Clarium's Peter Thiel: The Credit Crisis Is Primarily a Crisis of Innovation

At Thursday’s 2009 Investor Leadership Forum hosted by the Argyle Executive Forum and Capital IQ, a speech by Peter Thiel of Paypal and Clarium fame linked future economic growth to innovation and technology rather than government stimulus.

Peter started by noting the difference in the type of questions asked today of emerging markets and the developed world. For emerging markets, the discussion is about how well they will do over the next 20 years. For the developed world, the concern is whether the entire system will collapse within the next six months. Thiel wants to take a different approach and think about the developed world in 20 years. He believes that the growth of science and technology will drive the developed world and will offset the economic headwinds we are facing, including inflation. His overall thought is that science and technology are broken because there is not enough innovation. He contrasts three facts with the bullishness of VCs, startup companies and scientists:

1. VCs made no money in 11 years. (We wonder whether this is really an issue because the nature of venture capital has changed so much in the 1990s. Venture capital is no longer pools of entrepreneurs who invest in other business with a profit motive but has become an asset class where financial products are structured to be sold to institutions with a goal of generating a management fee. If there is a 20% payday at the end, that’s great, but in the meantime the managers collect a cushy 2% management fee. We believe these incentives make venture capital today less of an indicator for innovation than in the past.)

2. There is a disconnect between the exponential technological growth and progress on one side and the stagnant median wage on the other (he acknowledges that the question of progress of the median wage depends on whether you believe that the government over- or understates inflation).

3. Demographic development does not favor innovation.

Thiel then steps back to the 1960s and how commentators then saw the year 2000. Back then, the year 2000 promised permanent bases on the moon as well as manned missions to Mars. Increased productivity would lead to seven hour workdays and 13 weeks of paid vacation. But none of these forecasts came true.

Thiel fast forwards to 2009 and claims that the credit crisis is primarily a technology crisis, or a crisis of innovation. Credit is a claim on the future, and if there is no progress, you will not get paid on your claims. The technology bubble was a sign of hope in the power of innovation. When that bubble burst in 2000 we added leverage to the system to offset the effects of the bursting. When still no growth materialized by 2008, markets collapsed.

Over the last 200 years, growth has averaged 8% per year. This was driven primarily by innovation. If you look back at other time periods, like the 1300s to 1500s, there was no growth at all. Thiel wonders what would happen if we were suddenly to enter a long no-growth zone. This would have catastrophic effects. In order to meet retirement needs, everyone would have to work to 80 and the savings rate would have to approach 40%.

To top off his bearish forecast, Thiel suggests that investments in large cap tech companies are actually bets against technological progress. Microsoft (MSFT) will do well if there is no disruption from technology. Therefore, investments are actually stacked against innovation.

During the Q&A session, a Bloomberg reporter asked the inevitable question about Clarium’s YTD 10% loss. Thiel responded that he was mistaken to focus on the real economy and overweight equities. Clarium did not expect the financial economy to read the real economy in a bullish way. The decoupling occurred because volatility declined, mostly through the help of the government which took risk out of the system, and because the Chinese stimulus was big enough to actually have an effect which percolated to the rest of the world. For the near future, he sees little prospect for volatility to decline more and thinks that China will begin to rein in growth.

Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund (PAEDX).

Comments

[chap08:]

It is an interesting thought that large cap tech companies are a bet on low innovation. I think its slightly more complicated than that, but I think there is some truth in it. Look at IBM. It files more patents than anyone else, but it is definitely not innovative. In fact Microsoft itself, plus others such as EDS and SAP, owe their existence to the fact that IBM was unable to handle innovation.

As for future innovation, I think this is too pessimistic. He talks about the period 1300 to 1500. A major factor in shaking that up was the invention of the printing press in 1440. It is not an exaggeration to say that we had our own equivalent, with the development of the web in the 90s. In future years we will see more innovations, but probably never understand how important the internet was in facilitating them. I certainly hope so. We are at a point in history where we badly need innovation e.g. in energy. If that need is allowed to express itself economically, then there is a good chance that it will be met.

Oct 20 07:03 AM

[Tom E.:]

The disconnect between technology and median wage growth has to do with where the new profits from the productivity improvements are invested.

If they are invested in new industries that create jobs in the US, then median wages will grow. If they are invested overseas, then median wages will decline due to the joblessness created by the increased productivity.

Oct 20 11:21 AM

[Oscar Sahlberg:]

I think the analogy to the technological "ice age" is faulty in two respects. First is that it was highly specific to the western european culture and secondly with innovation occuring randomly for each person (probability of p for each person to invent something) then population growth will drive innovation so it is a bit of a stretch to assume a malthusian perspective where we hit a ceiling on growth and then face declining per capita wealth and doom&gloom(census.gov estimates show pop estimates until 2050 and US is still growing...). Also consider the quality of what $1 buys today versus historical purchasing power (technological improvements do not reflect on the dollar to dollar comparisons so the actual purchasing power of that dollar on a quality base is never captured). As mentioned, the issues with CPI (by fixing the base year goods, you are overstating the true cost of living by not allowing substitution etc) also have a large impact on the analysis.

As a side note, clarium apparently got whacked performance wise. I wonder how much of their rhetoric/thinking is shaped by their macro book rather than vice versa (sometimes people get too married to their positions).

Oct 20 05:57 PM