supposed to enjoy again, that created not for profit. There is no hook or scam to the game. Every time I played it, I’m keep waiting for some kind of pop up to show up asking for money or something to happen, and it doesn’t. So I think part of the the virality of it has been people actually being shocked that someone could create something just for enjoyment and just for bringing people together on the internet.

S1: It sounds like he’s created a viral game and he hasn’t become a millionaire. And that’s good.

S2: Yeah. Oh, and he created for is his partner for his wife because she liked, like doing word games. So at first it was just he

S1: and she picked out all of the words like the two thousand three hundred ninety nine words or whatever it is. It’s just like the ones that she recognized. And the one thing I will say because I have gone down so many rabbit holes, the one little nugget that I will, I will give this late money, listeners. If you play Wordle, which you probably do because everyone does is the. The letter s is much less common than you think it is, and it almost never appears at the end of the word because there are no plurals and there’s no like pleasant participles. So don’t lie if you want a letter that does appear, it’s more likely to appear in the first position than in the last position. The letter is very common in the last position that you might not expect is why.

S3: I can I can see that I can see them. I mean, I think also the question do you think Wordle will be being played three months from now or six months now? These these dynamics around viral gaming where it kind of and especially again, making it so easy to post your score to Twitter, obviously was the key viral dynamic. I mean, we’ve seen these games come and go. We’ve seen these kind of crazies. Do you think, where are you going to be playing Wordle six months from now?

S1: I think it really just depends how many people are texting me the results every morning because so long as people are texting me their results every morning, I’m going to have to do it and and see whether I got better or worse than them. I think that’s the that’s the other really important part of the game dynamic is that everyone on the planet plays the same word every day. So you’re all playing exactly the same game, and that feels like a collective endeavor, which I like. The one thing which is a little bit hidden in the top right hand corner is this thing called hard mode. You can turn it on and then if you turn on the hard mode, then your score has an asterisk next to it when you when you posted to Twitter. Hard mode is what it’s also like naive mode, where you basically have to turn every single word into a gas and you have to use all of the letters that you know that you have. It does make it a little bit, you know, a little bit less creative, but definitely harder.

S2: Speaking of flash in the pan games I was thinking about this week, Zynga, the creators of Farmville, were bought for $11 billion, which I could not believe because I thought they had a flash in the pan business model, but apparently it’s worth $11 billion.

S1: Does anyone play Farmville anymore?

S3: It is important. They did IPO at $12 billion, 10 years or 11 years ago. So so from from ROI perspective, not too great. But yeah, I think I when I saw that news, it definitely made me think about Wordle and the viral game dynamics. And almost Zynga is kind of the opposite utopian vision of this utopia where it just Facebook rode it to kind of growth. Zynga rode Facebooks of growth and Facebook just cast it aside in 2012 2013 and let them kind of wither away. And again, Farmville would upsell you on any number of paid types of additions. So, yeah, I think I mean, even Felix making the point that it’s one word that we all come together around, that we break out of our filter bubbles. I’m even getting more sold on Wordle after talking to you guys, I think is the perfect division of the internet year.

S1: Zynga the one thing it did manage to realize that it couldn’t be a parasite on Facebook, so it did wind up doing a bunch of acquisitions is quite big on, you know, Web3 Crypto Easter. I think that’s what Take-Two was really buying. I don’t think take it’s like, Oh, the future of social gaming and Facebook is why they bought Zynga. But yeah, that Zynga is the the exact polar opposite. This is like the Wordle is the enticing and and just the the effects of it, right? It’s almost like the Google homepage, you know, it’s just a blank white page with some squares on it. That’s it. And it’s so clean.

S3: So my my heart will be crushed when they announce that Tiger Global has invested $100 million into these around Wordle.

S2: I believe in Josh Wordle.

S3: Please, Josh, please know Tiger Global

S1: talking about crazy investments. Remember yo yo yo yo.

S3: Greatest app that ever existed. It was the future of the interior brand, right?

S2: It was an app. You could just say Yo to your friends.

S1: It’s the only thing it allowed you to do is just say Yo.

S3: And it raised, I think, three or $4 million. But but actually, Josh Wordle, one of the other things he created, he created the button on Reddit. Not sure if you saw this that and I remember when it came out another kind of weird, utopian, almost art art piece of internet culture. Although you have to wait to press

S1: down, right?

S3: You just pressed it. You just press and press down. And and it did nothing. You don’t know what it would do. There was no reason to press it. Yet hundreds of thousands, or maybe millions of people would press the button on Reddit. And yeah, it was. He knows how to go viral. He knows something how to bring some joy to our lives.

S2: And he’s not abusing that power, so we can all appreciate that as well.

S1: Numbers round Emily. Do you have a number?

S2: Yeah, my number is my number is 94 percent. And this comes from the piece you were talking about earlier Felix that I wrote. For Axios, on Friday, 94 percent of the unemployed workers in December who said they don’t want a job. 94 percent of them were over 55 years old. That is crazy. It’s it’s about three point two million people. And so the point is old workers are really still sitting on the sidelines. A lot of them afraid for their health. But the a lot of them are just like chilling out because their stocks went up so much and their retirement accounts are looking sweet. So they’re not working, either. Some of them are grandparents who are taking care of children, blah blah blah, because we’re still living in a weird time. But I feel like the story of older workers not working is not an appreciated tale because a lot of the time as people retire and go back into the job market like you might retire from your fancy job and then decide, like, I want to take a few hours, I was talking to someone who they wanted. They retired, but then they wanted to like work at Home Depot for whatever reason, because they like puttering around the house, and they thought it would be like a fun thing to do in retirement. But people don’t want to take jobs like that right now because they’re they they the word is they suck because, you know, retail is hard right now. People are getting sick all the time. It’s just not safe anyway, until all these older workers are, some of them come back in. I think the labor market will be crazy no matter what the Fed does.

S1: That was the big story of 2000 at the height of the boom in like the dotcom boom in 1990 2000. The, you know, the monthly payrolls report would keep on going up while the unemployment rate didn’t go down. And the and the reason was that all of these old people would just wind up getting sort of late dragged out of retirement because the companies were so desperate to hire them. And they’re like, Well, I can’t say no to this. This is a great offer. Also, a lot of them were the people who would like, you know, who programmed the original computers with the Y2K bugs, and they were the only people who could program them. Remember Y2K? But that that phenomenon of, you know, when a job market is really hot and people are willing to pay really good salaries, then that will bring unemployed workers off the sidelines and get them to take jobs is something that I’ve been. I’ve been waiting for that shoe to drop for a while and it just hasn’t dropped

S2: because COVID,

S1: it’s the pandemic because got it. Yeah.

S3: Interest rates don’t affect employment in the same way that we would, there’s all these other factors.

S1: My my number is is 17, which is the number of English Premier League clubs with crypto sponsorship deals. There are 20 English Premier League clubs, so 17 of the 20 have crypto sponsorship deals. There was a wonderful article which I will try and put in, the show notes if I can find that which, which talked about Floki. Right? Floki is a shit coin that was invented. It is a coin is named after Elon Musk’s pet Shiba Inu, whose name is fluky. It is not Dogecoin. It is not Shiba coin. It is Floki. It is called Floki Inner Floki Inu and is named after Elon’s dog and it has already signed up Napoli and Bayer Leverkusen and like. Some club in some big club in Russia, like they are sponsoring a whole bunch of huge soccer clubs. And they’re just, you know, like a fourth tier meme coin.

S2: I don’t understand actually how a decentralized coin can sponsor a soccer club. Am I missing something in my brain?

S3: I don’t see a fair question. That’s a very fair question. And someone is making a good amount of money somewhere.

S1: So what happens is that every time, every time you buy Floki, like four percent of that money goes into some pool to like. Make Floki. Here and more speaking. And if they take that money and they use it to buy soccer, soccer, it deals. Yeah, the whole thing is,

S3: why would it so, so more

S2: people? Oh, because more people than it’s mark, you’re paying for the marketing of the coin.

S1: You’re paying Peck Musk. But one of one of the interesting things about crypto is the way in which it has really, really aggressively gone into sports as a way of reaching, you know, young men who are hard to reach otherwise. So there’s this ad featuring like Matt Damon is on every sports cast, and all of the sports fans are getting heartily sick of it. There’s the Crypto.com Arena in Los Angeles. I think FedEx sponsored an arena, basically every crypto company. If they’re if they’re going out and they’re spending huge amounts of money marketing themselves in the real world, they are doing it in sports. And that connection between crypto and sports is something which I have to admit I didn’t see coming. But yeah, Ranjan Musk, a number

S3: that could lead into my number two two point zero two percent is where I’m looking for for the 10 year yield to go and when it hits there, it was last there July 2019. And I think that’s when we will all officially say Zirp is dead. It’s kind of inching there. A few months ago, it tried to make a move towards there. There always has to be some psychological number in the financial markets where we all kind of say something has fundamentally changed. And I think two percent on the 10 year U.S. Treasury yield is that number.

S1: And OK, but so can they just like to be clear about this? Are you saying that we didn’t have zirp in July 2019? Like if, if, like the end of Zirp and this like end of an era thing, is this era really like only a couple of years old? And like even as recently as July 2019, we were not in a zirp averse.

S3: No, no. There was there was a hiking cycle from December 2015 to, I think, December 2018, and then it started trailing off a bit so. So the zero went away for a few years in there. But the added to the mentality again, the idea was the moment the market freaked out. In December 2018, Jerome Powell started cutting, even though nothing else fundamentally changed about unemployment or inflation. It was simply, the stock market had a bit of a freak out, and they started started pushing down rates. To me now, what’s changed is there is inflation. And again, that’s why these these markers that in the past wouldn’t have been as significant. That’s why right now, there’s definitely going to be big psychological markers that the entire market’s going to look at because inflation’s here, so. So in the past, you could just cut the rates whenever you needed to. Now you can’t do that anymore for me.

S1: For me, I think the 10 years yield that I’m looking at is not the 10 year U.S. Treasury yield to much as it’s like the 10 year bond yield. If I want to see 10 year yields in Europe above zero, that’s that to me is like so long as you have 10 year negative 10 year yields anywhere in Europe or anywhere in the world, really. I’m still going to hold that we we still live more or less in a zero interest rate world because, as Ranjan notes, than anyone, you know, everything can wind up getting swap from one currency into another currency. And if you know, if we’re if we have yields, which when you swap them into euros are still negative, they’re still kind of negative.

S3: Yeah. And we avoided talking about nerve versus zirp, which is negative interest rate because nerve just does not sound is going to zirp.

S1: So maybe next time we’ll talk about NERT. We have so much more to talk about, but we are not going to do it in this show unless you are a sleepless listener, because we are going to talk about a little bit more about crypto. Actually, we’re going to talk about the crypto investment in Citadel Securities, which is Ken Griffin’s hedge. Well, it’s nice hedge fund. It’s his bank. He was always a bit of a crypto skeptic, but now he’s taken the billion dollars of crypto money, so we’ll talk a little bit about that in Slate Plus. Otherwise, thank you for coming on. It’s been awesome having you.

S3: Thank you for having me.

S1: And thanks to all of you guys for listening and thanks to Shane there for producing and we will be back next week on Slate Money. So, yeah, let’s talk a little bit about Citadel. This is the company that is 85 percent owned by Ken Griffin, and it makes him billions of dollars a year. He’s a an old fashioned billionaire who made his money by literally making billions of dollars and getting, you know, checks and billions of dollars every year because he runs a company that is that profitable. It’s not one of those things where he is listed on the stock market. And if you look at the value of his paper stock, then it’s worth a lot of money. He has been very successful and he tried to make a bank. He had a hedge fund. He tried to turn into a bank didn’t really succeed. But what he did succeed in creating was this thing called Citadel Securities, which is just very, very good at trading stocks. And it’s kind of hides behind all of these places like Robinhood (HOOD). Now there’s this billion dollar investment in Citadel securities from basically crypto land Ranjan. Tell me what’s going on.

S3: So paradigm securities are, I’m not sure, Paradigm Capital is a crypto fund. One of the co-founders is Fred Ayresome, who is Coinbase co-founder. They, along with Sequoia Capital, one of the most famous traditional technology investment funds, both invested over a billion dollars into Citadel Securities. It was a bit surprising to everyone because again, Ken Griffin has been very vocally anti crypto in the past, so to take money from a crypto fund definitely raised some eyebrows. But also, he didn’t really need outside capital. As you said, these businesses are shockingly profitable. In 2020, there are some numbers that leaked Citadel Securities made off of $6.7 billion in revenue, made $4.1 billion in EBIT. I mean, these businesses are just all profit. So in a traditional sense, there’s no real reason to need outside capital when you’re generating that much cash. But it’s clear that this capital infusion, you know there’s more to it. There’s something strategic. They’re obviously going to start going after the crypto market. And why not? There’s so much money to be made there right now.

S1: Yeah, because what he’s doing is he’s buying and selling stocks, you know, high frequency trading. He’s making pennies on each trade. But in crypto, if you do high frequency trading, you know you can make orders of magnitude more as just the efficiency of the stock market is just in stark contrast to the incredible inefficiency of the crypto market. So it’s easy to see that what he’s doing is he’s bringing in not only the capital from paradigm, but also the expertise they have in order to be able to try and take his expertise in terms of like, fast arbitrage. Combine it with their expertise in in deep market structure, understanding of the crypto market. And maybe just turn this company that is now valued at 22 billion into something that is valued at 200 billion.

S3: Yeah. And also, I think what’s smart, very smart about it from the Sequoia Paradigm side is you have Robinhood, who’s basically their entire revenue comes from payment for order flow to citadel. Robinhood is a very nice UX and skin of an app, and it has a customer base. But now every other brokerage can basically create that skin, that kind of front layer that the customer interacts with. But the money has always really been made in the pipes underlying that, which is Citadel Securities Vertu Financial. So why invest, especially Robinhood? Their business is slowing down in aggregate. The stock is down a lot. It’s kind of showing that the real value might not be in that front facing thing interacting with the customer, but where the money always was being made in the actual execution of the trades themselves,

S2: like a big part of Robinhood’s consumer business. Is people trading crypto, right? But Citadel Securities isn’t involved in that or hadn’t been involved in that. They’re just. Yeah, exactly.

S1: Exactly. Exactly exactly. Like Robinhood makes all of its money in in crypto. So Citadel is like, we should be where Robinhood is making their money rather than where Robinhood is like doing the last leader on the stocks.

S2: That makes sense.

S3: I think that’s it makes sense. It’s it’s a good. It’s weird when something just makes perfect sense like this. No.

S1: The weird thing about it is that Ken Griffin has been relatively vocal over the years, saying that crypto is like a massive Ponzi scheme, which them just because it’s a massive Ponzi scam doesn’t mean you can’t make money off it.

S3: Yeah, if anyone I think should be OK with seeing that, there’s money to be made in what is as Ponzi like dynamics, but and especially he won’t be. Owning the assets, he’ll simply be making money on the transaction of the assets. So why not? Why not get into that? I mean, you don’t become Ken Griffin without seeing where there’s money to be made and going after it.

S2: Wait, how rich is Ken Griffin anyway? He doesn’t get talked about the way some of the other rich guys do, but

S3: gazillionaire, maybe

S2: gazillionaire. So he’s on the Forbes billionaires list. Yeah, right.

S1: He’s the one who famously bought the Constitution for forty some million dollars

S2: last year

S1: outbid all of the crypto people just just because, well, no, partly because it’s but, but also partly because he was like, You crypto. People think you can raise lots of money to buy the Constitution. I can write this out of my checking account and, you know, never mind. Yeah, I’m just going to buy it myself.

S2: OK, here’s his net worth. According to Bloomberg, it’s twenty eight billion after this deal. I guess it jumped six and a half billion with the deal

S3: his net worth to because he bought that two hundred and forty million dollar penthouse in New York. He has that kind of old finance way of spending money and showing wealth, I feel, versus the tech billionaire where even if they’re buying up islands or whatever, they keep it a little quieter. Ken Griffin definitely has the I will make sure everyone knows I’m very rich.

S1: Yeah, he bought that big place just down by, like Buckingham Palace in London, he’s buying properties up around the world. I’m I’m relatively comfortable saying that we’re not going to see him dropping $50 million on an NFT anytime soon.

S3: I mean, maybe, but he’ll be making money off the people that do

S1: absolutely a million

S3: dollars off the NFT. Actually, there was the Matt Levine in his newsletter. He had a good line about how in the future the conspiracy theory will be. Ken Griffin will not only screw everyone who raises money on the Constitution Dow, which is what we were just talking about, but he’ll also be making a transaction or a fee off of every single person who puts money into that sort of thing. And I mean, again, if anyone can send

S1: since we’re here on on sleepless, I think I want to end this just by noting the true crazy of Constitution Dow, which is that everyone knows that a bunch of people put in a bunch of IEF and raised a bunch of money and got these people coins in return, which were meant to be used to buy the Constitution. They weren’t able to be used to by the Constitution, so you could take your money back, except for no. But most people didn’t take that money back because doing so would cost so much in transaction fees that it wouldn’t be worth it. And so they’re left with these people tokens, those people tokens are now worth hundreds of millions of dollars and anyone who put money into the Constitution, Dow is now sitting on a massive profit. And it’s like even though the Constitution Dow failed to buy the Constitution. If you put money into the Constitution Dow you now own, the token is worth much more than you paid for it.

S3: But I have one big question about all of this now that now that we’ve passed December 31st and people are going to start putting together their taxes for last year. From what I understand. If let’s say you made a bunch of money needs the moment, you then go and sell the eith to buy the Constitution Dow, which you have to do to transact, to do it, you should be taxed on that. Profit is a capital gain. Correct. And in fiat U.S. dollars. So even though then your Constitution DAO tokens are worth whatever on paper, you will owe the IRS some amount of real dollars. And that’s going to be happening across the entire world of NFTs and DAOs or whoever was sitting on crypto gains last year and then transacted that into some new crazy asset is going to owe taxes on the initial gain, right?

S1: Correct. Well, yes. Yes, yes, yes. But everything you said is absolutely true. The minute you spend any crypto, if that crypto has risen in value since you bought it, then you have to pay capital gains tax on the rise in value. The fact of the matter in the real world, though, is that no one does like, I’ve been talking to crypto experts about this, and they estimate that of all the people who make capital gains in crypto. Of all the U.S. persons who make capital gains in crypto, like the people who are, you know, who pay us taxes every year, maybe five percent of them actually pay taxes on those gains. Most of them just like treat them as gains and treat them as like, you know, cash under the table and never pay taxes. And if you have an account at Coinbase, Coinbase (COIN) is not going to report to the IRS. There’s no like 10 99 form that you get. You’re absolutely right. You do have to pay taxes on this, but also no one does. And trying to work out how that’s going to square itself is one of the huge big unanswered questions in the crypto world right now.

S3: Yeah. Now I’m curious how that all plays out because it still feels that every JPEG that sold for $6 million. Was that just tax avoidance, or was that something else?

S1: All right. That was a fun, sleepless by.

S2: Sleepless by.