Virtualization – The Next Big Theme (w/ Daniel Arbess) | Interview | Real Vision™


Incredibly excited today to meet with Dan Arbess. Dan is a friend of
mine who’s been involved in the industry for a long time starting back in
the late 1980s and early 1990s, when he was the youngest
Western lawyer on the ground in Eastern Europe. He had a unique opportunity to sit with the
governments of Russia and Czechoslovakia in the process of restructuring
their nationally held companies into profit of
publicly traded vehicles. Dan brought that perspective on the fall of
communism and the insights that actually predicted the fall of communism to his investing
career and continues to be a big picture investor who invests across long arcs. As we see some of the dynamics that I’ve talked
about another interview is this idea that perhaps the curtain is closing again the world
is reversing I’m really excited to get Dan’s
perspective on what’s happening out there and
where he sees the opportunities today. Dan, friend, mentor. So excited to have you here to talk about
whatever you want to talk about. Delighted to be here. What do you see now as you see the Chinese
are placing increasing emphasis on SOEs and reducing the impact of the market
economy, even as they give lip service to the
idea of reform? The Czech Republic or Poland or many areas
in Eastern Europe– Russia, for example– have dramatically reversed this. And both you and I share a love for Ayn
Rand and the ideas behind independence, so this feels very much like something that isn’t
part of the natural circle. But it seems to be playing out. Do you not see that, or do you see
that as well? I see it. It’s such a pleasure to talk to you, whether
it’s on camera or off camera, because you’re such a brilliant thinker. Packed into the question that you just asked
are layers and layers and layers of developments
that I believe all point back in one direction. So remember that I said that I’m a big multi-year
idea guy, so I’ve only invested in 4 or 5 big ideas and implemented my understanding
of those developments in a variety of ways in thousands and thousands of positions in
trades over the last 15 years. So the evolution of the devolution of communism
from Europe to Asia through China’s industrialization, urbanization, which involved
a lot of fixed asset and investment. And most
recently, the transition to the big moment that everybody’s been waiting for in China,
where Chinese consumers are a player and a magnet
for everybody’s production, and China becomes a consumer economy. The arc of that is something that I’ve followed
for the past almost 30 years now. Along the way, I got the housing crisis, as
you know. So when I was looking for an asymmetric way
to get short the housing speculation, after trying to do it by shorting stock in the homebuilders
too early in 2005, I remembered the mortgage CDO structure and went out to look
for mezzanine tranches of mortgage CDOs to buy protection on. So I got the housing short. It was very, very clear in the 4th quarter
of 2008 that there was going to be a huge opportunity in reflation,
because when you saw the Treasury Secretary Hank Paulson on his knees begging Nancy Pelosi
for congressional action, it was very clear that Congress was going to be incapable
of taking steps that were going to be necessary to rescue the financial system and
to rescue the economy. So it was absolutely
going to fall to monetary policy and to the central bank. And if you listened carefully to thoughtful
people in the 4th quarter of 2008– I remember Jim Bianco in particular being brilliant on
this– there was all kinds of signals that there
would be extraordinary monetary policy, and you could connect the dots pretty quickly
to understand what exactly that was going to
be after interest rates were brought down to the
0 bound. It was going to have to be quantitative easing,
and so I made the call in ’08 after being short housing, long mining for China
on the weak dollar, which did beautifully in
’07 and ’08. So it was up 40 in ’07 and up in ’08. In the 4th quarter of ’08, I said, OK, now
it’s time to flip and go long, financial assets from
investment-grade credit all the way down to equities that are going to benefit from financial
market reflation that’s going to come from unconventional monetary policy. So ’09 was a terrific year, OK? Along the way, there
were other big ideas, like shale, like Abenomics, but by 2014, the big ideas were getting
smaller. There was one huge idea– I’m going to come
back to your question now– that was becoming apparent to me, which was that the
penetration of software and services, the potential penetration of software and services,
into traditional industries was very likely going to bring big displacements, big cost
reductions, labor displacement, and capital displacement, because you could achieve efficiencies
in traditional industries with software and services that don’t require capex. So back to your question of what’s going on
in the world, we are in the middle, in my view,
and I think our generation, to some extent, overlooks this, because we are all in our
heuristics, in our mindsets that we learn when our world views were formed, whether
it was in the late ’70s or in the early ’80s. The world is a completely different place. Normally,
everybody likes to look backward at what they did before and then make adjustments
based on what they have to do to accommodate the most limited change that’s taking
place. I really believe that our generation is still
missing the foundational changes that were taking place in the economy and in the whole
world being rocked by technology. What I mean by that is you had an economic
transformation 150 years ago, of an agrarian economy, where the focus of the economy and
the growth in the economy transferred from the farm to factory and services. We are in the midst now of a completely new
economic transformation as significant as the Industrial
Revolution was, where we are moving from factory and services, which are labor intensive
and capital intensive, to information and process data, which is not capital intensive
and not labor intensive. So what is happening around us is jobs are
being displaced by technological process. People are becoming anxious, both existentially
about their security– which I’ll come back to in a moment– and economically, because
they see the unemployment rate is down, which in my view is completely incomplete. What’s much more relevant is the participation
level in the job market is at the lowest point in
decades, and the participation rate in the job
market– especially for young people in the prime of their working age, 25 to 54, I believe
it is– is the lowest that it’s ever been. So what’s going on here? People are available to work. They’re out of the work market. Some people say, well, that’s because the
baby boomer generation is retiring. Not true. Baby boomer generation participation is higher
than expected. What’s happening is new
graduates are not getting jobs. Why? Because jobs are being displaced, and it’s
not just manufacturing, factory floor jobs. It’s white collar jobs. It’s legal jobs. It’s data and analysis
jobs– all being displaced. So at the same time, the same technological
forces are making information readily available to everybody
for free. So this is the tension that you’re describing
though, because on one hand, it sets the stage for tremendous gains and productivity,
which potentially leads to significant rises in
standards of living, right? Reduced capital investment, reduced labor
investment for the same output fundamentally is a good outcome,
right? But when it leads to this type of
insecurity that you’re talking about, it creates counteractions, right? The political state
emerges to reassert control from the corporate actors, who are exploiting these loopholes,
and try to reestablish that security. And so it– there’s a feedback loop. The culture really is, has become, and maybe
always was, but certainly in my lifetime that I’ve been following political culture,
40 years now or more. The culture is to express
regret about change and look for someone to attach blame or responsibility for the change
to, rather than embracing change as positive and seeing what can be done with it. So what
you have right now is very genuine anxiety about headwinds to job creation and job
growth, because it is true. Technology should be improving productivity. Per unit of labor, you’re getting a lot more. OK? The problem is we’re a consumer economy. Over 75% of our GDP is driven by
consumption. People that don’t have jobs don’t consume. That stands to reason. So if you
want the consumer economy to thrive, we need to be thinking about where jobs are going
to come from in this new information and data analytics economy, and that’s the problem. You have the Treasury Secretary of the United
States saying, I don’t see job displacement by technology as being a problem in my lifetime. It’s actually happening today, and then on
the other hand, you’ve got some very thoughtful people who are closest to the technology,
like Mark Zuckerberg, talking about, OK, if there
aren’t enough jobs for everybody, we’ll have universal basic income. And we’ll just put
money in people’s pocket. There’s a couple of problems with that concept. One, which I
think is the most important is, it’s undignified for the recipients just to receive handouts. And
two, is the obvious question of where are you going to get the money to put in people’s
pockets? That opens a door to redistribution, which
brings me right back to kind of the Bernie Sanders direction that the Democratic
Party in this country is moving toward. I have lived through and looked very closely
at the impact of government in controlling and
managing businesses, and I’m here to tell you having dismantled it in a number of countries,
at the level of dozens of specific enterprises, it doesn’t work. So the notion of governmental
redistribution, governmental renationalization of business, government’s involvement in the
microeconomy, bad idea. The road to perdition. We should have already learned that from
the devolution of communism. That was a system that didn’t work. State engagement in the
microeconomy at the level of the enterprise does not work, because state actors do not
have the same incentives as private sector actors and shareholders. They just don’t. So I 100% agree with you. I think your point about insecurity and the
importance– it’s not so much that people want jobs, and this
is what Mark Zuckerberg is tapping into, right? You and I want jobs, because we love what
we do. But the vast majority of people really
don’t want to show up on an auto assembly line. They’re really saying that they want to
increase my consumption or maintain consumption at a level that is above what my savings
currently allow me to do, right? And so there is this alternate solution, right? You can go to something like universal basic
income to solve it. You turn to the state, right? And you’re correctly– 100% agree with youpointing
out that it doesn’t work, that ultimately, in the immortal words of Maggie Thatcher,
the problem with socialism is eventually you run out of other people’s money. Look, I think with respect I may disagree
with you on the premise. I have a tremendous
amount of respect for the American voter and for people in general. So I take issue with
the proposition that people don’t want jobs. They may not want repetitive task job. They
may not want boring jobs, but I believe that all people, when they wake up in the morning,
at some point want purpose. They want to do something that makes a positive
difference to someone somewhere, whether it’s love their
family, love their children, help other people. People don’t want to sit in a chair and receive
handouts. People want to get up and do
something, and it’s the role of thought leaders in society, whether they’re political leaders
or they’re market leaders or they’re– whatever they are– to think about the future of society
strategically, not what does it mean for me? For my taxes or for whatever? Think about how
we will give purpose to people, give opportunity to people to define purpose, that will
allow for the cohesion of society to stabilize and increase, whereas it’s going in the other
direction right now. You’ve highlighted this, that there’s this
opportunity to deploy many of these technologies and insights from data management,
data libraries, data acquisition into the traditional industrial. How did that emerge, and how do you see that
as an investable theme? OK, it’s just starting to take place now. What’s happened is you’ve got hundreds of
startup companies that are involved in different aspects of what I call the internet of things
arc, which is sensoring, processing, analyzing data, and making cloud-based remote
changes to the industrial process, to either preempt maintenance or improve the efficiency,
which leads to margin improvement. You do this, it displaces labor, it displaces
capex, because the customer in the end wants to buy
a service. The sellers of the components of the service,
whether its routers or other hardware or software, want to sell components. There is a huge opportunity in consolidating
a holistic solution of all these fragments and introducing
it across industries. I spent a lot of time
earlier this year working on micro-irrigation company, which is basically in the business
of selling hardware drip lines. They invented drip irrigation. We’re in a water crisis in the
world. Drip irrigation is much more efficient. The company was put up for auction by Goldman. It
was sold for an extremely high multiple that we wouldn’t pay to Mexichem, because
Mexichem, I believe, wants to sell more drip lines through its drip line network in India
and China. But the real opportunity for that company–
and many other companies in many other industries– is to turn the company from a
seller of hardware into a seller of water solutions,
whereby censoring the irrigation process and optimizing nutrients and the right pressure
and amount of water at different points in the drip line, delivering water to the crop,
you will be able to get more crop per drop, which
has very specific economic value. So you introduce this to the grower as a service,
not go to the grower and say, hey, you can put all these pieces together, because
they don’t know how to do it. They’re not an
integrator, but you do it for them. You do it for them, and you provide them a
service and take a share of the economic value added that
you contribute. This is a gigantic idea that
I’ve sort of developed through my travels in studying this, which is all I’ve been doing
for the past three years, and making venture investments
in different components. There is the
need for integration, but more importantly, for application to traditional industries. And I
can give you a list of 100 probably, but certainly a handful of public companies that I’m
already investing in that are about to benefit from this whole thing. And so this is a variant, and this is similar
to the dynamic we’ve seen with workspace or with the software as a service type model. But you’re saying extend it to Caterpillar
tractors and to drip irrigation. To all kinds of process. In other words, to take a piece of hardware,
integrate them with software and data analytics to provide
a greater service outcome without the need for
capital expenditure. Another whole area of opportunity is telecom
network function virtualization, which is basically the movement
of telecom infrastructure through the cloud. As we know, the relationship between telecom
customers and telecom providers is being completely disrupted, because voice communication
has no value anymore. It’s given away
with data. And even data, even mobile data– as you saw
in the last quarter, Verizon blew its quarter because its competitors were giving away unlimited
data service in favor of getting app traffic. So the people who were benefiting from this
whole dynamic in the telecom industry are the app developers, who are attracting
the advertisers and getting the advertising revenue from the advertisers. So what the telecom guys need to do is they
need to restore their direct relationship with the end users,
whether it’s enterprise or retail customers. And they need to do that by offering applications
directly over their networks, and they need to get away from the plain, old telephone
service, copper wires, which, frankly, on the block where I live in Manhattan, there’s
been no service for two years, because Con Edison cut the copper wires. Verizon doesn’t want to bother fixing them,
because there’s no value in retail customers for voice, and
they haven’t gotten around to provisioning Fios
to our block of Manhattan. And so this is going to be the tension, and
it’s what I’d love to come back and be able to revisit with you, right? So one thing that you’re highlighting is that
the real opportunity for you is to pursue this in the
private markets, where you can exert control again. It goes back to this control premium that
you highlighted in Eastern Europe that you saw emerging, right? The corporate control–
And so this is going to be the tension, and it’s what I’d love to come back and be
able to revisit with you, right? So one thing that you’re highlighting is that
the real opportunity for you is to pursue this in the
private markets, where you can exert control again. It goes back to this control premium that
you highlighted in Eastern Europe that you saw emerging, right? The corporate control–
It’s in the private markets, but it’s also through persuasion and influence and being
in the right place to where the technology solutions
are going to be implemented for the benefit of public companies. So I’m back in public markets with my own
capital now, investing in companies that stand to benefit from this
dynamic. Some of which companies already are
involved in it in some way, some of which are getting involved in it because they’re
being asked by their clients to add a more comprehensive
integrated service. But they’re all going
to be moving in this direction, so if you can get to the summit and plant the flag early,
which is what I’ve always done in my career– sometimes too early for the structures that
I’ve been working in, the hedge funds, which we haven’t talked about, the hedge fund
structure. But if you can get there at the right time
with the right patience, this is a value-added investment opportunity. It is not a trade. It’s not even a private equity investment. It’s going
to take as long as it takes to change people’s mindsets and culture, to have them adapt to
what’s going on around them. And you can’t put that on a calendar. Could take a month,
could take a year, could take 7 years, could take 10 years. But the returns from this strategy
will be disproportionately large relative to what we’ve been used to looking at for
the last 10 years, at least. Because this a situation where there’s un-skied
terrain. There’s opportunity for fresh tracks. It hasn’t been all skied up. It hasn’t been everybody
doing it yet. It’s just starting. It’s like distressed credit 15 years ago. Yep. Well, and what you’re describing ultimately
is organic growth through a form of vertical integration. You’re just capturing pieces of your client’s
value chain. So that the
opportunity as you see it. You’re back in the public markets. You’re enjoying yourself. You
see fantastic opportunity. Most are concerned, but it’s great to hear
that you see a path towards higher profits. Any chance I can get you to come back in about
a year to revisit it and see where–? Absolutely. It would be my privilege. Rain or shine. If it works or it doesn’t, we can talk
about why it didn’t work or why it did work or what the status is. Great! Thank you very much, Dan. Really appreciate it. Thank you.

17 comments

  1. i believe i remember people talking about "everything as service" comming out of the last couple of bilderberg group meetings. also from davos. its certainly happening. i see it being driven everywhere. adobe for instance went completely service subscription model. personally its just more middle men in my way taking pieces of my pie so im not thrilled by it. i prefer to increase my knowledge and look for alternatives to middle men, even if they provide value they still take profits away from my business. do that enough and who are you really working for. seems kind of parasitic to me. thank god for open source software in the adobe case. in alot of circumstances its better than the pay for versions. so i choose to go around this model.

    the point is well taken about jobs and consumers. whats an economy without both of those, lol. kind of makes you wonder if maybe this econ game is relevant in a high tech world where technology brings deflation to the point of making us all ask, whats the point of this system anymore? maybe we should grow up and make the economy about personal achievement and helping everyone meet their goals and dreams and ditch the whole negative punishing aspects of the capital system. go startrek future and get over it already. after all how many houses can you live in when 6 billion people are still starving.

  2. Oh Boy, that was elegant. "14:45 Look, I think with respect I may disagree with you on the premise."
    The difference is this: A Goliath like Dan Arbess
    15:14 I believe that all people, when they wake up in the morning, at some point want purpose.They want to do something that makes a positive difference to someone somewhere, whether it's love their family, love their children, help other people.
    An inverse Goliath can be recognized by sentences like this coming from Michael Green's mouth :
    "14:11 You and I want jobs, because we love what we do. But the vast majority of people really don't want to show up on an auto assembly line."
    Green could be technically correct, I don't really try to blame him. If he talks to another car mechanic, he could appear to viewers as the brighter, or brilliant person on that level. But he is a light year from the level of Dan Arbess and similar big picture guys view. Green sheepishly is following a school, and Arbess is creating a school -as I see.

  3. the answer to the problem of jobs is a simple one. Jobs are going away, yikes, time to create my own. In this age of access there are no excuses, everyone can have their corner on the net. With blockchain the possibilities are endless. Steemit is a social media platform you get paid on in crypto. If you live out of a box, can get yourself to the library, use the internet and you ask the right questions, success can be yours. Where there is a will there is a way.

  4. Great points about the use of iot in the future and the transition between these phases of our economy that we are in. Not a new idea though. Jeremy Rifkin and his Third Industrial Revolution book discussed this idea years ago. I could be wrong but once you combine global cryptographic ledgers (blockchain) , with these devices along with companies selling these services, you end up with an economy of things that provides value to a business at near zero marginal cost. The company that provides the service gets to benefit as well as the company receiving the benefit. A win win? Too good to be true? If we can all just pull our heads out of our ass and wake up to the fact that we are all going to have to cooperate if we are going to make machines that cooperate and exchange value if we want to solve the global climate crisis. Because at the end of the day, we are stuck on this big rock hurling through space together anyway so we might as well enjoy it and each other's company while we can. Keep the great interviews coming!

  5. I agree with almost everything Mr. Arbess said. The point I take exception to is when he talks about Senator Sanders and redistribution of wealth. To me, giving back to the people the wealth that's been stolen from them for many decades is NOT redistribution of wealth. It's just giving back to the people what rightfully belongs to them. The corporations in this country (and many other countries) have been STEALING the natural resources of the land. Who gave them the right to do that?! Why does Mr. Arbess (and people like him) never mention anything about that?! Why does NO one ever discuss this issue?! Doesn't the oil, natural gas, gold, silver, etc. belong to the American people?! If so, then why are the corporations stealing everything?! And on top of that, they cheat on taxes in various ways (including lobbying government to pass tax law legislation favorable to corporations) and hardly ever pay their share. WHY???!!! To stop this crime is NOT redistribution of wealth or socialism or communism. IT'S CALLED JUSTICE!!!

  6. If you work for counterfeit currency, computer credits, debt, promises to pay in the future, you are a free slave, a debt slave, wage slave, sex slave, prisoner of financial war slave. From 1966 to 2016, the public does not have real money, gold and silver. The US dollar is one ounce of .999 silver, redefined in 1986 by Congress. One dollar is one fiftieth of an ounce of gold. Measure the real world in real money instead of fake, counterfeit currency, computer credits. The world is distorted to benefit globalism, technology, immigration, counterfeit currency bankers like Wall Street, and war, cold war or hot war. The currency system from 1966 to 2016, is a felony fraud, raping the world of labor and assets, transferring these assets to elite 1% of the world. The currency is corrupted, deforming and torturing our real economy. Is Facebook worth TEN Ford Motor Companies? No. The FANG stocks are a fraud, subsidized by counterfeit currency. We need a reset. The currency collapse is over. The consequences of the collapse of the dollar have yet to occur. Protect yourself. No one else can or will. We are now going to have massive declines in lifestyle for the 99%. Wall Street is a felony fraud, counterfeiting currency to buy up all the cash flow assets. Is the ethnic cleansing of white males with affirmative action really beneficial to the world? Why is this the "policy" of government and USA, an illegal racist reengineering of our society. This is a tragic distortion of free markets because we are in Communism 2.0, also known as globalism.

  7. Universities, government, corporations, and Wall Street have taken over the economy, kicking the high school drop outs and high school graduates to the curb. It's a counterfeit fake felony fraud rigged game based on debt slavery. This is a tragedy.

  8. Let's embrace change and diversity in Israel, cutting off their $3 billion subsidies, and shipping 1,000,000 immigrants for more diversity because diversity is Israel's strength. Right? No. People talk the talk but don't walk the walk. Facebook is fake, worth ten times Ford Motor Company? It's a fraudulent economy where we are debt slaves, in Communism 2.0.

  9. Here's the issue – this guy preaches free enterprise but has engorged himself using inside information and, in effect "capitalizing" on the same governmental intervention he decries.

  10. Would a better title be Abstraction versus Virtualization? Great points and insight and am grateful for your enlightenment on the employment statistics.

  11. I don;t understand your recollection of making money as your foresaw the housing crash and again on QE but later decried Government (Democrats) intervention into business. Was the bail out and QE not govt interference into business? Was FNMA not govt interference into business? I wish Mr. Green was more inclined to engaged in challenging discourse during your talk. Still, I truly appreciated your conversation.

  12. He is right on the consumer economy suffering because consumers have been made poor. Whoever thought that cutting labor costs would make one's customers poor.

Leave a Reply

Your email address will not be published. Required fields are marked *