“Our company is thirty days from going out of business.” That’s the motto at Nvidia, a chipmaker powering the AI revolution. Nvidia’s market cap presently sits at around $1.148 trillion.
Despite its present status as one of the world’s most valuable companies, there’s obviously a humble quality to the business. So many times it wasn’t expected to make it. Something about money running out.
What’s interesting about the Nvidia story is how common it is in the real world of business. To read the various biographies of Elon Musk, is to read how frequently Musk and his businesses came to near ruin in recent decades.
The view here is that Washington Post columnist Megan McArdle would profit from closer reads about Musk, Nvidia, and for that matter the movie industry itself. Writing recently about how “entertainment will never again be quite like it has been over the last decade, when ultralow interest rates freed Hollywood from the need to care about broad popularity,” McArdle revealed a haughty naivete that is more often found within her seeming ideological opposites at the Post.
Really, just where was all this cheap money McArdle was writing about that allegedly freed the industry from economic reality? On its face McArdles’s reasoning was puzzling when it’s remembered that compound interest/returns are easily the most powerful force in all of investing. And nothing else comes close. Of course, the muscular genius of compounding is a reminder that an “easy,” carefree theory about returns is something that could only be found inside the minds of the economists, think tanks, central banks, and universities that employ economists. Investors and savers can’t be so blithe. Returns are everything. The genius of compounding is what had Warren Buffett so certain from a very young age that he would eventually be rich.
Still, even economists who identify as “free market” grasp that price controls never lead to free anything. If real or with teeth, price controls by definition result in scarcity. Applied to rates of interest, if the Fed’s alleged “ZIRP” had actually resulted in the “free money” that McArdle claims powered all manner of careless capital allocation, then there wouldn’t have been any money to borrow. See the genius of compound interest yet again.
It’s all a reminder that contra supercilious musings from McArdle and others about disdainful of returns businesses doing as they formerly wished with “free money,” the actual reality is that money is never, ever easy, particularly for businesses pursuing high risk notions. That’s why Nvidia has stared so many times at failure in its past, continues to operate as it’s about to fail now, and it also explains why Elon Musk’s various businesses nearly died in the 2010s when, according to McArdle, money was “free.” Really? Where, and for whom?
What’s important is that what’s true for technology is similarly true for entertainment. Brian Grazer (Splash, A Beautiful Mind, Friday Night Lights, etc. etc.etc.) is easily one of the most accomplished film and television producers in the history of the medium, but as he observed in his 2015 book A Curious Mind, something north of 90 percent of movie/TV ideas are rejected, including Grazer’s. In his words, “Everybody still says ‘no’ to me.” To be clear about just how tight money is in Hollywood (Grazer published the book during the Fed’s allegedly “easy money” era), Grazer writes that “Instead of spelling out H-O-L-L-Y-W-O-O-D in the famous sign in the Hollywood hills, they could have spelled out ‘N-O-O-O-O-O!”
That money is difficult to come by in Hollywood much like Silicon Valley is a statement of the obvious. Since most startups, movies, and television shows fail, financing for them is difficult. Basic stuff, and it’s made basic yet again by the truth about returns: precisely because compounding is so powerful, vanishingly few put money to work in careless fashion. And contra McArdle, the Fed can’t alter this truth with price controls.
Republished from RealClear Markets
