Many people asked me with surprise why I did that. Why would I wait for so long to cast a vote. WHYYY??? Because it matters.

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I believe in democracy. In giving everyone the ability to elect the people who will govern the country where they live in. It’s something so important that it merits standing in line for hours and hours. It’s one of those things you do out of principle.

I’d love to tell you that elections are fair and that everyone who votes gets a shot. But it couldn’t be farther away from the truth.

In reality, elections are a controversial topic. One in which fraud, corruption, and abuse tend to happen quite frequently. One in which the actual outcome can be rigged with dirty tactics.

Let me give you an example. According to a report from the Mexican government, there are approximately 103,000 Mexicans living in Europe. However, there was a limit of 1,500 ballots per consulate. Here’s the kicker … there were only two consulates that allowed voting: the one in Paris and the one in Madrid. A total of 3,000 ballots for 103,000 people.

Even if 80% of those 103,000 people voted online, the remaining 20% would not have a shot.

I was there. And there were easily more than 1,500 people in that line at the Paris consulate. Not everyone was able to cast a vote. Starting right there … something is just off.

This didn’t happen just in the Mexican consulates in the European Union. But also in the Mexican consulates in the United States — not to mention in Mexico itself, where people were seen burning voting booths, annulling ballots, and meddling with the election process.

In this day and age, where we can do most things securely with our cell phone and an internet connection, it’s quite mind-blowing that elections have to be so painful.

This year alone, we expect two BILLION voters to participate in elections. Over 60 countries will hold national elections, including some of the biggest democracies in the world.

So … why isn’t this easier like sending a photo from your phone? Everything tells me that it should be that easy.

Before we answer that, let’s understand one thing:

How did we get here?

The use of paper ballots in elections dates back to ancient Rome and Greece. But the modern concept of the paper ballot was introduced with the Australian ballot, which provided privacy and confidentiality for voters.

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Many years later … in the 1990s, the direct recording electronic (DRE) voting machines were introduced. This revolutionized the voting process by speeding up the process and making the vote counts more accurate.

However, as with every technological innovation, there was a lot of controversy. Concerns about the security and reliability of electronic voting systems were brought up. In the past few years, hacking, software glitches, and the lack of a paper trail for voter verification have raised questions about the integrity of electronic votes.

The most famous example being the 2016 U.S. presidential election, in which Russia allegedly interfered with the electoral process. There was even a whole movie about this called “The Great Hack”. Watch it if you haven’t already.

OK … back to our question.

Why isn’t voting easier?

There are three main reasons why voting is hard: logistical challenges, technological challenges, and socio-political challenges.

Let’s start with the first one.

Logistical challenges … where you live matters.

This one is probably the easiest to explain. In a country like Mexico, which has close to 130 million people, a lot of people live in rural and remote areas. These towns lack the required infrastructure needed for convenient voting. From an internet connection to secure locations, to the right training for people who volunteer as part of the institutions which facilitate voting.

Technological challenges … 2024 feels like 1984.

This is where it gets interesting. There’s two main types of voting mechanisms in elections. Paper ballots and electronic ballots.

With paper ballots, the count happens manually. Each booth has a limited amount of papers where people can select the candidate and political party they want. However, as with anything manual, this is prone to error. Or worse, manipulation.

With electronic ballots, you would think the process is more secure. But no. Enter cybersecurity. If your vote goes into a piece of software that can be easily tampered with because it lacks authentication, segregation of duties for different types of users, data access rights, among other things, you can be sure that the process will not be fair. And in consequence, someone who doesn’t deserve to win an election will end up sitting in a position of power.

Socio-political challenges … It all starts with fear.

This is probably the most important one. Political instability breeds all sorts of issues. When incumbents sense the fear of losing political power and influence, they will resort to voter intimidation, violence, and finger-pointing. Anything that will make them keep that power for another few years.

If you ask me, it was voter intimidation which caused Mexico’s left to win. Embodied by the phrase: “vote for your President’s political party because if you don’t, they’ll take away all the free money you’re getting”.

And when a few thousand pesos is the difference between feeding your kids and starving them, the vote is the easiest decision you can make. When 50 million people live below the national poverty line (chart below), they don’t focus on the macro (i.e. the country’s wellbeing), but the micro (i.e. their family’s wellbeing). And if I were in their shoes, I’d probably do the same.

There was a silver lining in these elections, though. The number of people who went to cast a vote was massive. Something I’ve never seen before. Which means democracy is alive. But we just have to fix the systems and institutions (and also the mentality of a few).

And in this day and age of technological innovation, I’m hopeful that we’ll get there.

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Can technology augment democracy?

I’d like to think so. Here’s what’s coming …

Advancements in blockchain technology might help create a tamper-proof ledger for recording votes. One that we can trust is transparent, accurate, and anonymous. One that we’ll be sure won’t be manipulated by others without the consent of the majority.

Biometrics will help with voter authentication. Just imagine registering and voting using facial recognition or your fingerprint. The amount of time this would save for a lot of people would be substantial.

Artificial intelligence could analyze anomalies in voting behavior and keep tabs on social media misinformation. We could have a real-time voting count and monitor progress across the country, which would help campaign managers identify and incentivize people who typically abstain in elections.

That’s just a few examples. Another important thing is the collaboration between sectors.

We need more consortiums and partnerships between the public sector and technology companies. And not just big tech, but also startups. I’m hopeful that engineers and product managers who typically focus on creating SaaS products for the consumer, will rather focus on products and services for bigger causes like democratic and fair elections. We need more of that.

And definitely, I hope that elected officials and heads of institutions invest more money in the right infrastructure to allow for fairer elections. This is one area where spent can be justified.

It’s not an easy task by any means. But surely one worth fighting for.

If you live in a country where there’s elections soon, what are your thoughts? I’d love to hear from you.

Wishing everyone a fantastic start of the week.

Until next time,

Antonio.

How many parts do you think are inside an iPhone?

This beautifully designed product requires 1,500 different components to make it work.

But that’s not the most interesting fact about it.

It’s this …

Even though the iPhone is one of the most iconic American products in history, more than half of its components are sourced and manufactured out of Taiwan and China.

That includes core processors, 5G modems, and camera lenses.

But why does that matter? Well, lately there’s been a lot of tension because of a potential conflict between China and Taiwan (and even the US).

The interdependencies among the US, Taiwan, and China are becoming more and more complex when it comes to technology. We’ll cover that in a minute.

So, what would the impact be on Apple if China decided to invade Taiwan?

Let’s get into it.

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Why China Thinks Taiwan Is Theirs

Let’s go back in time to get some context.

To 1945.

China and Taiwan have been in a complicated and tense situation since the end of World War II.

When Japan lost the war, China took over the island.

But in a short period of time, civil war erupted between the communists under Mao and the nationalists under Chiang Kai-shek.

The communists won and took over Beijing. What was left of the nationalists went to Taiwan and established a government that would go on for decades.

The People’s Republic of China claims that Taiwan is a province that needs to be annexed.

Because of this, there’s a chance that China might utilize military force to annex Taiwan to mainland China. In which case, Taiwan could only do so much given that China dwarfs Taiwan when it comes to military resources and defense spending.

OK, but why does it matter if the Chinese government annexes Taiwan?

Why Is Taiwan So Important For The Technology Industry

Well, Taiwan is a critical piece of the supply chain for the technology industry.

Not just for Apple. But Google, Meta, Amazon, and many more.

A lot of the electronic devices you use on a daily basis are powered by technology that is manufactured in Taiwan.

From cars to medical equipment, all these goods contain a semiconductor of some sort.

Taiwan dominates the computer chip industry so much, that one single company, TSMC (or Taiwan Semiconductor Manufacturing Company) claims more than 50% of the world’s market.

This means that if China were to use military force or a blockade on Taiwan, the disruption in the production of computer chips could cost trillions of dollars in revenue to customers of Taiwanese semiconductor manufacturers.

And the trickle-down effects in the economy would likely be catastrophic.

Shortages. Inflation. Stock drops.

And one of the most affected companies would be Apple.

Imagine for a second that a big chunk of the orders on the new iPhones and MacBook Pros with M3 chips can’t be fulfilled.

Yes, the famous M3s that were announced in November are being produced by TSMC.

That would create a massive customer experience problem for Apple.

Which would result in reputational damage beyond repair and an unavoidable stock dip.

Some hedge fund managers are even going as far as saying that the stock would be cut in half. At its current valuation, Apple would lose over a trillion dollars in market capitalization.

But …

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Is Apple REALLY Going To Let That Happen?

Apple, with its massive influence, would not let that happen.

As you know, tech companies have massive influence in geopolitics. If you want to know more about how this works, I wrote another article about why companies are as powerful as nations. Check it out.

Apple has been lobbying TSMC to move production out of Taiwan. And they succeeded. TSMC has been working on opening up a plant in Phoenix, Arizona in 2024. 

This reflects the urgency that Tim Cook has on reducing the dependencies the company has on Taiwan’s manufacturing footprint.

To put it in perspective, as of the latest supplier report, Apple has more than 70 suppliers in Taiwan working on its products. And 270 in China.

One thing I’m sure is keeping Tim Cook awake at night is how to shift production capabilities outside of Asia

.

This way of thinking was exacerbated by Nancy Pelosi’s visit to Taiwan in 2022. A lot of customers of Taiwanese suppliers were asking them to move production outside of Taiwan in case war would happen at some point.

However, it is easier said than done. Most of the supply chains are in Taiwan and China. Therefore, pulling this off would take decades.

What Else Could Go Wrong?

Another important consideration is the fact that if China were to take over Taiwan, a lot of the contracts under these Taiwanese companies are of military nature. This type of company is known as a foundry. And it’s a vast industry. Almost 100 billion in 2021.

Just think of Nvidia making the semiconductors that will be used for AI technology that will be used in military and public sector applications.

If the Chinese government were to take over that, that would represent a massive risk for US companies and the US government. 

Just think about the new Apple vision pro. It’s perfect for military contracts. They could use this technology (just like Microsoft intends to) to train soldiers in virtual simulations where they need to rescue people or improve stealth tactics.

A stretch maybe. But who knows.

As you can see, there’s a lot of skin in the game for Apple. Taiwan and its companies are a key component of the supply chain of the company. Or in other words, the stock.

Therefore, Apple will do everything necessary to make sure that is not disrupted.

Whether that means lobbying the US government to protect American interests via protecting Taiwan using military support, or helping them with investments to move out production to other countries.

Right now , the situation is tense. Let’s see how it unfolds.

Hope you enjoyed this week’s issue! I’ve been a bit MIA dealing with a few personal things, but coming back strong.

Please share it with your friends and family if you found it useful.

On a personal note, I was in New York this week for a Google offsite and it was amazing.

Wishing everyone a fantastic weekend ahead!

Until next time,

Antonio.

My mom had the same question a little while ago.

She really thought it had something to do with satellites or some balloons flying over.

When she asked me this question, I realized that explaining something like this needed a more relatable approach.

So, instead of diving into an ocean of technical jargon like On Premise, IaaS, PaaS, and SaaS, I relied on the universal love of pizza to give her some clarity.

Here’s how I tried to turn this complex topic into a delightful and digestible conversation.

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Do You Want To Cook It or Just Eat It?

The first thing I needed to demystify was this:

The cloud is not something in the sky. In reality, it’s just a bunch of computers sitting in a room being rented for other people to use.

Once you get that out of the way, you can start explaining the pizza thing.

In reality, companies like Amazon have a bunch of computers sitting inside a highly secured warehouse, known as a data center, which they rent out to other companies to store their data (like the pictures in your phone), or create applications that you can use.

This is what that looks like:

Yes. All of that is a combo of computers/servers/networks. Cool, huh?

Anyways … let’s get to the pizza thing.

The concept of using pizza to explain cloud computing is not a new one.

In fact, an IBM engineer was credited with this comparison years ago.

But why pizza?

Probably because it's one of those few thing we all love (I mean, you should distrust anyone who doesn’t like pizza, in my opinion), but also because there are so many ways to experience and eat it.

Think about it. You can:

Make the pizza yourself: Here you have complete control. You pick the cheese, toppings, and even the thickness of the crust. It's quite a little bit of work, especially if you decide to make the dough, but it gives you so much freedom and flexibility.

Buy a frozen pizza: This is more of a “convenience” move. You can’t put exactly what you like on the pizza, but it saves you time and effort. You still have to put it in the oven, maybe add some extra toppings of your choice, cut it and that’s it. You may have to live with that “freezer taste”, but you have to do the bare minimum.

Get the pizza delivered: You can call a restaurant of your choice and have the pizza delivered to you. In this case, they take care of everything. You just have to set up the table with a plate and you can eat it right away.

Eat the pizza in a restaurant: Here, you just enjoy the ride. You pick a nice restaurant in the area, ask for the menu, and order whatever makes your taste buds salivate. The waiter brings you the pizza to your table. It's hassle-free and allows you to focus on enjoying the meal rather than worrying about the process.

You’re probably either getting hungry or impatient. Bear with me.

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Cloud Computing Is All About Flexibility

In the realm of cloud computing, the aforementioned pizza methods have their parallels in four core delivery models.

In other words, to what extent a client can use all those racks with servers and computers in the picture above.

Each delivery model provides a different level of control and management complexity, very much like our pizza scenarios.

Let’s go through each one:

On Premises - Making The Pizza

On Premises is the equivalent of making your pizza from scratch.

This means buying or renting servers, installing software, and handling all the maintenance and updates.

Companies like Amazon Web Services (AWS) and Google Cloud offer IaaS solutions where you can rent virtual machines or storage space.

It’s like choosing your crust, sauce, cheese, and toppings, then baking the pizza in your own oven.

The end product is entirely your creation, but it comes with the responsibility of managing the whole tech stack.

Infrastructure As A Service (IaaS) - Buying a Frozen Pizza

Just like the frozen pizza gives you the basic ingredients ready to go, IaaS provides the basic building blocks (server, storage, networking) but leaves it to you to handle the "baking" (i.e., setting up the OS, installing software, managing databases, etc.).

You don't have to worry about the underlying infrastructure, but you still maintain control over the virtualization, OS, and applications.

Platform As A Service (PaaS) - Getting The Pizza Delivered

With PaaS, the focus is more on developing applications on infrastructure (or a platform) that already works.

You don’t manage the racks, the servers, the operating system, etc.

Services like Heroku or Microsoft's Azure DevOps offer you an environment where you can deploy your code without worrying about the underlying hardware or system software.

You still have some leeway to customize your application, but you’re not involved in the nitty-gritty details of server upkeep or security patching.

Software As A Service (SaaS) - Eating Pizza In A Restaurant

The SaaS model is the ultimate in user convenience.

You’re probably more familiar with this one than any other.

Companies like Salesforce and Adobe offer complete applications that run in the cloud.

You simply subscribe and start using them.

No need to worry about anything technical.

Imagine walking into a pizzeria and ordering a Margherita.

You don’t need to worry about how the oven is heated or what kind of cheese is used; you just enjoy the finished product.

Here’s a great graphic that helps you visualize the entire tech stack and what level of responsibility each gives the cloud provider and the client.

By the end of our conversation, my mom was quite surprised that the cloud wasn't some esoteric concept from a sci-fi novel.

So, next time you find yourself needing to explain what the cloud is to someone who’s not well-versed in technology, just ask them: "How do you like your pizza?"

If you like what you’re reading, please share it with a friend or family member to spread the word.

Wish you a fantastic Sunday and an amazing start of the week (from London this time)!

Speak soon!

Antonio.

Before you make a big financial decision, you need to make sure you weigh all the pros and cons.

And one of the biggest financial decisions you’ll ever face - after leaving your parents house - is whether you should buy or rent the place you’ll call home.

There are many factors that will influence this decision.

Financial factors such as: how much income you make per month, the interest rate offered by the bank, or how much cash you have for a down payment.

Non-financial factors such as: will you stay in that city for the next 10 years, are you single or do you have a family, or do you want the house as a home vs. a rental property.

Considering that most likely you’ll spend the next 20-30 years paying that house, it’s a good idea to arm yourself with as much knowledge as you can get before signing a mortgage.

So, where do you start?

First, let’s go back in time.

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The American Dream

It’s 1945. The end of World War II.

Soldiers were returning from war, the economy was booming, and the middle class was expanding rapidly.

The federal government offered subsidized loans to help returning soldiers buy homes. This initiative institutionalized the concept that homeownership was the epitome of American success.

The US government wanted to create stable communities and stimulate economic growth through the housing market and construction industry.

Suburbs started to grow. And with them, shopping centers, schools, and hospitals, started to grow like mushrooms, further boosting the economy.

As time went by, the media contributed to this notion too. Movies and advertisements often portrayed happy, successful families living in their suburban homes with a white picket fence. A true dream come true.

Over time, this image solidified into a cultural expectation.

The ownership of a home came to symbolize freedom, success, and the attainment of the American Dream.

Time To Wake Up

That dream is a lot harder to attain now than before.

Why? You ask. Well … where do I start?

The purchasing power of the dollar has weakened. Fact.

Many reasons have contributed to this. But one important factor is the increase of interest rates. That matters because a 1% increase in a mortgage rate can impact the type of house you can buy.

Take a look at the chart below:

A $3,500 monthly payment can get you a house from $400,000 (when the rate is 10%) to a house worth $800,000 (when the rate is 1%).

Crazy, right? And that’s not all.

Home prices have significantly gone up (118%) relative to median household income (15%), after adjusting for inflation.

And the cherry on top is that the gap between skills and high paying jobs keeps getting wider and wider by the day.

It certainly does feel like the deck is stacked more and more against you.

It feels like the only people able to buy a family home nowadays are the consultants, bankers, and engineers. And not the entry-level ones. Nope. The senior-level ones.

Ask anyone living in the Bay Area.

It’s not for the soldiers anymore. It’s for the elite.

But I digress …

Let’s assume you actually fall into the privileged category of someone who has the option to buy.

You have a decent paying job, and some cash saved in the bank.

Should you go ahead and buy a house?

Math Never Lies

My short answer is NO. At least not right now.

Let me illustrate with an example.

Let’s say you want to buy a house that’s listed at one million dollars.

You have 20% of that in cash to make a down payment (this is probably the optimal ratio to buy a house, as many financial experts will tell you).

That means you need a bank loan for $800,000.

On average, banks are offering a 7.12% rate on a 30-year mortgage. Remember, this is stated on an annual basis. Therefore, you need to divide the rate by 12 and multiply the years by 12 to get a monthly view. After all, you’re making monthly payments.

With that information and some basic time value of money knowledge, you compute the monthly payments, which equals $5,387.

Now, this is where it gets interesting …

When you add up all the monthly payments, you get $1,939,338 (total cost of the loan).

What that means is that you paid back $800,000 of the loan in full (also known as the principal and your equity) AND you paid the bank $1,139,338 in interest.

In other words, for every $1 dollar you paid for the $800,000 loan, you paid another $1.42 of interest ON TOP.

Talk about making the bank rich.

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If you’re not shocked by now, let’s compare that scenario with what you would have paid if this was 2020.

Three years ago, the average interest rate on a 30-year mortgage was 2.86%, which is 4.26% less than right now.

I’ll spare you all the math we did before. But two things stand out here:

1. The monthly payment would have been $2,074 less than today; and

2. You would have paid $392,582 in interest. Or $0.49 of interest for every dollar of principal paid.

Those numbers are significantly lower than the amount of cash you would have to disburse if you were to buy a house right now.

The cost of doing X is not doing Y.

One of the most important financial concepts is opportunity cost.

Opportunity Cost = Chances You Miss By Not Doing (Or Doing) Something

The cost of eating cake every day is to not have a six pack.

The cost of binging on Netflix is not reading a book.

The cost of buying a house is not investing in something else that might have a better return.

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Think about it this way. What other things could you have done with that $1.1M dollars you paid the bank as interest?

You could have invested it in the stock market, which tends to perform better than real estate.

You could have started your own business (probably a few of them with that amount of capital).

You could have put it in a trust fund for your kids.

The options are many.

The key thing to understand here is which investment makes the most sense for you.

And by now, you should see that a house is, probably, not the best one.

At least not right now. I’ll keep saying this.

Banks won’t help you make that decision. It’s not in their best “interest” (funny word to use).

This is why understanding the basics of personal finance is important. You should be able to make a quick spreadsheet like the one I have above to make an educated decision.

This is the first step. There’s many others like estimating the phantom costs such as property taxes, repairs, maintenance, etc. In a span of 30 years, that will add up.

With that said … let me write the biggest disclosure of all.

Buying a home is something VERY personal. And even if it doesn’t make financial sense, it might make sense in some other way to you (e.g. building a home for your kids to grow up).

I just hope if decide to buy a house, you do it being aware of the financial implications of it all.

If you have any questions on this, please let me know. I’d be happy to help you or point you in the right direction.

Hope this helps you with one of the biggest decisions in your life.

Wish you a fantastic Sunday and an amazing start of the week.

Until next time,

Antonio.

We went through all the basics of how to react and provide assistance to someone suffering a minor or serious injury.

We heard about the importance of prioritizing the different organ systems before giving assistance, as well as asking ourselves some routine questions before addressing the injury.

Is the problem respiratory or circulatory?

Is it a hemorrhage that requires a tourniquet to save that person's life or is it a cut that just requires some pressure and bandages?

Identifying and diagnosing correctly these situations can sometimes determine whether that person lives or dies.

We also got to practice mouth-to-mouth resuscitation with some dummy dolls and even shock them using AED pads.

Quite the Dr. House moment. 

It was a pretty interesting way to spend a Saturday morning. But the best part was receiving the certificate in the mail. A piece of paper that allows us to provide first aid to someone in need (and hopefully save that someone’s life).

When we left the hospital and got in the car, I started to wonder if there was such a thing as "first aid" in business?

In other words, if a business was on the brink of dying (figuratively speaking), what would be the most appropriate first aid do's and don'ts?

It didn't take long to realize it was a question that wouldn't have a clean-cut answer.

But … it would be interesting enough to explore. 

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During the class, the instructor walked us through one of the most vital processes in the human body, which is oxygen delivery.

In a very simplistic way, it works like this:

The brain sends a signal through the nervous system to the muscles and diaphragm asking them to contract.

This creates more space for the lungs to expand within the rib cage. When they expand, pressure goes down and air starts to come in.

When oxygen is inside the lungs, red vessels take the oxygen and carry it through your whole body assisted by the heart, which acts like a pump.

If any of these steps fails and the body is not getting oxygen, it will go into respiratory or cardiac arrest. 

If I try to apply a oxygen delivery as an analogy in business, I would argue that cash flow is like oxygen.

The CEO, CFO, and board of directors would be the brain and nervous system.

The muscles, diaphragm, and lungs would be the sourcing, manufacturing, and operations teams.

And the red blood vessels and the heart would be the logistics and customer service teams.

Think about it like this …

Management would send instructions to the various departments of the company explaining how cash flow should be spent in a given year.

The sourcing department would then use this cash to buy raw materials, the manufacturing department would transform these materials into finished goods, and the operations teams would ensure they are free of defects and ready to be delivered to customers.

Finally, the logistics department would ensure the goods get delivered on time, and customer service would follow through on any complaint.

This is the typical business cycle and every single step requires cash in some form. If anything goes wrong in this process, the business will struggle in some form or fashion.

Just as there are many types of injuries, there are a myriad of business problems.

But the most critical one, the one that can kill the livelihood of a wild-eyed entrepreneur or a fortune 500 company, is a very basic one.

Running out of cash (i.e. running out of oxygen).

So, what do you do when your business is running out of oxygen?

These are the steps I would take: 

Diagnose The Problem.

The best way to do this is to look at a direct cash flow statement.

The indirect cash flow statement works as well, but using the direct form will give you more visibility into where exactly the money is going.

The direct cash flow statement will break down the inflows and outflows by type such as cash received from customers, cash paid to employees, cash paid to suppliers, and others.

This will give you a good idea of where to focus your efforts into resuscitating the business.

Look out for patterns and one-offs.

Is the problem in sourcing because the department is purchasing too much inventory upfront?

Is it in manufacturing because the blue collars and supervisors are working extra hours and wasting material?

Is it in logistics because the packaging or delivery routes are not designed effectively?

Once the problem has been identified, it will be much easier to attack.

Treat The Symptoms.

Now it's time to apply the bandages and medicine.

Three of the most common problems that cause negative cash flow are: late payments from customers, too much inventory, and excessive cost structure. So, let's tackle these.

1| Late payments from customers. The recommendation here is to renegotiate terms with your biggest accounts (80/20 rule …after all this is first aid).

The idea is to reduce the days to pay through incentives such as discounts or a free trial on one of your products.

If there's not enough traction, you could explore alternative financing solutions such as invoice factoring.

This is basically selling your invoice at a discount to a third party, who then collects it from the customer when the invoice is due. The point is to get the cash in the bank.

2| Too much inventory. The best course of action here is to identify the slow-moving inventory first.

You want to make sure that the items that have a risk of becoming obsolete go out the door as fast as possible.

One tactic you can experiment with is to organize a "fire sale" and sell those items at a discount to your customers.

This will keep the cash flowing in, buying you enough time to focus on bigger issues such as inventory velocity down the line.

3| Excessive cost structure. A lot of times, the reason why businesses go into negative cash flow is that their expenses are way too many for the amount of revenue the business brings in.

The business may have a lot of SG&A (Selling, General, and Administrative) costs such as payroll, marketing, or even office supplies that are unnecessary for the business to operate effectively.

One tactic here is to focus on cost out. Going line by line in the P&L to determine what costs are absolutely necessary and which ones are not, which ones can be turned into variable vs. fixed (e.g. balancing payroll with commissions), which ones can be outsourced vs. kept in-house, etc.

The goal here is to "shed the fat" and get as slim as possible.

Monitor Improvement.

Just as you would monitor someone's vitals such as pulse and breath after giving first aid, you should apply the same principles to a business.

Make sure to look at KPIs and ratios that can be used as a proxy for business health. Operating cash flow margin, receivables turnover ratio, inventory turnover ratio, etc.

Have a weekly review with your team to review progress and adjust as you go. 

These are few of the business lessons I've learned in my career to tackle negative cash flow.

They are short-term measures that will give your business some breathing room before you tackle more fundamental issues (i.e. profitability or product demand).

As the instructor told me in that course, not every person can be saved through first aid.

By the same logic, not every business can be fixed or turned around using the measures mentioned above.

However, there's a very big chance you might give that person or that business a fighting chance if you know the basics of first aid care.

Hope this gives you some tools in your utility belt to save your business (one day).

Thank you for reading this far.

If you like this content, forward this email to your friends and family.

Wish you a fantastic start of the week.

Until then,

Antonio.

$1,000,000,000,0000. That’s a lot of zeros.

Let that sink in for a second.

What should shock you about this number is not the vastness of it, but the fact that people are willing to incur expenses at one of the highest interest rates to ever exist (compared to mortgages and car loans, for example).

As of June 2023, the average interest rate on credit cards was passing a whopping 20%.

That means that for every dollar you borrow from the bank, you owe them 20 cents as a cost of borrowing.

For the bank, though, this 20% is a return for lending you that money. Keep this in mind as it becomes important a little later.

Why is this happening? Well …

When broader interest rates are low (which was the case since 2009), banks often lower lending standards. This means they might offer credit cards to riskier borrowers.

And, with the convenience of digital transactions, a consumerist culture, and easy access to credit, many consumers have found themselves accumulating high balances on their cards.

This combination of easy accessibility and high rates have led to this ballooning effect on debt.

However, I would argue that interest rates are much more important in dictating the behavior that led to this massive debt number.

And the whole point of this article is to try and unpack interest rates as much as possible. Because regular people like you and I need to get this right.

In order to do that, let’s go back in time.

Charging Interest Was A Sin?

Interest rates, as we know them today, go back to ancient civilizations. Merchants in Babylon, for example, extended credit and expected a return for the wait.

But in the more recent part of history, especially the one highly influenced by religion, charging interest was considered sinful. The term for it was ‘usury’. A practice frowned upon by Jews and Catholics.

But, as with everything, a few loopholes were found to this sinful practice.

Jews could not charge interest to fellow Jews, but it was allowed when lending money to non-Jews.

Catholics, like the Medicis, earned interest through fees or currency exchange rates — which were more related to business practices rather than lending — and allowed them to comply with church doctrines.

As you can see, interest has always been about earning a return on your money.

Whether it is because of you’re putting up with a time horizon or a specific risk.

Is it still a sin? I’ll let you answer that question on your own.

So, how does someone determine what that return should be?

How Murphy’s Law Determines Interest Rates

Returns are all about compensating for risk.

The risks that come with placing your money on a given bet. From putting your money in a savings account to investing in the stock market or real estate.

A return rate is all about estimating the chances and consequences of something going wrong and placing a risk tolerance value on that opportunity.

In other words, how much do you want in return to put your money somewhere where everything might go to hell?

In the example above, the bank considers they should get a 20% return for lending money to risky borrowers through a credit card.

So, how do you get to that number?

There are five main building blocks that make a return.

We’ll go through them now:

• Real Risk-Free Rate: This one doesn’t exist. Full stop. It’s a theoretical rate of an investment that doesn’t carry any risk if no inflation is expected. But, there’s no such thing. Even the safest investment, like giving your momma a loan, has a small amount of risk (no offense to your momma).

• Inflation Premium: This one compensates investors and businesses for the impact inflation will have over the maturity of the investment. It’s important because it accounts for the fact that inflation reduces the purchasing power of a unit of currency. In other words, it reduces the amount of goods and services a dollar can buy. As we have seen, inflation has risen substantially since the Covid-19 pandemic and the purchasing power of the dollar has substantially decreased with time.

  

  

Here’s an important side note. Adding the real risk-free rate and the inflation premium give you the nominal risk-free rate. Treasury bills, for example, are the closest proxy to a nominal risk-free rate.

• Default Risk Premium: This one compensates for the fact that someone might default on their promise. If someone borrows money (borrower) from someone else (creditor), there’s a chance the borrower might default on that loan. Circumstances like losing a job (in the case of individuals) or losing customers (in the case of businesses) can lead to the inability to repay that loan.

• Liquidity Premium: This one covers the risk that someone might need to sell an asset like a stock, bond, or real estate at a discount because there’s not a market that trades these as quickly as possible. An example of this is what happened to mortgage-backed securities in 2008 during the financial crisis.

• Maturity Premium: This one compensates investors for the market volatility that interest rates have on debt, especially long-term debt. There’s a lot of investments with different maturities, from a few days with Treasury Bills to 20 years with Treasury Bonds. The difference in interest rates between short term and long term debt comes from a higher maturity premium on longer term debt.

It’s important to note that these premiums are not all included in an interest rate.

Which ones are baked into the interest rate will always depend on the nature of the financial instrument you’re dealing with. Stocks, for example, don’t have a maturity date. Therefore, they won’t have a maturity premium as they don’t expire.

Another important thing is that some interest rates might be fixed and others variable (or floating). I’ll show you why this matters in a second.

Great, so now that we understand all of that … so, what?

How does it actually affect your pockets and those of businesses and corporations?

The Domino Effect

Let’s take a hypothetical example.

Imagine a business — let’s call it Captain Electric — that relies heavily on a line of credit to manage its accounts receivables. They do this because they have long payment cycles and irregular cash flows (quite normal in manufacturing and construction industries).

Let’s say Captain Electric secured this credit line at a floating interest rate of 5%. What this means is that the rate is tied to a benchmark and adjusts with market conditions. A common one is the LIBOR (London Interbank Offered Rate).

Now, due to rising inflation, the central bank decides to tighten monetary policy, which results in an increase in interest rates (sound familiar?). Captain Electric suddenly finds its interest rate on the line of credit soaring to 10%.

This single decision by the central bank could have a massive impact on business operations for Captain Electric. A domino effect that will be felt throughout the entire company.

Let me illustrate:

Domino 1 : The interest expenses on the line of credit would double, right? From 5% to 10%. If Captain Electric has substantial borrowings, this could mean a significant monthly increase in interest payments.

Domino 2: With more money directed towards interest payments, there’s less money available for research and development, marketing, or even payroll. Cost-cutting begins.

Domino 3: Expansion plans might need to hold off. Inventory purchases might need to be put on pause or reduced, which might become a problem if customers are demanding the product. This will turn out badly from a customer satisfaction standpoint.

Domino 4: If Captain Electric is a publicly-traded company, this will definitely have analysts questioning how/when will they deleverage the company and reduce interest expenses. This will influence the stock price and investor confidence.

Domino 5: Executives start steering the company in a different direction.

Do you see it now? I may be exaggerating a bit on the one above, but not by much.

Interest rates dictate a lot of the behavior consumers and businesses engage in.

I’ve always preached that executives and entrepreneurs should have a good understanding of macro and microeconomic factors.

Because business performance and personal finance are intricately tied to how interest rates move.

Spending a little bit of time understanding this metric will serve you well.

Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life.

Tyler Cowen

I hope this attempt of explaining something so pervasive in our lives is helpful to you and your friends and family.

If you enjoyed the article, please forward it to someone you know to spread the word.

Wish you a fantastic weekend ahead.

Remember to add some spice and variety into your life to keep it interesting.

I’m doing so by enjoying this amazing scorpion taco in Mexico City.

Until next time,

Antonio.

I remember taking the Eurostar from Paris to London and going through the little publicly available information I had.

I went through the valuation once, twice, thrice. I couldn't get my head around it.

To me, it sounded just like another real estate company providing office space.

But the money was good. So, I ignored my spidey sense and decided to give it a shot.

I arrived at the offices and was amazed at the amount of glamour around the office.

Free drinks. Free food. Game room. Friendly staff. Almost like a night out in the town.

I loved it. But, in the back of my mind, I was still wondering what they did and why there was so much hype about the company.

I managed to clear every single interview round, but …

They went with someone else.

Looking back, this was definitely a blessing in disguise.

Why? Let me show you.

WeWork or WeDream?

First, let’s answer an important question: How did WeWork actually work?

Their business model was predicated on the idea of taking long-term leases on commercial properties, refurbishing them into modern co-working spaces, and then subleasing them on shorter-term contracts.

A lot of their members were startups and freelancers. But some of their tenants were big companies such as Facebook and Microsoft.

The appeal was clear: flexible working spaces with modern amenities that businesses could use. And without committing to a traditional lease. Great idea, right?

The gig economy and remote work came at the perfect time. And just like adding wood to the fire, business started booming.

OK, so now we get how they made money. But, now …

Let’s answer another important question: What’s wrong with this picture?

If you think about it, what WeWork was fundamentally doing was “rent arbitrage”.

In concrete words, you lease a building for 15 years at one rate and sublease the space to members on a monthly basis, for example.

The logic here is that the revenue coming from the volume of short-term memberships (at a certain price point) will surpass the long-term lease payment for the same period.

However, this is very risky because it creates a duration mismatch.

In other words, if the economy goes south and people abandon their spaces on short notice (remember, they’re paying a monthly fee with cancellation rights), WeWork will see a decline in revenue, while still being liable for the long-term lease obligation.

That would create a lot of pressure on cash flow and profit.

And it did.

The company was burning cash and losing money at the same rate as revenue was going up.

Not a good story. Not even a good dream.

At this point, you should have noticed two things:

1. The idea might sound great, but the business fundamentals sound risky.

But most importantly …

2. I never referred to WeWork as a Tech company.

Huh? Yep. WeWork was considered a tech unicorn.

Not just by the CEO and the staff. But also by some of the biggest investors in the world.

Namely, SoftBank.

A $47 Billion Lie

At its peak, WeWork was valued at $47 billion.

To put that number in perspective, companies in the same industry like CBRE or IWG were not even 10% of that.

So, why would these guys be treated differently? Well …

The answer is simple: WeWork believed they were a tech company. And Adam Neumann would harp on this every single time he got a chance to.

In fact, the word “technology” appears 93 times in the prospectus they filed with the SEC at the time they were going public. I sh*t you not. Do a Ctrl+F on the S-1 and see for yourself.

The valuation was primarily based on growth metrics and the “potential” for future profitability, rather than present-day financial health. Their favorite metric was the infamous “community-adjusted EBITDA”.

Tech companies often receive higher valuations because scaling software doesn’t require a huge cost burden. But WeWork was capital-intensive.

Think of all the property and equipment in every building they leased, and the community managers and staff overseeing new member acquisition and overall satisfaction.

That’s a huge corporate cost that regular tech companies don’t have.

This was an odd case of extreme optimism on market domination.

But many people pushed Adam Neumann’s narrative. Included in those people was SoftBank’s CEO, Masayoshi Son, who injected billions of dollars in investments that managed to push the valuation to $47 billion.

Soon enough, SoftBank would realize this was a BIG mistake.

The House Is On Fire

Like they say, all good things must come to an end.

And WeWork was no exception.

After going public, the company went south in many ways.

A cut in its valuation from $47 billion to $5 billion, the ousting of Adam Neumann as CEO, and 2,400 layoffs across the company.

Business challenges of every type came knocking on WeWork’s door.

Mismatched lease structures: Co-working spaces saw a drop in demand due to recession fears and the latest rounds of layoffs happening across the tech industry. That fear in the fundamental business model of the company came to pass.

Overexpansion: WeWork was known for growing its tentacles fast in the real estate industry. Every week, it felt like they had a new office in one of the most coveted districts of countries like Singapore, the UK, and Australia. The problem with that was that global expansion without establishing profitability in those markets is a recipe for failure. Besides the long-term lease commitment, the retrofitting of each building would accrue massive liabilities that would come and hunt them down the line.

Corporate governance: Adam Neumann was not just the owner of the company but he was also a tenant. He was, allegedly, also a customer. This gave the perception of a huge conflict of interest. Part of the reason why the board asked Neumann to step down.

The issues kept piling up on after the other. To the point that, as of this week, executives have sounded the alarm on whether the company can exist at all. This is known as the “going concern” principle. Accounting 101.

And now, the stock is practically worthless.

Here’s an excerpt of WeWork’s Q2 2023 earnings release.

“In a difficult operating environment, we have delivered solid year-over-year revenue growth and dramatic profitability improvements,” David Tolley, Interim Chief Executive Officer, commented. “Excess supply in commercial real estate, increasing competition in flexible space and macroeconomic volatility drove higher member churn and softer demand than we anticipated, resulting in a slight decline in memberships.

In addition, as disclosed in WeWork’s Quarterly Report for the three and six months ended June 30, 2023 (the “Second Quarter 10-Q”), as a result of the Company’s losses and projected cash needs, combined with increased member churn and current liquidity levels, substantial doubt exists about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is contingent upon successful execution of management’s plan to improve liquidity and profitability over the next 12 months.”

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The Importance of Accounting Fundamentals

Reporting the inability for the company to continue is a big deal.

It means liquidating assets, restructuring the business, and firing people. Basically, shutting down the whole thing.

It speaks volumes about the need for financial literacy in business. Especially in an era when is easier than ever to get a check from investors to scale a business.

It says a lot about how investors and founders can get fixated on growth metrics and stories that will, supposedly, disrupt and revolutionize industries, rather than basic profitability and market fit.

At some point, income statements, balance sheets, and cash flow statements have to be the signals we take into consideration to running the ship. I wrote a quick masterclass on Twitter that seemed to work. You can check it out in the link below.

https://twitter.com/theantonioreza/status/1688531699771326465?s=61&t=9Fywxctpd7eylzM5v4zU_g

I don’t doubt there was talent in the finance team.

But, this feels like there was a king at the top. And anybody who would disagree with the “flow” at WeWork would get tossed to the guillotine.

Therefore, I can only assume the WeGeneration was more of a dictatorship than a community.

I hope you liked this week’s issue. If you like the newsletter, please forward it to a friend!

For now, I wish you a fantastic weekend from the Loire Valley in France.

Until next time!

Antonio.

Maybe …

Think about Apple. What’s the first thing that comes to your mind? iPhones. Macbooks. But it’s so much more than that. 

Behind those beautifully designed products, there’s a behemoth that exerts influence in everything that you do every day. And it probably knows you better than you know yourself. 

It has access to your biometrics, from your fingerprints (via TouchID) to your face (via FaceID). 

It knows your purchasing tendencies every time you buy something (thanks to every Apple Pay). 

It can locate you and calculate how many steps you take in any direction (via Health). 

It even knows if your heart is malfunctioning. 

Apple has managed to wrap itself in the fabric of society. 

Hardware. Software. Financial Services. Healthcare. AI. VR. And many more. 

With 2 billion iOS users around the world, it is only logical to think the level of influence this company has goes beyond what many countries can do.

How does a company obtain that kind of power? Let’s explore that.

This shift in power dynamics can be attributed to various factors, such as the ability of companies to generate vast financial resources, their global reach, and the increased influence they wield on politics and society.

The Financial Might Of Corporations

To understand this phenomenon, consider the valuation of tech companies.

Apple, was the first company to reach a market capitalization of $3 trillion. This figure is just as large as the Gross Domestic Product (GDP) of countries like France and the UK, which are among the top 10 largest economies in the world. 

Even though these are two different metrics that measure different things and should not be used for comparison purposes, it gives you an idea of how much value investors are placing in the company.

From an economic perspective, these corporations have a level of financial power that can directly influence global markets, shape industry standards, and even impact national economies. 

When companies of this magnitude make strategic moves, such as shifting manufacturing bases or altering supply chains, it can lead to significant economic changes in the countries involved. 

For example, Apple has been trying to move its manufacturing away from China, which would affect many jobs. 

On the other hand, India and Taiwan, the two countries where manufacturing operations would move into, would benefit greatly.

The Invisible Hand

Another point worth considering is the global reach of these corporations. 

Unlike countries, corporations are not geographically bound. They can operate across borders, navigate through different laws and regulations, and reach out to consumers worldwide. 

This international presence gives corporations a form of influence and soft power that many countries cannot match.

For instance, consider the social media giant Facebook (now Meta). 

With a user base of over 3 billion people as of 2Q’23, the platform reaches far more individuals than any single country. The influence of such platforms on public opinion, information dissemination, and even political discourse, is a testament to their power. 

Not too long ago, we were talking about Russian meddling in US elections and the invisible hand on the Brexit vote. Remember Cambridge Analytica? If you don’t, do yourself a favor and watch the Social Dilemma.

Furthermore, corporations are increasingly influential in political matters. Through lobbying, corporations can shape policies and regulations to favor their interests. 

This trend is evident in the United States, where, according to newly filed lobbying disclosures, over $55 million was spent on lobbying in 2021 by Apple, Amazon, Facebook, and Google.

That’s an army of lawyers trying to push an agenda with legislators and other government officials.

Too Big To Fail?

This influence isn't limited to policy. It can extend to economic stability. The economic fallout of corporations can have far-reaching consequences on countries economies.

For example, the bankruptcy of Lehman Brothers in 2008 was a critical catalyst of the global financial crisis, leading to recessions in several countries.

Due to the interconnectedness of financial institutions, banks worldwide faced the prospect of significant losses. This led to a lack of trust between banks and a freezing of interbank lending, which is a key mechanism for maintaining liquidity in the global financial system.

The gross domestic product (GDP) of certain countries contracted because of this: 2.5% in the United States, and 4.5% in the Eurozone. This impacted people’s livelihoods in a way we hadn’t seen in a long time.

However, while corporations have amassed significant power, they exist within the legal and regulatory frameworks provided by countries. And also, the power of countries extends beyond the economic dimension, with military, diplomatic, and cultural elements that corporations do not possess.

Nonetheless, all of that doesn’t diminish the amount of influence these corporations exert in society.

Just look at the amount of layoffs these companies have made in the past 12 months. I wrote a an article called “Why Layoffs Are Far From Over last week. Feel free to check it out to understand the details.

Without a doubt, tech companies and banks are become too big to fail. And they’re succeeding, without you even noticing. 

Will this trend continue? It’s possible. 

Regulators are trying to split them up or ring fence them into what they can and cannot do. But it’s only the beginning.

There’s no doubt in my mind, this will keep happening, especially as we enter the new era of AI.

Hope you enjoyed reading this. If you think someone else will enjoy this type of content, please forward them so they can subscribe too!

See you next week!

Antonio.

Imagine this …

You wake up, get a cup of coffee, get dressed to start your day. The usual routine you go through right before you go to work.

You decide to check your email to make sure there’s nothing urgent before you start the day. And then, suddenly, you can’t access your emails. You get a cryptic message saying your company has decided to block your account.

You panic.

You check Twitter and LinkedIn and there’s a bunch of people posting they’ve been laid off from the same company you work for.

You open the Wall Street Journal and see right there on the front page in bold letters: There were massive layoffs in your company.

You text your manager, and when he finally replies, you find out you were let go overnight. Ouch.

This happened to thousands of employees in FAANG and other companies around the world.

But why? Aren’t these companies supposed to be the most profitable in the world?

You’d think they have enough cash to keep their employees, right? Well, it’s more complicated than that. Let’s break it down.

There are four main reasons why all these companies are firing their employees. Let’s go through each of them.

Post-Covid Reality

If you go back to the start of the decade, the world entered a period of confinement as a public health safety measure.

People couldn’t go to their offices to work or go to the grocery store to buy food. The world lost, for a little while, the freedom to work productively and consume freely.

But then, the tech companies came to save the day. Microsoft, Amazon, Google, Netflix, Zoom, Slack. They gave governments and businesses the ability to operate as if nothing had happened by using their products.

Whether it was video-conferencing software, office productivity tools, or management of their tech stack via the cloud, the world started to shift into a path of digital transformation.

Business plans and financial forecasts were updated to reflect the new reality. One where the world was finally accelerating its reliance on tech giants. And more importantly, it was a complete paradigm shift rather than an anomaly.

Companies assumed a big amount of revenue was expected to come from this shift. Which meant companies had to invest more aggressively in hiring talent to develop the products of tomorrow.

Take a look at these chart. You can see the headcount growth during the years we had Covid. Because the growth expectations were so strong, hiring this many people made sense.

But, what if this was, in fact, an anomaly?

What if, after Covid, people wanted (or were forced to) go back to the office?

What if people preferred buying their groceries in person rather than through an app?

What if businesses wanted to invest money in other things rather than digitizing all their tools and processes?

Then all these companies would be stuck with a massive cost structure while revenue started to decline.

This translates into lower profits on a long-term basis, which is not well-liked by investors. To keep investors happy, profits have to be grown over time.

And the only way to rectify a mistake like this one, and quickly, is to fire employees.

Immediate cost cutting.

And as we’ve seen lately in earnings reports, Wall Street liked it.

The Stock Price

A company’s stock price reflects the collective opinion and sentiment of market participants regarding the company's future prospects.

Positive news, such as strong financial performance can drive the stock price up, indicating optimism about the company's future.

Conversely, negative news, such as poor earnings can lead to a decline in the stock price, reflecting concerns or pessimism about management’s ability to run the company.

There are two things that are important here:

1. Executive compensation is tied to how well the stock performs in the short term and the long term. So, there’s an incentive for executives to keep the stock price as high as they possibly can. The higher it is, the richer they get. This also applies to investors, though. Regardless if it is an individual or an institution that buys a bunch of stock, their expectation is that the price will go up and they’ll get a return.

2. Tech companies tend to have highly bloated cost structures. Example … Twitter. When Elon Musk took over the company and made it private, he cut payroll cost by firing 80% of the staff he considered non-essential. A lot of roles like recruiting, program management, operations, strategy, etc. are roles that don’t contribute to designing, developing, marketing, or selling the product. Therefore, they’re typically the ones that get cut first.

If you look at the market’s reaction after the layoffs, you will notice that the price went up in most FAANG stocks. Check the upward trend after November 2022.

Why?

Because to the market, these cuts mean the companies are course correcting. Which is a good thing (for management and investors; not so much for employees).

But what if it the cost cuts are not enough?

Recession

Even though we’re not in a recession yet, we are living in a highly inflationary environment. Interest rates are rising and the prospects of a collapsing economy get more dire by the day. And a weak economic environment means that businesses won’t grow. In fact, they might shrink.

A weak economy has a domino effect. If a consumer doesn’t shop as much online, it’s not just the business that runs the online store that gets affected, but also the payment platforms like Shopify or Stripe, because the volume of transactions decreases.

Because of this lower economic activity, businesses in this type of environment typically tend to be more conservative and cut spending as much as possible, anticipating the fact they’re no longer in growth mode, but survival mode instead.

This is where layoffs start to happen. Jobs that are open to help the company grow are the first ones to go. Support functions like recruiting, strategy and operations, marketing, and even finance. This is backed up by a study done by Revelio Labs.

As long as the economy continues to weaken, layoffs are likely to continue.

The AI Wars

Artificial intelligence will have a massive impact on jobs. No question about it.

Think about ChatGPT, Bard, and all the applications that are being created right now using their APIs. Even Apple is rumored to come up with their own GPT. All of this has the intent of making people and businesses more productive and save some cost.

Let’s take the example of copywriting. Pre-AI, you’d hire a freelancer or an agency to work on your copy to sell a product. There would be meetings where people would go over multiple revisions until a decision to choose the winner was made. Now, you can ask ChatGPT to create compelling copy in a similar style to David Ogilvy by only spending 20 dollars a month. And without the hassle of multiple meetings or dealing with an agency or freelancer.

Another example is the amount of hours people spend making presentations or data analysis. I’ve been there myself. And it sucks. But that may be fixed soon enough.

Microsoft launched Co-pilot recently and it is supposed to help you do just that. Reduce the amount of time finding inspiration to create a presentation, think about the messaging, the tone, and soon enough, it will perform complex analytical tasks.

This will reduce the amount of hours spent in these activities. And in business, 8 hours a day, 5 days a week, for a full year is equivalent to hundreds of thousands of dollars saved in payroll. You can bet there’s a few full time employees who perform this type of work that will get cut. Unfortunately, this is unavoidable.

Business is evolving at a rapid pace. And all of this will create new ways of looking at profitability, efficiency, and productivity. Layoffs are just a symptom of what’s coming in the next few years. And we should be prepared to reinvent ourselves to catch the new wave.

If you enjoyed this week’s newsletter, please share it with your friends and family!

See you next week!

Antonio.

Can you picture the difference between a million and a billion?

Let me help you, counting to a million would take you 11.6 days if you counted one number per second without stopping. Counting to a billion, though … Well, that would take you about 31.7 years if you didn’t stop. Let that sink in for a minute. Most people can’t understand the vastness of 1,000. Let alone a million or a billion.

And Coca Cola sells almost twice as much. PER DAY.

How is this possible? And could they sell more than that using generative AI?

Let’s take a look inside one of the most dominating and valuable brands in the whole wide world, and how they will use GPT4 and DALL-E to increase their already dominating market share.

This is Inside Coca Cola.

If you've ever had a soft drink, you've probably had one of these.

Coca Cola is a household name and one of the most successful brands in the world. In fact, they sell over 2 billion bottles a day in 200 countries. That's a lot of soda. And a lot of sugar.

So how did Coca Cola become such a global powerhouse and what role has technology played in its success?

Let's go back in time.

Coca Cola’s Quest For World Domination

In 1886, a pharmacist named John Pemberton created a syrup to be mixed with carbonated water, which he called Coca Cola. The beverage quickly became popular and was sold at soda fountains across the United States.

As the company grew, they faced competition from other soda brands, but Coca Cola's amazing marketing campaigns helped to establish it as a unique and iconic brand.

Those marketing campaigns were ideated and created by some of the most talented artists, marketers, and graphic designers. You can bet that the most prestigious agencies were working in one of their campaigns at the time.

It wasn’t just marketing, though. Coca Cola's success also stems from their commitment to innovate using the latest technology available.

For example, in the 1920s, Coca Cola began bottling their soda, making it easier to distribute and sell. Later, they introduced the concept of vending machines, allowing customers to purchase a bottle of Coke on the go. These innovations helped to increase the availability of Coca Cola, making it a household name across the world.

Fast forward 100 years, and Coca Cola is now using generative AI to create marketing campaigns. They also use AI to analyze consumer behavior, preferences, and purchasing patterns, which helps them make data-driven decisions about product development, marketing, and distribution. All of which contributes to more revenue and more profits.

And a healthy bottom line means happy investors.

Coke’s Adoption Of Generative AI

One of the most interesting things they’re working on, when it comes to AI, is this partnership with OpenAI and Bain & Company.

These three companies collaborated to develop a custom-made platform powered by GPT4 and DALL-E that allows creators to generate art with iconic images owned by Coca Cola, such as Santa Claus and its polar bear.

These images will feature in their marketing materials and social media posts to help them predict consumer trends in developing markets. Trends such as who prefers tea rather than coffee, or who prefers Diet Coke rather than Coke Zero based on its flavor, for example.

According to a study done by the University of South Africa, which measured the effectiveness of real time marketing campaigns on consumer purchasing behavior, more than 70% of the people surveyed answered they will purchase from a retailer if they respond to trends and specific cultural events using social media tools in real time. So, if they can use AI to exploit this opportunity, it is a goldmine.

Why Is This A Big Deal?

Firstly, the speed at which they can generate these campaigns will increase exponentially. Think about it this way, rather than selecting a group of designers to work on the images, they are now democratizing the development of the images to anyone who has some creative talent and can generate effective prompts. Probably at a fraction of the cost and without the hassle of dealing with an agency.

In the current inflationary environment we’re living in, where cutting costs are now becoming the norm, this will allow to shrink their operating costs and expand margins. Which is … a good thing.

Secondly, because they can generate these campaigns a lot faster with the use of AI, they’ll get a quicker feedback loop on how effective these campaigns are. Subtle, but important things such where to place text in the ad, what people should look like, and what colors to use can be iterated quickly to test which one will sell the most in local markets. Particularly, developing markets.

If this platform turns out to be successful, we can expect that campaigns will become more effective with time. This will result in more sales, higher profits, and increased market share.

As of today, Coca Cola has an approximate 43% market share on the beverage industry. By using campaigns that are more targeted and effective, they will be able to sell more bottles direct to consumer, but also do more business through partnerships or distributors.

This is similar to what happened to businesses that started using Google and Facebook ads to target users based on interests and social media profiles.

Additionally, the more business for Coca Cola, the more business for their bottling partners, who are key to the business model. A fantastic flywheel.

Finally, if this partnership and platform become a success, Bain & Co will probably use it as a framework for other Fortune 500 companies.

This would be the dawn of a new service offering that gets consumer packaged goods executives interested in how to leverage AI. This might be able to inject some new life to an industry that is not in hyper growth at the moment.

Just imagine running the same experiment for tobacco, beer, and clothing companies that have a big and loyal fan base. Marlboro, Corona, or Nike.

This would be a massive paradigm shift on how marketing is done today. All possible through Generative AI and Analytics.

Welcome to the new world.

I hope you liked this week’s issue and wish you a fantastic rest of the week!

Until next time,

Antonio.

The post was … somewhat controversial. More than 365K impressions and 2K reactions. Crazy.

Why? What struck a chord with so many people?

Brief Intro - Neutron Jack

For those of you who don’t know who this person is, Jack Welch (aka Neutron Jack) was named “Manager of the Century” by Forbes Magazine in 1999.

During his tenure, GE created a 5,200% return for its investors (2x the S&P 500). Its market cap went through the roof and become one of the most valuable companies to ever exist. A true American icon.

So why is he such a polarizing character? Shouldn’t people love a guy who delivered on the most fundamental business promise — increasing shareholders value?

Let’s break down the two sides based on the comments this post got.

The Lovers

The people who love Jack, love him unconditionally.

Many people commented on how much they loved the ruthless candor he demanded in the organization, his obsessiveness with Six Sigma to drive productivity, and his commitment to develop people in tough assignments.

These traits permeated the organization more than a decade after he was gone during the Jeff Immelt era.

How do I know? I was there during that time.

When I was a young auditor looking for trouble, my peers and I were expected to be brutally honest with the CFOs of GE businesses. This applied to any issue we could find. Accounting discrepancies. Compliance violations. Anything that would put the company in harm’s way. We didn’t hold back any punches.

That wasn’t easy, though. And it wasn’t for the faint of heart. Two times out of three, executives would yell at us frustrated, and challenge every observation we would have. And they would use words and phrases intended to make you cry in the bathroom wondering why the hell would you have signed up for this type of job.

“Get your sh*t together!” was probably one of the ones I heard the most.

However, that was the point. It was tough love. I developed a thick skin because of that. I didn’t always like it, but deep down, most of those executives were developing the next generation of leaders.

To me, that was candor. At its purest form.

In a world that is getting softer by the minute, I think we could use an extra dose in our lives.

The Haters

In that post, there were two main criticisms to Jack’s way of running GE.

The first one was the infamous “Rank and Yank” policy.

It’s basically getting rid of the bottom 10% of the organization. The ones who don’t perform. The “rest and vest”. The complainers.

Jack’s argument was that these people would be happier somewhere else.

There’s a lot of hate on this policy as evidenced in the comments. But was it, really?

If you’ve ever worked in a corporation, you might have noticed that there is always a performance management system. A process that intends to rank and stack employees based on accomplishments, effort, attitude, and other factors. What you do and how you do it.

There are standard metrics that are used by managers to let you know where you stand in the organization. Some examples are: exceed expectations, meets expectations, needs improvement. And based on where you land, you might or might not get that promotion you’ve been so patiently waiting for.

This is exactly the same thing as GE’s old policy. The difference is that these companies might keep those people, which is a detriment for both, the individual and the company. The employee is unhappy and the company is losing money because of a headcount that is not producing a return.

The second criticism was that he manipulated earnings.

A little bit of context …

During that time, GE was a conglomerate. It had many businesses.

Healthcare. Aviation. Energy. Even a financial services business. GE Capital.

When the time came to report earnings to Wall Street, GE never broke down the performance of each individual business. It was all lumped up.

Why is this an important detail?

GE Capital was a cash machine. As profitable as they get. There’s rumors that even investment bankers wanted to work there. Why? Lack of regulation. In other words, deal making was freakin’ cool.

Because it was so profitable, whenever an industrial business struggled, GE Capital would always cover the losses. This created a very smooth quarterly performance for the company. Wall Street got accustomed to earnings calls filled with good news and no bad surprises.

Was this manipulating earnings? It’s a fine line, but I don’t think so. Executives all over the world know that “keeping a penny in your pocket” is a good strategy to fall back on. And GE didn’t make trades like Enron or WorldCom.

Genius or fraud?

As with any public figure, Jack will always be subject to scrutiny.

He wasn’t perfect. But he wasn’t a total failure either. Just like everything else, it’s never black and white. The answer lies somewhere in the shades of grey.

This man took a company from domestic player to international powerhouse, created one of the most coveted leadership development institutes (Crotonville), and sent out many executives to run the biggest companies in the world after their time in GE.

For me, personally, he falls more under the category of genius.

What do you think? Let me know in the comments.

Until next time,

Antonio.

P.S. Below is the link to the post if you want to read it (the comments are the best part).

Jack Welch Post - Linkedin

If you’re reading this, we’ve probably interacted on Twitter in the past or you’ve received a copy of my Accounting Basics e-book.

I’m glad you’re here. Again, thank you.

Why are you here?

We live in a world obsessed with making money. If you go back in history, you’ll observe that we’ve become more sophisticated with time. We’ve gone from barter to coins. From fiat to digital money.

What’s next? That’s the trillion dollar question.

More recently, we’ve started to become obsessed with technology. Particularly, intelligent beings that might help us become more productive in the future. Or, in a more dystopian future, they might erase us from the face of the earth.

What’s going to happen? That’s the quadrillion dollar question.

When you combine these two topics, you get an interesting intersection of things, ideas, and people.

Venture capital funds. Billionaires. Ethics. Banking. Research. Fraud. Cryptocurrencies. Inflation. Policy. And many more.

This newsletter’s manifesto is to explore these intersections. The past, the present, and the future of our relationship with money and robots. In an attempt to answer, as best as we possibly can, the many questions that arise from our interactions with these two ubiquitous concepts.

I will give you my perspective as someone who has studied and worked in finance in the technology industry (Google, Microsoft, GE) for the last 15 years. And to keep things balanced, I will try to bring other people’s perspective from my network as well.

I want us to get more educated on what’s coming and how it will impact our lives, so we can make adjustments as we go.

That’s why you’re here. And I really hope you stay.

Thanks for embarking in this journey with me.

See you in the next post.

Until then,

— Antonio