"Not Even Wrong" Podcast
Investing in fundamentally new concepts and engineering practices with large impact.
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How to deal with setbacks. 1/3 Reset expectations 2/3 Make sure you have right assets, resources and skills to pursue your goals and 3/3 Enjoy the game.
Big macro call. Inflation in the US will be moderate because of geographic arbitrage, people moving from the coasts to places like Texas. Lower cost of living will mean lower inflation. Higher innovation will lead to higher real growth. Positive for technology stocks and USD.
The great geographic arbitrage. People are moving from high cost coastal areas to low cost regions such as Texas, Utah or Nevada. This will have an impact on inflation wich will be much more moderate than the market narrative currently reflects.
Inflation is the topic du jour. But will we get it? Three scenarios for US macro. Deflation, Inflation and robust growth. Inflation is likely, but robust growth, which is moderate inflation and innovative growth are also possible. We believe the market is starting to price the latter.
Five books that influenced me most in 2020. 1/5 The Innovation Stack. 2/5 The Beginning of Infinity. 3/5 Breakthrough. 4/5 Chasing the Light. 5/5 No Rules Rules.
The biggest surprise this year was the extreme bifurcation in the market. Strong companies got stronger and the weak weaker. For next year the trend under appreciated by the market is the wealth generation by genomics and synthetic biology.
Culture is what gets you promoted or fired. In the Hedge Fund business culture is what gets you paid. Wealth creation can only happen if fund managers have skin in the game. That means they make money on the upside and loose on the downside.
A culture of progress and wealth creation requires rational criticism. Ideas proliferate and compete in a system of constant iteration and improvement. Netflix according to the book "No Rules Rules" applies the same system through constant feedback culture.
Should Elon Musk create a holding with all his companies and list it? NO. Keep them separate. But go public with them as soon as possible. This is the best way to increase transparency, limit Rube Goldberg drift and create value.
What is Waymo trying to achieve? It looks like Google is pushing Waymo down a rabbit hole of engineering for the sake of engineering. There is a lack clarity . Tesla on the other hand wants to decarbonize transport by continuously improving convenience of its cars, lower price and delivering cash flow. This feels much better.
Apple wants to enter the EV business, one way or the other. The key driver for success for any new entrat is how far along the commoditization of the value chain has come along. Currently, the commoditization is not enough . Only integrated players like Tesla can deliver superior intelligent Electric Cars to real costumers.
The downside of the Bio-Pharma-Health industrial complex. Simple, low cost engineering solutions have a hard time getting implemented. Michael Mina talks about this problem and why low cost, rapid testing isn't used more widely to combat Covid in the US. He also brings up questions about the efficiency and implementation of vaccine solutions which make us re question Moderna.
New potential addition to our portfolio Moderna. Fundamentally new concepts and new engineering practices with large impact. Moderna is using MRNA technology to fundamentally redesign drug delivery and mode of action.
Can market prices be evidence for investment explanations? No. Market prices are a function of daily demand and supply of shares, not a longterm reflection of wealth creation potential. The only evidence supporting market prices is cash flow.
What is the role of evidence in investing? It's the thing that needs to be explained. Same applies to science. Problem is, we need an explanation for what evidence actually is useful for our theory? This is a problem both science and investing have to work around with precision.
Chapter 1 of "No Rules Rules" by Reed Hastings. Discussing talent density and how more talent per employee results in better performance. Developing an innovation stack by applying fundamentally new concepts and engineering practices requires high talent density. Examples Netflix, Tesla.
Chapter 11 "The Innovator's Dilemma". Conclusion. Disruptive companies create new markets and grow with them. Crispr, synthetic biology and cell programming are fundamentally disruptive concepts with new engineering methods. They attack existing markets with new concepts and also create new markets.
Chapter 11 "The Innovator's Dilemma". The key problem with disruption is how to answer the question "what to do next?". Or, how to create a dynamic organization while maintaining stability. Tesla solves the problem focusing on three goals, convenience, low price and cash flow.
A dynamic organization and culture of rapid innovation requires continuous replacement of values and processes with better solutions. Competitive advantage is directly related to the speed of which such change happens. There is direct relationship between dynamic societies and dynamic companies. In both cases the ability to adapt, change and improve is the key so success.
The evolution of culture. Companies need a flexible, adaptive culture to build an innovation stack with large impact. The best way to increase flexibility is to drive down the cost structure.
With a new missions statement we are brining more precision to the investment process. Generating wealth by investing in fundamentally new concepts and engineering practices with large impact requires a thorough cross check with our principal stack.
New Mission Statement for Orange Capital Partners. "Our purpose is to generate wealth by investing in fundamentally new concepts and engineering practices with large impact."
Repositioning portfolio. Two in, two out. We focus on companies with fundamentally new concepts and engineering practices. The convergence of biology with computer science puts biology on the trajectory of Moore's Law.
Chapter 9 "The Innovator's Dilemma". Established players build technology around markets. Disruptors build markets around technology. The key is to build an innovation stack around disruptive technologies and simultaneously develop a new market around the innovation stack. Tesla built a new market for luxury, intelligent electric cars around its own innovation stack.
Is there such a thing as an objectively good investment or is it just circumstances? We say yes. There is a difference between Tesla and Uber for example. We start with the principle stack. Building from there we develop an objective thesis that defines what a good investment is.
Chapter 9 "The Innovator's Dilemma". When is a product a commodity? When is a product overperforming? Tesla is doing the reverse of over performance, first deliver high end and then gradually lower cost curve to serve lower priced markets. What is Crispr? Disruption or more?
Book discussion "The Gifted School" by Bruce Holsinger. Why are parents obsessed with their kids talents? Will Crispr change that behavior. What's the point of competing for IQ when IQ points can be bought by the base pair?
Discussing the disruptive nature of Crispr and why we are increasing our Crispr positions. The opportunity has increased due of Alpha Fold's discovery of protein folding problem solution. Now there is a direct link between genes and protein function.
Repositioning portfolio. More focus on Crispr, gene editing and the new opportunities with protein folding.
Chapter 8 "The Innovator's Dilemma". How can a company be best run when dealing with disruptive innovation? How can fund managers spot wealth creation? Focus on values and simple longterm goals with large impact, such as getting rid of fossil fuels or curing disease with one shot genetic manipulation.
Chapter 8 "The Innovator's Dilemma". Intuition is the key to managing disruptive innovation. You cannot use patterns and extrapolate from the past. But you can use experience, intelligence, knowledge and flexible adaptation, in short, intuition.
Chapter 8 "The Innovator's Dilemma". Companies are a set of resources, processes and values. Today we focus on values. Values are the answers to the question: "What' should I do next". Established companies often suffer from rigid value systems which prevent them from embracing disruptive technologies.
Quantumscape and the anatomy of a stock bubble. Solid state batteries are a great scientific problem. But is it a disruptive technology. Tesla at Battery Day has addressed most problems Quantumscape is attacking. What's left?
Chapter 7 "The Innovator's Dilemma". How to organize for disruptive markets? Problem is, they don't follow patterns. Best is to size appropriately and follow the technology and usage of emerging customers. In short, build an innovation stack.
How relevant are valuations for wealth creation with disruptive innovation? Turns out, not at all. Valuations are a macro variable and not controlled by entrepreneurs. As fund managers we focus on our principle stack and finding and correcting errors in our investment process.
Twist Bioscience and disruption. Some parts of the business are disruptive, some are not. The valuation reflects value in building a platform for making life science more like an engineering discipline.
Chapter 6 "Innovator's Dilemma". Best way to respond to disruptive innovation. 1/3 Create separate organization 2/3 with appropriate size and 3/3 incentives. VW and GM are not doing that.
Chapter 5 "The Innovator's Dilemma". How should incumbents respond to disruptive threats? Best is to build a separate organization that harnesses the new disruptive technology and builds an innovation stack around it. Mingling the old structure with the new innovation does not work. VW is choosing the latter. This is a mistake.
When measuring something you need an explanation for what you're measuring, why you choose this particular metric and what you expect. The Why precedes the What. Wall Street often lacks this fundmental approach. We invest based on our principle stack.
Bad analysis and false analysis. Both are prevalent on Wall Street. Bad analysis is when you're wrong. False analysis is the kind where you don't allow for criticism and error correction.
Chapter 5 of the Innovator's Dilemma. How can incumbents react to disruption? VW offers their strategic positioning to fight Tesla. They want to become a software powerhouse. But they first need to figure out how to adapt their cost structure to compete in a Moore's Law driven car market.
Chapter 4 "The Innovator's Dilemma". We finish the discussion of chapter 4 with emphasis on why the cost structure defines a company. Also, discussing the importance of theory and sound analysis in the process of wealth generation. Parallels to science.
Innovator's Dilemma case prediction. Disruption in the eduction market. Universities are like the Church before Luther. They will be be disrupted by new entrants. Rapid increase in disruptive innovation in industry will change the employment market.
Chapter 4 "The Innovator's Dilemma". Asymmetry of going up market but not down. We discuss Tesla self drive tech stack vs. Waymo. Why Waymo is sticking with high specs while Tesla is disrupting from below.
Chapter 4 "The Innovator's Dilemma". A company is defined by its cost structure. Tesla like Amazon is relentlessly focused on adapting the cost structure to capture large markets.
Chapter 3 of Innovator's Dilemma. Incumbents loose against disruptive entrants because they cater to their existing costumer base and miss the new markets. Two questions for Tesla. 1/2 Is Tesla disrupting the ICE industry? 2/2 Is Tesla at risk of being disrupted by Chinese entrants?
"The Innovator's Dilemma" doesn't explain well why Tesla is successful. "Zero to One" and "The Innovation Stack" are filling in the gaps. To realize our mission we are continuously improving our principle stack to find better explanations for how to generate wealth.
Chapter 2 Innovator's Dilemma. How do leading companies loose markets to disruptive entrants? Interesting contrast between Jim McKelvey's Innovations Stack and Christensen. Jim says that innovation is not a choice but a necessity. According to Clayton innovation happens and sorts out in the market place.
Chapter 1 of Innovator's Dilemma by Clayton Christensen. Why do successful incumbents give up markets to disruptive innovators? We discuss Tesla and the threat of Chinese EV startups through this lens. Tesla is answering the threat by aiming for a 25k car.
Tesla competition? One set of competitors is to be taken seriously, the Chinese startups. Nio alone has reached almost 60 Bio. $ in market cap. This is significant. We are discussing the Innovator's Dilemma, Chapter 1 through the lens of Tesla and the competitive dynamics. For now, Tesla is fine. No threats.
Everything is possible unless prohibited by the laws of physics. It is our job to find the subset where wealth creation is likely. We grow with our investments and find new answers to questions we don't even know today. Knowledge compounds like interest.
The purpose of generating wealth is to keep building financial and human capital. Our goal is to ask better questions in the future, to identify new types of problems have our capital work towards potential solutions. We call this the idea stack.
Trump polarizes not just Main Street but also Wall Street. A few winners such as Amazon or Tesla contrast many losers such as ExxonMobil or Goldman Sachs. If he wins, this will most likely continue. If not, probably same.
Introducing the market stack. Conquer one market, kill competition, create new markets, kill competition. Repeat. Concept of "Last Mover" from "Zero to One" means you fire the last shot to kill last competitor. Example, Tesla Battery Day..
A problem that is not solvable is not interesting. An interesting problem has to be solvable. The question whether something is interesting is not subjective but based on objective facts. Climate change is not interesting because it's not solvable. Reformulate the question to "how to decarbonize energy" and you have an interesting problem with an interesting solution likeTesla.
Markets are jittery because of Covid resurgence and US elections. We took a drawdown of 22% in October. US elections should be over in a few days without large turmoil and a clear decision. Covid should abate and global economy should get back to growth. If that happens, markets look at double digit returns for year end. Otherwise, further drawdowns. Probabilities are tilted to the former.
What is the goal of driving? Piecemeal approach vs. "end to end learning" Alpha Zero style. But how can an "end to end learning" strategy deliver full self driving when the goal is not clear? Tesla strategy feels better.
Resurgence of virus crisis causes market sell off. Markets have no faith in experts and authorities. The problem is not that they don't know how to deal with the virus. The issue is that they don't admit it and keep making knee jerk decisions.The markets will not calm down until this attitude gets fixed.
Why don't we let everybody work freely? It's because people differ genetically and therefore compete and oppose. Best solution is visionary leaders giving employees freedom to explore technical challenges.
Education is key to the innovation supply chain. Knowledge is a commodity and can be acquired through a mix of public and online services. More difficult is the acquisition of agency and autonomy, which are key ingredients for wealth creation. Agency is impact and autonomy is the expression of free will and creativity.
Adding the book "The Beginning of Infinity" to our stack of principles explains in particular why we believe ingenuity can create wealth. Free will is just another way to say that only by acting free you can develop creativity. And only creativity yields disruptive innovations that create large markets and generate wealth. The measure of wealth is freedom and freedom is the key to wealth. It goes both ways.
We are adding one more book to the principal stack of Orange Capital Partners. It's "The Beginning of Infinity" by David Deutsch. The book sets the fundamentals for the other three principles, wich are Zero to One, The Innovation Stack and The Innovator's Dilemma.
The measure of wealth is freedom. And freedom is necessary to generate wealth. It goes both ways.
Discussing Square versus Tesla. Why are we invested in Tesla and not in Square? Square lacks clarity, leadership and differentiation to become a large company with impact. Tesla doesn't.
Disruption in payment systems is just the beginning. Companies like Square and Paypal are in the business of developing an algorithmic commerce platform. As a consequence we expect more efficiency, less cost and faster innovation.
Discussing David Deutsch's book "The Beginning of Infinity". Drawing lessons from philosophy and physics for investing. In particular, what is a good explanation for an investment?
What about human capital? A full stack company like Tesla is integrating vertically everywhere but relying on an archaic academic infrastructure for hiring talent. Changing that would require innovating in the human stack. Why not?
Never underestimate compound interest. The key to wealth creation is compound interest and that means you have to pick the right situation and stay invested for al long time.
Discussing Peter Thiel's book "Zero to One". In particular the question of indefinite optimism vs. definite optimism. The latter is key to wealth creation.
Tesla is building a monopoly for a decarbonized energy infrastructure. How much is this worth today? The question is execution and competition. Both look good for Tesla right now.
Distributed Living is accelerating. Living, working, playing and raising children wherever your want is liberating and offers tremendous opportunities for businesses such as Tesla.
What new ideas are we working on? Snowflake IPO, Programmable Cells, Social Life Style Products. When looking at new ideas we filter them through the lens of Zero to One, The Innovation Stack and The Innovator's Dilemma.
Tesla's marketing and PR strategy is an important part of the innovation stack. Selling, communicating and marketing through social media is a skill not to be underestimated. It's a serious competitive advantage.
What will be the most valuable company on earth? It's the company with a full innovation stack in one or more large markets. Today the contenders are Amazon and Tesla.
Tesla dismantling PR department is just another part of the innovation stack. Solving the problem of information dissemination.
Our purpose is to generate wealth by investing in disruptive technologies. We differentiate from competitors through principles based investing, high concentration and high compound returns.
The measure of wealth is freedom. Wealth can only be generated with disruptive technologies that increase freedom by lowering cost and improve quality and choice.
Tesla is building a business for a decarbonized energy infrastructure. This has implications for market size and valuation. It also brings up the question of market power.
Charpentier and Doudna win Nobel Prize for developing Crispr technology. Wealth is created when science and engineering come together to enable rapid innovation. Crispr is one of those.
Why is Tesla pursuing Nickel mining? Integrating all aspects of the value chain is exactly the right thing to do. At this point in time the integration cannot go too far since Tesla is creating a new market.
You can tell a lot about a fund manager by just looking at his portfolio. Diversification is not a good sign. Wealth is generated with concentration, not diversification.
Episode October 2, 2020 Part 2
When competing most companies just congregate around similar products and services. Individuals compete for the privilege to attend the same schools, same colleges and same companies. There is a paradox here. Why does everybody compete when real wealth is created with unique approaches? This question is inspired by Peter Thiel's book Zero to One.
Episode October 2, 2020 Part 1
Tesla Q3 2020 production and delivery numbers are extremely good. Reassuring confidence in demand and execution. The company keeps delivering on positive signals.
Discussing two recently read books. 1/ Chip Wilson's Story of Lululemon. 2/Oliver Stones' Memoirs. One common theme is that only unique visionary thinking and grit can create something extraordinary. "Happy people are all unique."
Where do we stand? What are we working on? What are expected money makers?
Tesla! If you don't win, you loose. Tesla cannot allow competition to catch up. For that, they chose to control the whole value chain of EV manufacturing.
"Everybody has a plan until they get punched in the face". Mike Tyson. Tesla punched the car industry on Battery Day and the ramifications are enormous.
We look at the Tesla Battery Day through the lens of three books. 1/3 Zero to One, 2/3 The Innovation Stack and 3/3 The Innovator's Dilemma. Wealth creation starts with those three books and Tesla stacks well.
Tesla introduced more technology risk at the Battery Day. That means more upside and more uncertainty. We expect investors to rotate.
First episode post Tesla Battery Day. Two key take aways. 1/ Value of Tesla is car volume * value of autonomy 2/ Tesla plans for 45% CAGR volume growth in coming 10 years. We expect the stock to deliver at least 30% CAGR.
What is your update rule? This is the key question we ask founders when considering investing. A new way to think about wealth creation opens up things.
Risk is what gets you fired. Market players continuously evaluate expected returns under the condition of risk. We discuss why it is so difficult for most market players to buy high growth stocks such as Tesla, Square or Lululemon.
Inspired by Stephen Wolfram's physics project we develop a new way to think about wealth creation.
Lessons from wealth creators applied to Tesla.. Lululemon founder Chip Wilson talks about the importance of vertical retail and Netflix founder Reed Hastings talks about optimizing for creativity and efficiency.
"There are decades where nothing happens; and there are weeks where decades happen". Lenin. Tesla is putting a gun in the face of OEMs.
Wall Street obsession with Tesla S&P 500 inclusion. Best is to ignore.
Partnerships in business are not good for investors. Tesla and VW have not much to share. Wondering how longterm the Nikola and GM partnership will be.
Play to win, don't play not to loose. Our Tesla strategy case in point.
Narratives are great for life lessons but dangerous for investors.
Tesla is selling the FSD software suite even though it's not complete. This is a part of building the innovations stack.
Volatility spike in markets. The purpose of financial markets are to generate wealth through investing in disruptive technologies with large impact. Those matter the most. Daily noise is irrelevant.
New Fed inflation policy will drive asset prices. In particular growth stocks with underlying disruptive technologies will benefit.
In 1994 the bondmarket sold off and scared the Clinton administration. What followed was a huge effort to reign in deficits. Today the bondmarket is tolerating high deficits and low interest rates. This is a conundrum. We discuss some ideas why.
Risks in the market. Bifurcation of economy in winners and losers will drive social unrest. This is the biggest risk. Best way to deal with it is to show kindness.
People have two lives, the second begins, when you realize you only have one." This Confucius quote works well for Hedge Funds.
When analyzing companies looking at job ads is a useful tool. Tesla is clear and precise. Twitter isn't. It tells you something about the company.
Questions for Tesla Shareholder Day. 2. What methods are you using to lower cost of iteration? Is iteration key to battery road map or are you banking on battery breakthroughs?
Questions for Tesla Shareholder Day. 1. How do you scale human resources while still keeping the high pace of innovation?
We discuss two positions that have lost money so far, INTC and RTX. There is potential for outsized returns when using the right instruments.
How to handle tail risk? Example, California wild fires and Tesla Fremont factory.
Iteration is key to improving battery technology. Tesla's main competitive advantage is building processes that can be continuously improved through iteration. Battery tech is case in point.
Tesla is building a supercomputer to run unsupervised learning on massive video content. We believe they are trying to create for video what GPT did for language. It's a great project with huge potential.
Will Tesla license technology to third parties? Even if they did, it won't help third parties compete. That's because Tesla's innovation stack is so deep that copying only certain parts wont help.
While Wall Street bets on climate change, Main Street is still skeptical. Why? Because people fundamentally mistrust science when it's not used properly.
What is disruption? Disruption stands on three pillars. 1. Clayton Christensen's Innovators Dilemma, 2. Jim McKelvey's Innovation Stack and 3. Peter Thiel's Zero to One.
Are there other avenues for knowledge acquisition, other than the scientific method? The question is relevant for science and the hedge fund business.
What do you solve for? The question is at the heart of any business, in particular a business as complex as fund management.
Discussing our positions other than Tesla. Performance review, analysis and thoughts.
Innovation Stack and Human Stack are two sides of the same coin. You need both. Tesla has the former, working on the later. Key question is, how to avoid an elitist culture as a market leader.
Innovation Stack and Human Stack are two sides of the same coin. You need both. Tesla has the former, working on the later. Key question is, how to avoid an elitist culture as a market leader.
What do I get out of my job? The hedge fund business is an eat what you catch business. It fosters curiosity, independence and the necessity to be interesting.
We need new Moore's Laws such as for battery technology, charging technology, AI and manufacturing technology. Those areas have more potential for disruption than the actual Moore's Law.
Why the gold price is bothering me. Higher Gold price is not a good thing. Tesla's stock reaction to earnings is a good lesson for market dynamics.
Valuation models for equities are difficult to reconcile with current market prices. The reason is that zero or negative interest rates require new models.
What we are is best explained by what we are not. No diversification, no excessive trading, no fund raising for the sake of fund raising and no obsession about volatility.
Focus on Fed credit and liquidity measures that are driving risk asset prices higher. Disruptive companies with real organic growth are beneficiaries.
Discussing two books, Dr. Faustus by Thomas Mann and Moby Dick by Herman Melville. Is there a limit to positive force and the "can do" mentality? Is genius a pact with the devil? How far can disruption take us and is it always good?
Discussing "I am a Strange Loop" book by Douglas Hofstadter. Tools for thinking. Reflection on AI and what is possible. Thinking about thinking is not just useful but absolutely necessary in the hedge fund business.
There are three vectors Tesla is riding on to become a trillion dollar company. One is AI, one is harnessing the power of the sun and one is building the machine to build the machine. Today we talk about harnessing the power of the sun.
Tools for running a hedge fund. It depends on your purpose. In our case it's getting better at spotting disruption and refining the concept of social impact.
Reverse Dispersion is how incumbents take advantage of disruptive technology. Example Intel.
Is capitalism an algorithm gone wrong? Yes. Also discussing today's massive market reversal. It's a great lesson for what it feels like to run a hedge fund.
Alex Honnold talks about free soloing El Capitan. There is an interesting connection between free soloing El Cap and running a hedge fund.
The three vectors Tesla is working on towards a trillion dollar company are AI, harnessing the power of the sun and accelerating AI in manufacturing. Today we talk about AI and the self drive effort.
Zero interest rates require new valuation models. Growth stocks appear overvalued based on old models. But are they?
We discuss our first half performance. The main driver was actually Macro. Quoting Keynes.
Purpose is key in the investment business. Elon Musk is very good at formulating purpose. What is our purpose?
The argument for a short squeeze in Tesla stock. It's not the shorts, it's the index trackers that are buying to match their benchmarks.
The rate of disruption depends on the cost decline of iteration. The more iteration the more disruption. Both AI and Biotech are in this sweet spot.
We expect Gold to depreciate in the coming years. Gold is the inverse of disruption and real economic growth. And we expect more of that to come.
Skunk Works is a book about technological ingenuity and institutional complacency. US dominates tech because of army of entrepreneurs. See Space X or Boom Supersonic.
Fed pulling uncertainty out of interest rate market lifts demand for risk assets. Entropy doesn't go away, it only shifts from one place to the other.
How would Laplace's Demon do as an investor? My guess is, not well. Looking for better vocabulary in the hedge fund business.
Do we have the right vocabulary for risk taking? Sometimes I feel like we're watching the weather from above and trying to analyze specific situations on the ground.
Experiencing and internalizing uncertainty is key to running a hedge fund. The test is on right now.
Markets shaken by resurgence of virus cases. The problem is we don't have proper institutions to deal with the issue.
The transition from analog to digital intelligence is the biggest event on Wall Street.
Mindset is the weapon. In the business of disruption mindset is the competitive advantage.
Key characteristics of winners.
Is the board of Tesla overpaid? Thoughts on board compensation and relevance for Tesla.
"When fighting Monsters make sure you don't become a monster" (Friedrich Nietzsche). We're concerned that yield curve control makes the Fed a monster.
Define variables we control. What are the degrees of freedom of a hedge fund? Less than you might think.
FOMC press conference and market sell off. Market testing Fed stance on negative rates and yield curve control.
Recent performance of TSLA and MSFT.
We start buying longterm calls on growth equities.
Disruption in nature and business. Lessons from the transition of fish from water to land.
Explaining why Podcast was named
"Not Even Wrong"
Falling longterm interest rates in the US will boost prices of quality assets
Purpose of "Not Even Wrong" Podcast