Shifting Baselines

Callum Roberts, author and marine conservation biologist, describes shifting baselines as:

…intergenerational changes in how we perceive our world. Each generation sets its mental benchmark of normality by how the world looked when first encountered, often in youth, and sees change relative to this. Younger generations accept as normal a world that seems tainted and degraded to older people.

One of his former students looked at fish catch records in England and Wales since 1899 and discovered that:

…a fleet powered mainly by wind landed five times more fish annually in the late nineteeth century than the sophisticated modern vessels one hundred years later. When she accounted for the technological advances that made the modern fleets more powerful and efficient, the gulf was even greater: nineteenth-century boats landed seventeen times more fish per unit of fishing power expended than those of the twenty-first century. If a nineteenth-century fisherman could somehow be transported to the present, they would conclude that the sea had been emptied of fish and the bottom left barren.

The financial markets, too, seem to operate in a psychological cycle of shifting baselines. Events that would have seemed completely preposterous and indicative of far more portentous trends in the near past are now viewed as entirely normal:

  • A digital media company’s co-founder concocted an elaborate ruse to imitate a YouTube executive on a conference call with investors. The CEO blamed the incident on “a mental health crisis” (although the co-founder was apparently quickly back to work and “thriving again”) and the board declined to investigate until a wave of bad publicity.

  • The idolatry of startups / founders, resulting in an upside-down world where purportedly ESG focused investors are also perfectly fine with dual-class shares and other concessions to control or oversight. The prime example of this is WeWork, where “little else mattered so long as WeWork’s shares were going up in value. It didn’t matter that [Adam] Neumann publicly said WeWork was profitable when it wasn’t or that he took out hundreds of millions of dollars to spend on homes and staff that trailed him around; it didn’t matter that WeWork was spending $2 for every $1 it took in; it didn’t matter that WeWork was a real estate company. None of it mattered because Neumann was able to convince the market that WeWork had extraordinary value”1

  • A paper on SaaS startup valuations, from an industry leader, offhandedly mentions that companies are trading at a “23x revenue multiple” vs a “historical norm of 10x.” Even this more modest 10x revenue multiple was considered “ridiculous” during the dotcom bubble.

  • A biotech company is valued at $15B, despite having “little revenue.” The company “can’t name a single significant product that is manufactured and sold using its organisms” despite having been founded “13 years” ago.

  • An electric car company that still has a market cap of $4.4B, despite its founder being investigated for fraud, and despite a “demo” video of its truck in operation being exposed as the truck “simply [being] filmed..rolling down [a] hill” with “the camera positioned at an angle that would make the road appear fairly level.”

  • The unabated craze for cryptocurrencies and NFTs, often of questionable value: “Every day, dozens of [hype coins] are created around the world by developers promising fortunes to would-be investors. It usually ends poorly. The vast majority of these tokens are worthless within a couple of weeks. The developers, on the other hand, can make tens of thousands of dollars, sometimes a lot more.”

  • Record options trading activity. Warren Buffett has famously called derivatives “financial weapons of mass destruction”, and it’s hard to believe that this trend ends well in the hands of unsophisticated retail investors.

You don’t need complicated valuation metrics (although those are also at all-time highs) to conclude that something is seriously amiss, and it’s not hard to see why some prominent investors are calling this the “golden age of fraud.”

Because of these shifting baselines, where increasingly speculative and fraudulent behaviors are normalized, each generation seems destined to repeat the follies of the past. John Kenneth Galbraith summed it up thirty years ago:

… financial disaster is quickly forgotten. In further
consequence, when the same or closely similar circumstances occur again,
sometimes in only a few years, they are hailed by a new, often youthful,
and always supremely self-confident generation as a brilliantly innovative
discovery in the financial and larger economic world. There can be few
fields of human endeavor in which history counts for so little as in the
world of finance.
Past experience, to the extent that it is part of memory at
all, is dismissed as the primitive refuge of those who do not have the
insight to appreciate the incredible wonders of the present.

Or, maybe this time it really is different.

1

As a surfer, I found another anecdote about Adam Neumann pretty entertaining. Apparently he hated paddling (some might say this is an essential part of surfing) and would just “step-off” a jet-ski in to his waves. “‘The way I surf, I don’t have time for paddling,’ he once said to a colleague.”