E78: VC fund metrics that matter, private market update, recession, student loans, Bill Hwang arrest

Is there gonna be an open mic night in? We were gonna have you speak, Freedberg, but we realize you're not capable, so. We want the show to be entertaining. Yeah, it's not, that's not Percival, Freedberg. You guys are missing out. I'll tell you guys what makes my stand-up comedy so good.

Oh, God, here we go. Oh, my God, we're back on this, Jesus Christ. It's my creative sensibility. So if I have some time to prep and write my script and read my own creative insights. Yeah, okay, bring one joke next week. J. Cal, for all the time we've spent together on this podcast, you know so little about me.

It's so depressing, I gotta be honest. Well, you know, here's the thing about friendship. It's a two-way street, you gotta open up a little bit. We gotta go out and get drunk one night. Absolutely. ♪ I'm going all in ♪ ♪ We'll let your winners ride ♪ ♪ I'm going all in ♪ Rain Man, David Sass.

♪ I'm going all in ♪ ♪ And instead ♪ ♪ We open-source it to the fans ♪ ♪ And they've just gone crazy with it ♪ Love you guys. ♪ I'm going all in ♪ I just want to, I just want to give a shout out to this guy, Andrew Lacey.

Okay. Okay. Shout out. He is the CEO of a company called Prenuvo. Oh yeah. Can you just flash it on the screen? Prenuvo. I went to Prenuvo, and what they do is, they do a head-to-toe MRI scan in 45 minutes, and they use a bunch of machine learning and image recognition to help a radiologist interpret these MRIs in real time beside you.

It's a service that you have to pay a few thousand dollars for. Yeah. So, I went to Prenuvo, and I was like, "Oh, this is crazy." I was like, "This is crazy." I was like, "This is crazy." And then I went to the other location in Silicon Valley, in Redwood City, and a couple of others, and we mentioned it.

But the reason I'm bringing this up is he sent me an email yesterday, and he said, "I just want to thank you and the besties for mentioning Prenuvo." Because we had a bunch of people come, and he said, "We found no less than 11 life-saving diagnoses." 11. 11 people.

11 individual listening to the pod. Pod saves lives. Went to Prenuvo. Went to MRI. Found all kinds of issues from a brain tumor and brain cancer to stomach cancer and other things, and was able to get the care that they needed. Amazing. Anyways, I just want to give a shout out to him for doing a lot of really important work.

And for the folks that are listening that have some money set aside and can afford to do this, I would just really encourage you. We have no financial stake in it, nothing other than we are users of it. But check out prenuvo.com, and shout out to Andrew and his team.

Yeah. Okay, here we go. Three, two, let's start the show. The war in Ukraine has him insane in the membrane, and Biden's new disinformation council is going to have him detained to calm him down from tanking Solana. He started smoking that marijuana. You know him as the Rain Man.

He's here again, David Sacks. How you doing? Have a good week? Yeah. Not bad. All right. Big energy this week, huh? Okay. In high school, he had no friends, but thanks to the pod, undergrads are in his DMs, all forms of stake, he's a purge, and he's the vanguard of all the virgins, the queen of quinoa, the Sultan of Science, David Friedberg.

Wait, I missed like half of that because Chamath was laughing so hard. I can do it again. Do it again. Do it again. Let me try from the top. Outtakes. In high school, he had no friends, but thanks to the pod, undergrads are in his DMs, all forms of stake, he's a purge, and he's the vanguard of all the virgins, the queen of quinoa, the Sultan of Science.

David Friedberg. Just for the record, there's no undergrads in my DMs, but I appreciate the intro. All right, we'll check. All right. In three, two, he's trying. Warfrey Berg is tweaked and the show hasn't started. I think I'm taking over intros next week. Okay, do it. I'm at least gonna do J Cal.

Yeah. Please, by all means, next week you do mine. You're a comedian who has a chance to prepare in advance and think your thoughts. Go ahead, big boy. Give me a week. You got it. Okay. Cheers next week. Let's see these latent stand-up skills in action. Yeah, absolutely. He's been hiding that.

He's taking them from us. Yeah. I don't know a lot of stand-ups who hide their ability. You know the funny thing about hiding something and not having something? From the outside in, they look the same. You can't tell the difference. Sorry, J Cal. I'll go over to you. Okay.

He's dropping annual letters in luxurious sweaters. As far as the SPACs go, well, it can only get better. The dictator himself, Chamath Palihapitiya. Ouch. I cannot comment on the SPACs. Oh my God. I mean, this is getting brutal. Who's writing these? Oh my Lord. All right, everybody. It's been a big week.

Did you read my annual letter, any of you three assholes? I saw your commentary. That's a no. I get it. I get it. I reviewed the table where you listed all your results, and I actually sent it to my team. I was like, this is a really nice way of summarizing a firm's results over a long period of time because you had every fund and your totals and all the key metrics.

Well, can I talk about that for a second? Yes, please. What's incredible about what you're saying, Sachs, is I was interested in a bunch of other funds that I'm invested in and their returns. Then I've also seen a bunch of leaked fundraising decks of all kinds of other firms from growth stage to crossover to PE.

It's incredible that they are not standardized. Some people only show gross IRR. Some people show net IRR. Some people don't show the total value of the paid-in capital, which means if you have a $100 fund, what is the total value? What is the total value of all of its holdings?

Some people don't show DPI, which is distributions of paid-in capital, which means, okay, for every dollar you've taken in, how many dollars have you sent up? If you don't show all of them, what was shocking to me is how much you can kind of hide and play and manipulate the numbers.

One of the most crazy things that I saw is that there are these late-stage funds that write into their fundraising decks that what they actually use are lines of credit to juice IRR. So what they do is if they're about to do a deal, they'll actually get a loan from a bank, put that money into a company, wait until it's about to get marked up, and then what they do is they actually call that original money from their LPs and pay back their capital call line of credit.

What does it do? It inflates IRR. But this is why if you see the other numbers, it still shows that it's kind of like not doing much of anything. If you ever see multi-hundred percent IRRs or high huge IRRs with zero DPI and a marginal TVPI, it's folks that are playing games to trick LPs.

Just a heads up to everybody. That is so weird. So what you're saying is, just to summarize for people in the audience who don't understand, hey, we get judged on the rate of return each year. So if the stock market does 7% or 8%, we're expected to do triple that.

So we've got to hit 20%, 25% each year. Now, the clock starts ticking when the money gets called from the LPs, the partners, and gets put into the company. Correct. So if you invest in year two of your fund, you pull the money down from the LPs, you put it into YouTube, whatever it is.

What you're saying is they will take a loan against that future money from a bank at an absurdly low interest rate, let's say 1% or 2%. Correct. They make the YouTube investment. Then two years later, YouTube has a price round that marks it up 20x. Then they put your cash in in year three of the fund, year two.

And pay back the loan. And pay back the loan. Now they've paid 2% two years in a row, but the thing's gone up 20x. Correct. That's dirty. Well, so it's dirty enough that the SEC has actually now introduced legislation. It was in February that basically is going to try to uncover all of this nonsense.

You'll have to be much more transparent. The format that I used, in my opinion, is the most transparent way of not being able to hide the cheese. You show all the critical elements together in a simple table that will make it very obvious who's playing games and who can actually make money.

There is a... There's a semi-legitimate version of the loan thing, which is where this comes from is a capital call loan. So we're making a bunch of investments throughout the quarter. A million dollars here for a seed deal, 10 million for a series A. It's happening all the time.

You don't necessarily want to hit your LPs with capital calls for every single little small investment. So what we do is you get a capital call line from SVB or something like that. And then you do one capital call per quarter. Right. So they will loan you the money.

And then you do a capital call for the next quarter. And then you do a capital call for the next quarter. And then you do a capital call for the next quarter. And then you do a capital call for the next quarter. And then you do a capital call for the next quarter.

do we all look at when we are LPs in a fund? Well, this is what I put down. I put down the ones that I look at for everybody else that I'm an LP in. What one is that for you? Multiple cash investment? I need to look at the totality of it.

I need to understand what is your gross and your net IRRs. Those are important things to understand because it shows how efficiently you put the money to work. Of course. But then ultimately the other two things that really matter is what is the total value you've created and then what percentage of that have you given back to me?

Because that allows you to understand how much paper value there is. For example, today, let's just say you had a fund that had a TVPI, total value of paid in capital of a 5X. A 5X on a fund is incredible. But if you've distributed none of that, well, guess what?

If we're sitting here in May of 2023 or 2022 rather, the total value of your paid in capital is not really 5X. It may be only 3X and it may be actually 2.5X considering what the markets have done to these companies. It allows me to really understand how performant funds are in not just being a part of the game but actually generating realizations.

This is the hardest part. As I told you, Jason, this past quarter, I think I passed 2X across my funds when I was managing outside capital. I think, my gosh, it took me 11 years to return 2X the money. That means I've returned $2.5 billion. You know how hard that was?

Yeah. I mean, you got to time the exit. You have to have the ability to exit. You can't even time the exit. You have to be constantly managing and working your portfolio. Sometimes you're selling in secondary transactions. Sometimes you're actually trading up in private markets where you help this company merge with another private company.

Other times, if I think about it, the number of times I've been able to get a loan, I've been able to get a loan. I've been able to get a loan. I've been able to get a loan. I've been able to get a loan. The number of IPOs I've had is relatively diminutive.

How do you make $2 billion where I've only had one IPO, which has been Slack? Yeah. This is a really, really hard business. It was just a reminder that in the last four or five years, managing capital has seemed relatively easy. But in these next few years, you're going to see who's really, really good.

It's kind of that old Warren Buffett quote. You can see who's naked when the tide goes up. Said another way, the last five years, raising a fund has been really easy. Jason: And writing checks has been really easy. And now comes Act Three, which is returning a multiple on the money you easily collected.

And boy, is that hard. All of these new LPs- The other thing that I learned- Let me just tell you this one thing, though. All these LPs send me, even if I'm not an LP, they send potential LPs their performance because they're so proud of it, like quarterly. I'm like, "I'm not even in this fund." And they have these crazy markups, crypto investments, this, whatever, but they've returned no capital.

And so it's like- Just to give you a sense of it, if you look at the most fantastic organization in the world, if it were an investment manager, which is Berkshire, their long run 50-year track record is around 20%. Gross. If you look at the most successful asset manager in the world, and I would put Blackstone at that, just incredibly good and best in class in probably three enormous parts of the worldwide economy, real estate, credit, and private equity, their long run track record is that on 200 and some odd billion dollars of private equity, and another 100 billion dollars of real estate, they've returned 2x.

That's what the upper bound is. Doubling people's money and generating 15% to 20% is the best you can expect if you are really excellent and long-lived. That's the best. What do you look at, Freeberg, when you're an LP? What number do you care about? Because you LP other funds, and I think all of us do.

I made my first venture fund investment in 2006. I am still getting distributions from that fund. I'm looking at it, and I'm like, "This is a 2.4x over that period of time." I'm like, "What the hell? Why did I even put this money into this fund?" I guess this makes sense for pension funds and very large balance sheet, long-range investors that need to diversify.

But as an individual, I should have put my money and had liquidity on it for 16 years rather than have it locked up in a bunch of private companies sloshing around and dribble out. At the end of all this, I only get 2.5x my money back. Two and a half times your money in 16 years.

What's that IRR? It's like low teens. Yeah, not a great deal. No, no. It's lower. You would have been better owning the S&P 500. That's right. For me, I think the only metric that matters, which I think you're saying, Chamath, is how much cash I got out relative to cash I put in.

Initially, my IRR is negative 97%. Then it goes up to negative 80%, and then negative 60%, and negative 30%, and negative 20%. Now it's 14% because I finally got more money out than I put in. It doesn't feel to me like just generally private investing, everyone gets excited because we all get sold stories, and individuals all get sold stories of, "You put $1 in, you get $100 in." J.

Cal. wrote a book, called How I Made $100 Million from Whatever You Invested in Uber. Yeah. That story, I think, gets everyone excited. But the reality is, the vast majority of the time, and if you diversify your bets like this, you're going to end up waiting a long time to get your money back.

You're going to be locked up. A top performing fund is returning 2.5x after 15 years, which is not much better than investing in the S&P where you could sell that anytime you want, and use that cash for any purpose you want. Yeah. Well, if you did a $100,000 investment, and you returned $260,000 in 15 years, I'm on an IRR calculator right now, internal rate of return is 6.58%.

Yeah. Better off than the S&P. Yeah. And if you did QQQQ, depending on how hot the market was then, yeah. It's really, really, really hard to actually make money. There are always going to be periods where people look like geniuses and have markups, but you can really see when people have skill after a decade and a couple of up and down cycles.

Same with hedge funds, by the way, right? Hedge funds put up a score every year, and in certain macro cycles that can last many, many years, everyone looks like they're doing well. And then all of a sudden, tides go out, and you lose more than you made over that period of time.

And then you realize, "Holy crap, I was actually in an insurance business," where you get paid some small premium every year, and then you have some massive loss one year, and that massive loss is going to be a huge loss. And then you're going to have some massive loss.

It turns out your underwriting wasn't good because you lose more than the sum of all of the premium you collected over that period of time. And unfortunately, a lot of investing looks like this, which is you have small returns for a long period of time, and then some massive loss, and the whole business makes you look like, along the way, a genius.

But the reality is over any long cycle, most folks end up in a bad position and they end up losing the market. The SEC, by the way, has solved this for mutual, and ETFs. There's very strict standard reporting. And I do think that as, for example, if you go to the big banks, sorry, Sax, to interrupt.

I just want to finish the last thought. If you go to the big banks, and you have, if you're an individual, like a doctor or a dentist or somebody, and they will aggregate and pool capital and put it into these funds on your behalf, as an example. It looks like JP Morgan or Goldman Sachs is a $50 or $100 million LP in one of these big funds, but in fact, it's just the sum of a bunch of folks on their platform.

It stands to reason that if the SEC can actually mandate standardized reporting for private investing, it would actually be a really good thing because all of these games will, and probably currently are, as far as I've seen in these presentations, tricking a lot of folks to put their hard-earned money into things that actually will never make money.

And it's because if you selectively cherry pick how you present this data, you can tell a partial truth. So, you know, I would really, I would love, I'm happy to be compared to any organization, but every time I hear somebody chirping about how good they are, my only comment is, I just want to see your table in the same format as my table, and we can compare it because it allows me to really understand.

Yeah, liquid returns. And by the way, the point I made earlier about when markets are generally good, hedge fund, public market investors generally can look like they're doing well by having a good marginal return above the benchmark every year, and then one year have a big drawdown, and suddenly they realize that they're underwriting what wasn't that good.

The same can be true in private investing in the opposite way, in the sense that you'll put in small checks, small checks, and lose money and lose money and lose money and then have one big banger, and you get 100x return, and you look like a genius, because your whole portfolio looks good.

But you fast forward and you keep doing that for another 10 years, all those small checks may not even add up to the banger. And that's, that's the flip reality that you realize. And by the way, I think that's a good analogy for the difference between public and private investing.

You have similar cash flow economics, where you can have small returns and then a big loss in public. And you can have small losses and then a big return in private. And the timing of when you present your data can make anyone look good if you catch a good hit at the right time, or you don't have a bad hit at the wrong time.

And then the framing over a long enough period of time, I think really becomes the key measure. And the reality is most people don't make it long enough in their career to actually to actually present true results in how they really do underwrite. And by the way, to the extent anybody's listening is able to invest in these private funds, I think Jason mentioned this superficially.

So let me just dig into it, because I think it's really, really thoughtful what he said, which you should understand. If you have the option to invest in a private fund, you have to understand that that private fund has two huge negative things working against it relative to investing in the S&P 500.

So you could put your money into a Vanguard ETF. Or if you could put your money into a private fund, you need to realize two things. Number one is it is illiquid. And not just for 10 years, but it could be illiquid for 12 or 14 or in, you know, Friedberg's case, 16 years.

So you need to get paid a premium for owning that. And then the second is depending on the business model, you may have very high failure rates, which means that you need to really hit these outsize Grand Slam home runs. And if you don't, then you're going to be worse off than if you invested in the S&P 500.

So that deserves a premium. And so Jason's right, which is the S&P 500 is a premium. And so Jason's right, which is the S&P 500 is a premium. And so Jason's right, which is the S&P 500 is a premium. And so Jason's right, which is the S&P 500 is a premium.

And so Jason's right, which is the S&P 500 is a premium. And so Jason's right, which is between 7% and 8% over long periods of time, predictable compounding. You have to add another 7% to 8% for this illiquidity premium, and another 7% to 8% for the business model viability of, for example, being in venture.

When you add those three things together, you do need to get paid basically in the low to mid 20s returns to be justified. Otherwise, you are much better off just owning the S&P 500. Much, much better. Jason: Much, much better off. Sachs, what do you look for when you're LPN?

And now that you have many large funds? What do you think LPs are looking for now? And what do you advise them to stay focused on? Sachs: The number one metric that matters is DPI, which is the ratio of distributions to paid in capital. And it's basically money in versus money out, right?

At the end of the day, that's all that matters is how much money did you put in the fund? How much money did you get out? The issue is that such a possible point, these are 10 to 12 year funds, and it takes a long time to get distributions.

So all the other metrics are basically triangulations or approximations of what you think the fund's going to do until you actually get to distributions. So I would say in the long term, it's all DPI. In the short term, you look at TVPI, the total value to paid in capital.

So it's basically what's the marked up value of all the positions in the portfolio versus how much cash has gone in. And then the big question is, does the TVPI turn into DPI? DPI. Does the total value- To explain that to people, if Chamath had invested in Slack, but there hadn't been an outcome, it could be on the books for a billion dollar position.

So the TVPI is looking really great. But until that company goes public, and the shares are distributed, the LPs haven't realized it. So it could be ephemeral, or it could go down significantly as we've seen with public markets. Yeah. So in the last four months, we just returned our fund one.

In terms of real distributions, I think we have a DPI of 1.1 or 1.2 on that fund now. The TVPI is 4 to 5. But it feels great just to distribute the entire fund out to LPs. Literally, in my first two funds, I think we did that as well.

And it's a really great feeling. Sometimes selling 10% or 20% of a position early and getting over that hurdle and just getting into the 1 to 2x, that's a pretty great feeling. By the way, just to talk about how difficult it is to convert paper gains into real gains, let's just say, Jason, in your example, you had a fund that had these huge paper gains but haven't distributed anything as coming into this year.

Here's a little interesting data about the ultimate buyer of all of these tech stocks, which is the NASDAQ. People that buy stocks in the NASDAQ, listen to this as of yesterday. More than 45% of stocks on the NASDAQ are now down 50%. So basically, one in two. More than 22% of stocks on the NASDAQ are down 75%.

So almost one in four and more than one in five. And then more than 5% of stocks, so one in 20, on the NASDAQ are down 90%. So you can use this to actually get a blended average. But what it means is that the ultimate buyers of tech stocks are taking a 60% discount to what they were able to buy even just four months ago.

60%. So there is no public mark that will support a private mark unless it's also discounted by at least 60%. Now think about that when you talk about this entire panoply of companies that have been overfunded, many who are under-executing and burning enormous amounts of money, who now have to come back out to the market.

As any sufficient sophisticated buyer will have to tell them the truth, which is, "I'm sorry, guys, but the data says there's a 60% discount to this mark. Are you willing to accept it or not? Otherwise, the lights are going to go off." Yeah. And these marks only happen, at least in the private markets and venture funds, when a transaction occurs.

So if somebody raised a bunch of money, as we talked about in previous episodes, at a billion dollars, and they're now worth $500 million, that's only going to work itself out in fund documents and reports for a year. Yeah. A year or two later when the next transaction occurs.

So there is a lagging effect. One thing I just want to bring up before we go into maybe GDP or the Bill Hwang situation is what we talked about on this pod last year about what was going to happen in private markets. I've been seeing the last two or three weeks, and I don't know, Sax and Freiburg, what you're seeing in private markets.

But really acutely, people who are going out and skipping rounds, this is the first time I've seen a lot of people who are going to be in private markets. And I think that's a big part of the reason why I'm so excited about this. I'm going to get credit for work that hasn't been done.

I'm going to raise $10 million without product market fit. Oh my lord, has the dialogue changed? I've been on many calls with founders who've met with 50 VCs, and the conversations are moving to, "How many months to break even? And how many customers do you have? And how have they increased?

And let's talk about the churn." It is getting super pragmatic out there. If you're a founder, and we said this a year ago, but it's worth stating here, this is not the moment I would try to over optimize. If you have a term sheet or money on the table, I would close it, just founder to founder.

What are you seeing, Sax? Yeah, I mean, it's gotten a lot harder, I think, especially at the growth rounds. We actually have signed two growth term sheets recently. And it was much harder for us to do growth rounds last year, just because you had these huge mega funds come in at crazy valuations.

But now, they're kind of licking their wounds, and we're starting to see some really attractive growth opportunities. Everyone else is backed off. So it's interesting. Yeah, it's changed quickly. Yeah. Now, one thing to, you know, to Roth raised a good point about, you know, private, not only are private valuations sort of sticky, but private marks are sticky.

And, you know, companies only get remarked every couple of years. And so whereas the public markets get remarked every day. So it is hard to know, like, what is the proper valuation of a company that raised money last year? Because yes, valuation multiples have come way down, but then also, they may have grown, and their performance is better.

So the analysis that I saw Jason Lemkin do in his LP newsletter, and we're basically repeating it for our entire portfolio is to calculate what was the ARR multiple that you pay, basically valuation divided by ARR, what was that entry multiple? And what is it today? And so we're doing that across our whole portfolio.

So what you see is, sorry, sorry, Sachs, clear, LTM ARR, or, you know, NTM ARR, which one? Basically, you lost 12 months next 12 months? Yeah, no, you just look at their current ARR, which is, you know, run rate, their current run rate revenue. Yeah, exactly. January, you times it by 12.

Or in this case, April, April, basically, yes, you take the current month and multiply by 12. But they have to be annual commitments, right? So if it's not, it has to be annually recurring revenue, if they're not in, if it's not an annual commitment with an expectation, that's recurring, you can't count it.

So for example, you don't count professional services revenue in that, in any event. So the point is, you, you basically calculate what was the multiple that you paid at, you know, entry in the company? And what is it today, as a function of the current valuation? And what we see is, yeah, there's a lot of companies that we got into, I don't know, two years ago at evaluation multiple that you couldn't defend today, 60 times 80 times 100 times.

But the multiple today is more like 10 or 20 times, because it's actually grown really fast. So you need to look at both sides of the equation. And that's the analysis we're running for every company in our portfolio. And then you know, LPS can decide how to how to market.

I mean, the most important thing is what's the next investor if they need more capital going to market at? Well, the question is, are you growing faster than valuation multiples are falling? Correct. And then can you that means you could have a down round a neutral round or possibly an up round, but it doesn't.

So are you growing faster than valuation multiples are falling? So are you starting to see people or people discussing on the board level, or in your firm? Hey, maybe we take a sideways round, a neutral round, we just go to last year's price and top off another 10 million?

Are you seeing that I've still told some of the boards I'm on just keep fundraising, just keep the round open and top off if there's money available, because you know, especially if you raised around eight months ago, six months ago, those prices, like if people are still willing to invest in those terms, that's a good deal.

I literally had this conversation with the founder, founder this week where they had raised that in a great valuation. And they turned money away. Because they were like, Yeah, that was a mistake. We're still growing. So why would we take the money now if our valuation is going to be, you know, double in nine months?

And now it looks like Yeah, maybe you know, that extra one to $5 million would have been good to lock up. Okay. So adding to these headwinds, I think we we've been talking about the possibility of a recession for those new to the to the concept, the concept of recession if you're under the age of 30, and haven't really lived through one as an adult.

It's two quarters, the official definition, two quarters of negative growth of the GDP. Well, it turns out, US GDP fell 1.4% in q1. And q4, we had a 6.9% growth rate. q1 was the weakest since the spring of 2020. When COVID hit Nick, cue the clipboard Saxon, I basically said this may happen in January of this year.

So I think the question is, you know, with the losses we're seeing, and I mean, every day, it just keeps like you've seen more red, that this could turn into a recession, you know, popping of bubbles is usually followed by, by recessions are, so I think, you know, the fortunes of the economy could turn really quickly here.

And that is that is the marginal risk, the marginal risk is actually for recession, David is saying something really important. The risk, in my opinion, is not of runaway inflation anymore. The Fed is now a big part of the recession. David Chou: And the Fed is now in this really delicate situation where China cut rates last week, we have an FOMC meeting, the Open Markets Committee that sets rates on Wednesday, I think, of this coming week.

What is he supposed to do? The risk is to a recession, because if we overcorrect, yes, and the leading indicators all around the world tell us that their economies are weak, then inflation may have actually been much more transitory than we thought. And right now, we have to decide.

Because if we overcorrect, we're going to plunge the United States economy into a recession. David Chou: Yeah, I think that's a good point. And I think that's a good point. And I think that's a good point. David Chou: There's a lot of data here. And obviously, this is when this data is always in the review mirror.

So obviously, we're talking about Q1, it takes a while to collect this data. And there's a lot of different factors going on at the same time, obviously, COVID and obviously supply chains, consumer spending rose at a 2.7% annual rate in Q1, a slight acceleration from Q4, there was also a 9.2% rise in business spending.

So we have a lot of spending going on, who knows if that is spending that actually occurred, and the previous quarters and because of supply chains, like people's cars are being delivered, people's machines and manufacturing equipment is being delivered now. David Chou: We had negative GDP in Q1, for a whole host of reasons that can effectively be summarized by the fact that we are still trying to restart an economy at the tail end of a pandemic, and we're doing it in fits and starts.

And so we have these small bursts of incredible GDP, which we had last year, and then contractions in the economy. The thing that's always been true about the United States is that we are a consumer driven economic engine, which means that as long as people feel confident, and they're buying things, the economy tends to do well, and we tend to move forward as a society.

When consumer confidence ebbs, and people contract their spending, we are in a world of hurt. The last couple of years, we've had a lot of consumer savings, right? We've had a lot of money that's been pent up in the system, whether it's a loan forgiveness or all of this stuff has allowed people to feel much richer.

As a result, they've started to spend in dribs and drabs. The problem now is that because prices are so high, all of those savings have largely been depleted. I just sent you guys a text in the group chat of what consumer spending looks like, and consumer savings rather. It tells a really, really scary story, which is that the savings boom is largely over.

Personal savings rate fell to 6.2% in March, the lowest since 2013. What does that mean? Well, it means that the setup is there for us to really contract what we are able to spend as a society. I think now the odds even push further in this direction that we could have more quarters of negative GDP.

All of a sudden, we're back to what we talked about before, which is a 2019-like scenario, where the government is going to be able to get rid of the debt, and the government is going to be able to get rid of the debt. The Fed, specifically, races forward to tackle inflation.

In 2018 and 2019, it turned out to be a head fake. By the way, in 2019, the stock market ended up more than 30%, up 32% or something like that. Crazy numbers. By the way, back then in 2019, China turned over. It looked like it was going to be a fast-moving economic recovery for China, and instead, they sort of slowed down.

We have the same thing here. We have a quarter of negative GDP. We have China in lockdowns. We have every company that's in the manufacturing supply chain ecosystem telling the world that we don't really know what this is going to look like. Intel today actually said there's going to be shortages in chips through 2024.

I think it could be a very difficult path ahead for the Fed. How do you raise rates 400 basis points into a slowing economy? How do you raise rates 400 basis points into a slowing economy? You could raise basis points 75, you know, 75 bps, maybe 100 bps, but it gives them very little freedom to operate without really tanking the economy.

There's also another point to highlight here, which is in some of this data that was released, there was a strong indication that there are real issues right now with inventories. I don't know if you guys have tried to buy an appliance or a car lately, or a piece of furniture, but like- I tried in the Q4 to buy a car.

I mean, right now there's like one year delays to get a frigging couch. I mean, like everything in the global supply chain, somewhat related to the kind of big inflationary pressure that hit us at the end of last year, and then everyone placed orders, all the factories kind of had to produce a lot, they all couldn't keep up, through to what's going on in China right now where there's lockdowns and factories are shut down.

I have several businesses in the hardware space that are actively searching and frantically trying to find a way to get the right product. And I think the reason for this is that you know, the market is a very competitive one. And so I think you know, there's a lot of things that are happening.

And I think the market is a very competitive one. And I think that's one of the reasons why we're seeing this kind of surge, is that there's a lot of people who are like, you know, this is a very competitive market. And I think that's a very competitive market.

And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very competitive market.

And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very competitive market. And I think that's a very this adversity right now on the market, it seems an interestingly, and by the way, that doesn't that doesn't mean sorry, that doesn't mean that we're not gonna have recession.

Because, you know, when I'm not able to spend money on Apple, Apple spending less on their suppliers, they're spending less on their suppliers. So there is a trickling effect of capital flows and the recessionary effect may be hit. But, you know, there is capital and there is demand for consumption.

It's just that we're really clogged up right now. Well, and the consumer confidence index has been on a bit of a roller coaster, we were at 130 before the pandemic. For the year of the pandemic, we were down in the high 80s 8788 89. We rocketed back up. You know, in 2021, people started to feel like, oh, we've got these vaccines, things are gonna go back to normal rocket back up to 128.

And it's been a slow tick down to where we're now at 107. And so I think consumers don't know what to think they don't know if you know, inflation is transitory, they don't know if gas is going to be separate. $7 or $4. They don't know if they should spend a big spend on a big vacation or not.

And so this I think in terms of people's planning, I don't know if people can plan how their own personal budgets, right. And I think that's on the confidence thing to Chamath point, we need to have a predictable economy. You know, it can't be this schizophrenic, to use the term sacks, what do you what do you think about what we're seeing here?

In terms of, we're obviously, either in a recession, or dip, you know, dancing around it, we're basically, you know, on the edge of the cliff right now, I think it's probably the most accurate. I tweeted in February, hey, anyone noticed that we've just entered a recession, and I got dunked on by all the professional economists, and you know, all these people, but the experts, the experts, the experts, exactly, correct.

And now it's like the data just came out negative 1.5% economic growth in q1. So what I wrote at the time was exactly right. And, you know, I don't know how the thread the Fed threads this needle. I mean, we've got a slowing economy with negative GDP growth, you've got inflation is still rampant.

It's not as I don't think it's gonna be as high as last year, just because we're lapping a much bigger number from last year. So on a year over year basis, the comps are you started a higher price level, but inflation is still there. So, you know, I don't know what you do about that.

about that. It's, it's a really tough situation. And when you have this kind of wealth destruction in the stock market, I mean, you know, and we, there was a good tweet that you shared, we should put up on the screen, I mean, so much, like wealth has been destroyed, you don't necessarily see it if you just look at the big cap indices, but you look at all the engines of process, sort of growth and prosperity, the small caps, the recent IPO's, the growth stocks, they've been absolutely hammered, it really hasn't been this bad, since the dotcom crash of 2000.

Like, and not just the, like, April period, but like, all the way in October, where it kept going. And then the 2008 recession, yeah, the 2008 real estate crash. So we're already like top three worst situations for growth stocks in the last 20 years. And when you have that kind of like wealth destruction, it eventually trickles down into the economy, because people just feel, you know, companies start cutting.

budgets, people have less money, that's built to spending goes down. That dynamic that that we're referring to in this tweet in that image is called dispersion, which means, you know, people baby being be confused when you hear why are all these stocks down so much, but the the indices are not down as much.

And it's exactly for the reason that David just said, which is that underneath the surface, the mega cap tax consumes so much of the market cap of these indices. So, you know, the Google, the Microsoft, the Apple's and the Tesla's, those four just clog up an enormous percentage, I think it's approaching 40% of these of these indices.

And so underneath the surface, you have dispersion, which means you have these tale of two kinds of stocks, you have these four big mega caps, and then you have everybody else. And the mega caps are generating so much cash, that they're just basically keeping the market afloat. So at this point, maybe there's a small silver lining.

And that silver lining is that to be bearish right now, is effectively not being bearish these growth stocks, because as we said, they've been just decimated. At this point to be bearish the indices means very specifically to be bearish those four names, and only those four names. And so that may actually mean that the market has effectively crashed already.

Yeah, but by the way, I'm not necessarily bearish on growth stocks from here, because like you said, they've already been beat up so badly. The stock market is usually a leading indicator. What I'm a what I'm a bearish about is just the state of the economy because the stock market is traded down, it trades down on expectations.

So it was already trading down months ahead of the slowdown in the real economy. So now new in December, the market new in November, the recession was coming in, like around November 6 of last year, and they knew it was coming in. Yeah, Mark knew when we talked about the sales that Bezos and Musk did the, you know, when when we sold equities, we were saying like, it's like, you can't keep all of your money, you know, on the table all the time, unless you have the durational wherewithal, meaning you're just not time bounded, and you can just be there forever.

And not everybody's in that position. And endowment could be in that position, but individuals with no an endowment is not because they have to create distributions every year, right? They have to talk about the mega endowments where they, you know, for you know, you know, Ford or Harvard may not need to do this.

But yeah, smaller ones might actually be operating, you know, Memorial Sloan Kettering might actually be operating their budget from it. But just to go back to David's point, like, it's a really difficult spot, like, what is the Fed supposed to do? So they're probably going to tighten 50 basis points in May, that's relatively well expected, we'll be, we'll be able to digest that reasonably well.

But what did they say to David's point, you know, if they all of a sudden go on a crazy program of quantitative tightening, right? And what is that again, that's when, you know, we were spent, they were spending, they were printing, you know, money, billions and billions of dollars, going into the market, buying securities and giving people the money, right?

That's called quantitative easing. Now we're doing the opposite, right? So where they're selling, and they want the money back. Now, the problem is, what that does is that removes liquidity from the market. And when you remove liquidity from a market, you actually make it a little bit more fragile, a little bit more precarious, a little bit more price sensitive.

And so it puts us in a very tough situation, when the economy is slowing, when these guys may be raising rates, and then at the same time, removing money from the system, it may be a lot for all of us to handle. And so I think that they're under a really difficult Well, and if you had a decisions, there is a business cycle.

And you know, there are always recessions, recessions periodically every seven to 10 years, but they have really magnified this because you had the Fed for years, maintain interest rates really too low, and doing quantitative easing during a boom. And then the federal government was printing trillions and trillions of dollars.

And they didn't stop, it was one thing, but it was one thing that was really important. to do it during that sort of COVID recession. But then last year, they printed that last 2 trillion. And that's what set off this wave of inflation. So you know, when I was like in school learning about economics, and they would tell us that all these government programs and actions are like automatic stabilizers, or what have you, like the government helps balance out the business cycle.

No, the government like magnifies the business. They've made this so much worse. Well, they're putting their hand on the steering wheel, right? Because like, let the economy drive, let the free market do this. And if you start, you know, you might oversee or into federal government is great at setting incentives, right and creating like tax credit programs and incentives for private enterprise to invest money.

But when they act as a direct market participant and start to actually direct capital flows and make decisions about how the capital market should work, it never ends well, because this is not what they're good at. Well, I think there's also another I mean, just to counter that there's there's also this other issue of not just incentives, but when they create a free capital that then allows a market.

To find a way to take advantage of that free capital. And that's effectively what we've seen happen with Medicare, Medicaid, as well as with the student loan program. And, you know, I don't know if we're gonna get to the student loan program today. But I think, you know, to your point, Chamath, one of the things that's happened with the cost of education in this country is that the federal program, which was, you know, and I took a bunch of notes here to talk about this today.

But the federal government began guaranteeing student loans in 1965. It's called the federal family education loan program. And that program made capital available for students to borrow to spend on universities or whatever education they want to go go get of their own choice. And the idea being that that will give them the ability to go make more income and extend their careers and educate the workforce.

And the problem is that when that capital was made available, a lot of private universities started to emerge and private for profit colleges started to emerge. And in the years since that that program was introduced, I just want to give you guys some crazy statistics. So in the 1969 70 era, the cost for a public four year college was 1200 bucks a year, that's room board tuition and fees.

And in 2020, that cost rose to $21,000. And here's the the other crazy stat for private four year college in 1970 2500 a year 2019 2020 $46,000 a year. And so that capital basically allowed these for profit organizations or these organizations that are trying to grow their endowments, which are effectively like for profits, to charge any price they wanted.

And the consumer, the student would be able to get free capital to fund that quote unquote education, because it was available to them for free from the federal government. And so the federal government created a bubble in education costs. And that bubble in education costs has now overburdened 15%.

15% of American adults with student loans, that many of which would they would never be able to pay back. And now we're in this really awkward situation of saying, hey, maybe we should forgive those loans, because it's unfair that people are burdened by this. And, and doing so obviously doesn't solve the fundamental problem, which is that making those loans available in the first place creates an inflationary bubble effect in the end asset.

And the end asset in this case is education. But we've seen the same thing with housing. And we've seen the same thing with pharmaceutical drugs, and medical care and other services. So any place where the federal government steps in and says, I will provide a backstop, I will provide free capital to support and create a quote unquote incentive for this market to accelerate, you end up with these inflationary bubble, you're gonna have people game the system, right?

You get whatever University of Phoenix types and you even the large AJ Calderon universities raising tuition to observe things and people take these loans to moth. Before their frontal lobes are even fully developed, and they have long term. Understanding of the ramifications of this. So where do you stand on this?

Chamathia? So there's a there's an interesting article in the Atlantic about who really wins when you forgive student loan debt. And I and I just pulled out some facts. So I'm just going to look down here and read them just so I get them right. It said in the article, 13% of the US population carries federal student loan debt.

grad students account for 37% of that federal student loan dollars. Currently, it's 1.6 trillion of total total student debt versus about 10 trillion of mortgage debt. So the average debt has gone from about 25k in 2012 to 37k in 2022. So, you know, almost a 50% increase in a decade.

The majority of student debt is held by white borrowers. Only 23% of black Americans age 24 or greater have a college degree in 2019. So the majority of the black population would not be doing college degrees. So it's really hard to see that. But the average debt is still a 50% increase in a decade.

So that's a pretty good estimate. So we're going to go through some of the numbers. And then we're going to go through some of the numbers that were published in the paper. So the average debt is $619. That's $619. And that's $619. So that's $619. So that's $619. And then the average debt is $619.

Now, let's go to the next slide. So the average debt is $619. So the average debt is $619. So that's $619. And the average debt is $619. So that's $619. So that's $619. And then the average debt is $619. And then the average debt is $619. And then the average debt is $619.

And then the average debt is $619. And then the average debt is $619. And then the average debt is $619. And then the average debt is $619. And then the average debt is $619. And then the average debt is $619. And then the average debt is $619. And then the average debt is $619.

So you know one of the takeaways is that this may be an issue that affects a certain percentage of the dems who went to college but it may not represent a plurality of all democrats and it doesn't represent you know a majority of all. They sure are vocal though to your point i think.

Yeah i mean look this is i think that there are two motivations uh political motivations for doing this now they're pretty obvious um and then i just want to say three things on on kind of the concern about this and why i feel very strongly that if we don't fix the underlying system you cannot forgive student loans you have to fix the system before forgiving student loans.

Fix it first what's the number one fix? Well so let me just say the two motivations the two motivations are the first one is that we don't have a system where students can't pay their tuition fees and the second motivation is number one this is a stimulus so this morning the biden administration said that they were thinking about taking executive action to make the first ten thousand dollars of student loans forgiven so if you do the math across 43 million people that's a roughly half trillion dollar forgiveness what happens that half trillion dollars much like we saw last year becomes a stimulus payment it is money that people now have that they didn't have before it is capital that they or freedom from debt that they didn't have before and it will stimulate the economy so there is a very very strong motivation for students to do this and we have a very important economic incentive here to do this which is if we do it it will be stimulating to the economy and people will spend more and the economy will grow by the way that's a it's a two and a half percent boost to gdp right so half a trillion dollars of free money just flushes into the system the second thing is that it will help in the midterms is their point of view right so they've obviously done this they've done the polling here right and and it's like hey when i was in junior high the kid that ran for class president was like i'm going to make everything in the vending machine free guess what that kid got voted in.

That's why we're going to get him in so you know the idea that you're just going to give everyone free give your your loans back to you for free everyone's like my gosh this is the best thing ever elizabeth warren your genius you know bernie sanders your genius joe biden your genius let's say yes and so they believe through polling that this is going to help um help them in the midterms um but the challenge is if we don't solve the problem if there's no standard of value of an education if there's no standard around whether or not a specific accredited university increases your income and earning capital that's going to help you in the midterms and so i think that's a really important thing to think about and i think that's what we're going to be doing and i think that's what we're going to be doing is we're going to be doing this for the rest of our lives.

potential as an individual or increases the opportunity for you as an individual you are wasting money you are giving federal dollars to private companies who are profiteering from that and the individuals are not going to benefit from it and i think that that we're seeing this sorry and we're seeing the structurally continue in a lot of other places where the federal government doesn't hold itself accountable to the standards of how their stimulus is meant to benefit the individuals that is being funded for the individuals are not getting a good education in many cases they're not getting a good education they're not getting a good education they're not earning more by getting this education to moss data speaks to the average but a large percentage of people go to crappy universities that don't improve their earnings potential and then the federal government says here's this free money that private university just made a bunch of money and no one's better off and guess who's end up paying for it taxpayers are going to end up paying that private company a bunch of money because we're going to forgive all the loans and so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university by having that university pay for it and then the federal government says here's this free money that private university has to pay for education at a specific university and so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university by having that university pay for education at a specific university and then the federal government says here's this free money that private university has to pay for education at a specific university and so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university and so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university and so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university and so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university tuition is because there's so much demand because there's free money.

And so if we actually saw the federal Loan Program cut back or put these standards in place, the cost of tuition would actually decline. And profiteering would decline. People will get a better education and the taxpayers would be better off. end of diatribe. Sorry. No, no, it's I think it's completely legitimate sex.

We talked on a previous episode, about how people make things like immigration, you know, such a charge philosophical debate, when there are point based systems being used in Canada, Australia and other places that make it much more logical. Do you think the solution here is to freeberg's point of just and I'm interpreting freeberg's point as what is the value of this degree nursing, great nurses can take out 100% of their loans, because we know there's a nursing shortage.

You know, philosophy, graduate students maybe can't take out more than $5,000 in debt, because we don't see a bunch of job openings for that. Getting a history degree at Trump University is a lot different than getting a nursing degree. So Saks, what's the solution here? And then we'll, we'll go to the next question.

I'm going to give you your your swing at bat in terms of buying votes. Yeah, let's go solution first before we go partisan. Look, I think that alone only makes sense when it generates ROI, right, it makes you're going to generate more income on the other side of that loan to make that loan worthwhile.

And the problem here in too many cases is these kids go to these schools, they spend five years there, they get a degree in some woke nonsense. And of course, it doesn't help their earnings power. I mean, that's a bit that's a fundamental issue here is that these degrees are worthless, right?

I mean, if you go if you go to if you go to college to get, you know, to become a doctor, or maybe a computer program or something where the skills have value, then of course, you can pay back the loan because you get a gainful job. But, you know, otherwise, if you just major in fine arts at Harvard or something like that, I mean, you basically graduate, you get a job at what the New York Times is your dream, you can't pay back your loan, you're saddled with this enormous debt.

And think about the cultural impact that has you have this young generation who believes in socialism. And I think this is a big part of the reason why is they have no capital and they have no ability to accumulate capital because they're so saddled with debt. So to interpret where you said sex hard to believe in capitalism, if you got no capital, right, if you start if you start the race at negative $250,000 in debt to get a degree that was basically worthless for you.

Yeah, so system is so long, I think maybe what we do is we reform the debt, I had actually okay with forgiving the debt in some instances, if you got a reform of the system. In other words, right, if we stopped funding these worthless degrees, but if you're basically going to acknowledge that, hey, we need debt forgiveness, because these degrees are worthless, why would you keep funding those degrees?

So, you know, we need to have a like a more honest, comprehensive solution here. The other thing we should do actually, is one really crazy part of bankruptcy law is that student debt is one of the only types of debt that's not dischargeable in bankruptcy. I don't know if you guys know that.

But right under George W. Bush's presidency, explain it to everybody. Yeah, basically, look, when when if if you ever get to the point where you have too much debt, and you can never pay it back, you declare bankruptcy, and then the court starts you over from zero. So you can at least start building some wealth, right?

But you lose credit, but you lose. Exactly. No one's gonna want to give you credit after that. But at least you're not so deep in the hole, you can never recover. So that's the point of a personal bankruptcy. But the crazy thing is that in bankruptcy, you cannot get your college debt, your student debt cancelled, you can get your credit card debt cancelled, you can get other types of debt cancelled, you can't get your student loans cancelled.

It's crazy. So that's one thing they should fix immediately, is make these debts dischargeable. Private market sacks, you wouldn't need to do that, right? The reason that's the case is because it's federal dollars that are funding those loans. But if it was private market dollars, people actually if banks and lenders took a loss, when people couldn't pay back the loans, then the market would work itself out.

The problem is, it's the federal government stepping in and trying to be a market maker, right? And it creates this this totally crazy incentive, right? It creates it creates double distortions. On the one hand, like you said, it basically means that because government's money is funding everything, the tuition goes up because college just take advantage of it.

But then also nobody's really making a smart ROI decision about whether a smart underwriting decision about whether this loan is worth making whether it actually stands a reasonable shot of being paid back. There is such an easy free market solution to this. Yeah, absolutely. And it's called the market solution here.

It's called an ISA stands for income sharing agreement. This is where you give a loan to somebody and you get a percentage of their income over a period of time capped at a certain multiple say two x. And what this does is it aligns the person giving the loan with the job that's expected to come from the education you already have that you already have that it's called taxes.

Yeah, but here's the problem. Nobody's watching the store. So nobody's looking at it saying, I'm going to give an ISA at this percentage return for nursing nursing. I got to pay 50% of my income every year to the federal government to the government like I paid taxes. The thing we have to remember is like if the federal government tries to do this, it really is just about buying votes going into a midterm election.

And here's why. If you arbitrarily give a bailout of one sliver of the population, unless that sliver is really, really large, which we know it is not, it's going to really anger everybody else. Think of all the people that are tradespeople, working class people who don't have a college degree.

What are they going to think? What about all the people that just finished paying off their debt? What are they going to think? It's going to upset so many people. And ultimately what this is, is a bunch of coastal elites who are miscast in jobs and saddled with debt is pushing for a program that isn't a broad based mechanism to create equality at all.

It's just a get out of jail free card for a small people for a small group of people who unfortunately were taken advantage of. And this is the thing that we're not losing sight. We're losing sight of. You can only pay back a loan if you're making more money than you owe.

And the fact that this exists shows that these loans were really poorly constructed and they were given in instances where they should not have been in the private markets. We've seen that happen, but we go through a cleansing mechanism to sort it out. Right? We've gone through- That's literally what happened during the 2008 real estate bubble.

People gave mortgages to people who could not pay them back. Exactly. If I as a lender think that you're not going to be able to pay back the loan, I don't give you the loan. That's the simple mechanism that exists in free markets. And part of the issue is a lot of people got loans thinking without doing the calculation, will I ever be able to pay this back?

And they took the loan to get an education. The other thing- The binary concept that I will just make money. But let me ask one other question of you guys. At what age and at what level- Yeah. level do you think individuals should take responsibility for the decisions that they're making when they take on personal debt?

Because we see ourselves getting in the cycle where consumers are given debt, they don't think about the consequences of that debt down the road or do the analysis themselves and maybe they're not equipped to. And they'll take out a loan on a car, on a house, on a- No, but the problem is- And on a loan- On an education- But here's the thing.

Like education is a very dangerous thing because we put so much societal credit and external signaling to it, and we give everyone effectively the same quantum of risk. But that's not true for a credit card, nor is it true for a car loan. So the private markets are efficient in that when you first try to get a credit card- Sure.

You don't get an MX Centurion or platinum card. You're given a Chase Sapphire card with a $500 limit, and you earn the right to borrow more. Same if you applied for a car loan, the same with a mortgage, it's based on a down payment. So there's differential risk pricing.

And if you don't have differential risk pricing, you're getting a lot of people- How would you edit education? The market would figure it out. The market would because you would differentially price the risk as you guys- You're literally a brainstormer right now. Like what are your grades? Well, no- What courses did you take?

Whatever it is, we're not going to get it right. The market will get it right, but the market would figure it out. The problem is, and sorry, the incentive was, and this is a really important point. If you guys read Ray Dalio's book, which we've talked about a number of times, he's identified and highlighted that a growing economy in a successful country improves by improving education and having more people get higher education, generally speaking.

And so the initial incentive, the initial intention behind the federal student loan program was a good one, which was to give people access to capital that the private markets were not providing at the time so that they could go out and get a higher education. We could improve the education of our workforce and we could grow our economy.

Nowadays, the question that we always forget, remember, we always get one step away and then two steps away and five steps away and we miss the point. We're in that moment now where the question really is, is the federal student loan program doing more harm than good? Are we actually creating value from our higher education system in this country or not?

No. No, but most importantly, is the private market there? Because you look at the total debt outstanding, $1.7 trillion. There would be a private debt market. Friedberg. Friedberg, don't sell beyond the close. The answer is no. We have a massive employment gap. The data tells you in every single which way possible that we are not educating our young people to take the jobs that are needed for a high growth, functionally moving economy.

We know that. So we are miseducating these folks and then we are giving them access to enormous amounts of debt that they have no reasonable chance to pay back. And I think that that should be fixed by fixing the incentives of the universities. You are right. Universities are for-profit asset management businesses wrapped by this philanthropic do-gooder nonsense that they try to tell people to get you to go there and pay $50,000 a year in tuition.

It's a joke. And they're calling people to think that these degrees are actually going to make them successful humans. They come out miseducated and undereducated and incapable of servicing the economy's needs. Separately, the other thing, if you take a step back and take student loan off the table for a second and just say, "Any A consumer handout that touches less than 40 or 50% of the economy or of the population of a country is very precarious.

Student debt, in this case, 15% of the US population, so a lot of people. But it also means that there's 85% who don't benefit. What will those 85% of the people say when they have to foot the bill for the first 15%? Then what do you think happens with other kinds of debt?

What happens when the oil lobby says, "Forgive our debt because we're in a national energy crisis." What will all the climate folks think about that? No accountability. It's no accountability. It's unfair. Well, it creates a slippery slope. My last point on this is, to the extent that we actually want to forgive student debt, I'm fine if that's the law of the land.

That's great. It should go to the floor and it should be debated in Congress and it's a law that should be passed, but it should not be by executive edict trying to back in— To buying votes in a midterm election. It's gross. Sachs, until the end— Well, by the way, just on the politics of that, I think this could potentially hurt them because, Chamath, to your point, this is basically a bailout of the woke professional class.

It's the underemployed graduates of these universities who, again, are members of the professional class. They majored in things that didn't increase their earnings potential. Meanwhile, the majority of the country is working class. Something like two-thirds of the country is still working class, meaning non-college educated. They're going to have to pay for this bailout.

In one way or another, either through higher taxes or more deficit spending or more debt, the burden of this bailout is going to fall on them. Why should they have to pay to bail out this professional class? Literally, somebody working in retail is paying for somebody's graduate school degree in creative writing or something.

It's completely and profoundly unfair. To the answer to Freberg's question, we actually know when executive function fully matures in adults, it's 25 years old. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. and that's when you can actually make long-term thinking. So, there is an argument that people should not be allowed to take these loans that are not even-- that you can't get out of, or there should be some cap on the amount of loans you can take because people at the age of 17, 18, 19, 20 are absolutely not able to make these decisions.

There are other programs, as well, that work. So, in Canada, I went to a school called the University of Waterloo and… Fantastic engineering school. The reason I went there and I did electrical engineering there is that they had a program where after the first year-- so, the first year looks like every other year at every other school, okay?

But you're there for two semesters from September to May. But after that, you start working and you alternate four months of work with four months of school. You get paid for that work and what it allowed me to do was graduate with meaningfully less debt, but it also allowed me to graduate with a commercial skill set.

I was able to get a job. And in that moment, actually, I was working at a bank and I got profoundly lucky, which is I worked for an individual and I was trading interest rate derivatives and I was learning to trade technology stocks on the side. And this guy, Mike Fisher, incredible human being, and I made in one year like $25,000 or $30,000 for him.

Yum, yum. Zip, zip. He wrote me a check and he said, "Here, you have $25,000 of student debt. Go pay it off right now. I'll let you cash out this whole book." How much did you--? I graduated with about $20,000. Yeah. This whole book. I graduated with about $28,000 of debt.

I had about $8,000, I think. I had somewhere between $10,000 and $15,000, $10,000 and $20,000. And then I got my first bonus check after my first year of work after undergrad and I paid off all my debt and it felt incredible. Incredible. It was amazing. When I paid off my debt, I've never been in debt since.

I walked downstairs to the bank and I gave them the check and I endorsed it and I said, "Here's my student loan number." And I was like, "Oh, my God. I was free." It was an enormous sense of relief. For me, it was credit card debt. I had accumulated all the credit card because I went to Cal.

It was like four grand a year to go to Cal. It was a lot cheaper back then. If I didn't go to Waterloo, I would have had double the debt because I wouldn't have had work. But then also, I think about all these scenarios, I wouldn't have had two years of work experience.

I may not have gotten the job that I did at Bank of Montreal at the time. That may not have been able to give me a chance to meet Mike Fisher. All these things could have happened. You can't rely on the luck of the butterfly effect so that you have a reasonable shot of building a good life.

There are all these things in universities that I think are really mismanaged today, and they go and work against what is right in society. I'll give you another example. The dean of the engineering school and the president of University of Waterloo was here this week with me. I asked them, "Tell me about these global rankings." They said, "You know, it's just a really difficult game." They said, "If we wanted to compete to try to get high on the list, we would have to do the things that would undo all the things that made us great and unique in the first place." Right.

I was like, "You know what? I am such a huge supporter of this school. Please just continue to do what you're doing." I'm so proud that they have the strength to just stand on their own two feet. But every other school is running this shell game of gerrymandering all of these statistics, trying to get high on the list, to trick some parent, to force their kid to go to some school, to then graduate, with $200,000 of debt, to get a job that doesn't then give them any line of sight to paying it off.

I don't think it's their kids' fault, but you have to reform the system. I think the first thing you need to do is look inside these universities and hold these folks accountable. These incentive systems are just crazy. Speaking about crazy, we talked about Bill Wang and his— That's your transition?

That's your transition? They can't all be as elegant and smooth. Here's Jake Howell. He's looking at the agenda for today, and he sees Bill Huang, and he's like, "Okay, how do I do this? How do I do this?" The Huang-er. The Huang-er. Yeah. Okay. Crazy. Crazy. The linkage is craziness.

Okay, go. No, no, no. No, no, no. Hold on. The linkage is trillions and billions. Trillions and billions. Speaking of trillions and billions— Speaking of trillion-dollar mistakes— We got a— Bill Wang and his CFO were arrested on Wednesday in charge with racketeering, wire fraud, and conspiracy— We talked about this when it happened.

His firm, Archegos— Archegos. Archegos. Archegos. Archegos. Archegos. His poorly-named firm and family office— We covered this in real time back on episode 28. They famously lost $20 billion over two days when they were margin-called back in March of 2021. He worked at Tiger Management, yada, yada. And it was at the time reported that they were trading— Billions of dollars at over 5x leverage.

According to the SEC complaint, at its peak, the firm was managing $36 billion with $160 billion of exposure, which is 4.5 times leverage. But Archegos, or whatever it's pronounced, started with only $1.5 billion in assets in March of 2020. So Wang flipped $1.5 billion in capital into $160 billion of exposure in 12 months, essentially trading somewhere in the neighborhood of $100 to $1 at its peak, according to this complaint.

A bunch of banks have lost money because they were supporting this. Credit Suisse lost $5.5 billion. Morgan Stanley lost $1 billion. UBS, $774 million. The New York Times described it as, quote, "orchestrating a stock manipulation scheme that relied on them masking and concealing the enormous risk they had taken." Chamath, you had some thoughts on this, I think.

So first, I think we should probably explain how he did this, right? Yes. So— That's— That's everybody's question, is how did the banks let this happen? So explain. Well, I think first, it's what's the mechanism? So there are ways in capital markets to take really extreme bets. This way is what's called a total return swap.

And so the basic way that this works is you have two people on each side of a trade. And what you basically say is, let's agree on what's called a reference asset. So I'll just use an example. Let's just say it's—I think Discovery was one of the companies that they were trading.

So Discovery Communications. Let's look at—that's the reference asset, that stock. And what I'm going to do is buy protection. And what you're going to do is sell protection. And essentially what happens is, as the stock goes up and down, you're going to net the difference between these two people.

And when you do it that way via a derivative—so what it forces the person to do, the bank in this case, is to go out and buy the stock, okay? Show that they are hedged in case the price goes up a lot because they have to pay that difference, in this case, to Bill Hwang.

And if the price goes down, Bill Hwang has to pay that difference back to the bank. So what happened is that he went to three different banks. Morgan Stanley, Goldman Sachs, and Credit Suisse. And effectively what he did was he bought—he made these bets across a handful of names.

But he did it with so much leverage that he ended up owning 60 or 70% of some of these companies. And in March of last year, when the stock market turned over, he owed them enormous amounts of money, so much so that these banks had to unwind these trades, which caused further downdrafts of the stock market.

And so the stock market went through a lot of these downdrafts in the stock and almost spilled over to the broader stock market. Jason, the numbers from the SEC complaint are pretty crazy. As of March 31st of 2020, they had $1.6 billion invested on a gross exposure of $10.2 billion.

What that means is they were able to go and lever up this $1.6 billion to behave in the market as if they had $10.2 billion. By January 1st of 2021—so nine months later— they had $7.7 billion of invested capital. So they'd done really well, right? They'd made 70% on this $10 billion.

But they levered that up again, and so they had gross exposure of $54 billion. And then just, I think, three months later, by March 22nd, they had $36 billion of invested capital, meaning they had $36 billion of cash. This guy had taken $1.6 billion and spun it up to $36 billion in investment.

Yeah, yeah. And basically— Yum, yum. This guy went like 20x. In a year. But then he had levered that up again, and he had $160 billion of gross exposure. And then the market turned, and he owed all this money, and so all these folks had to get out of it.

But they also allege that he was trying to do short squeezes on the stocks to try to make them goose even more. So there was massive manipulation because of his position size, correct? Yes. So this is what happened. But then here's how it is allowed to happen. So if you try to do the same thing in interest rates, in the interest rates market versus the equities market, it's not possible.

Why? If I wanted to go and buy a credit default swap, effectively think of that as the same kind of thing he did, but on the debt of a company, on the debt of Discovery. What I would do is I would be able to enter into that trade with a bank, but it goes into a clearinghouse.

And that clearinghouse is able to tell all the banks how much risk is building up in the system. And the reason we implemented this clearinghouse was to make sure, because we're going to make sure coming out of the great financial crisis, none of that chaos ever happened again. But we did not include the equity markets in that clearinghouse and in the laws that regulate it.

So what this is is a very shadowy gray part of the market that is poorly regulated, that has very little oversight. So what do the banks do? The banks say to you, if you want to put this thing on, give me a balance sheet so I understand what the risk is.

A piece of paper, a report. And I think what they're alleging is that these guys lied so that any individual bank, in this case Goldman, Morgan, and Credit Suisse, had no idea because they kind of doctored these reports to each other. And that's why all this risk built up in the system.

It would be solved if you had a clearinghouse for equity derivatives the same way you have for interest rate derivatives. It is crazy to think that somebody was doing this and thought they would get away with it and had been up 20x. The psychology of these people, the Madoffs of the world, I just find, I don't know, I'm just fascinated.

I mean, why wouldn't he if he had 20x? We just thought, by the way, we talked about how the four of us are grinding to return 2x of our money in 10 years. Yes. And this guy's like YOLO. He's 7x or 10x, 1.6 billion dollars, and it was not enough.

It's not enough. It's insane. I mean, people have-- I mean, what do you think the psychology of this is? I have no idea. That's what I'm trying to figure out, Sachs. What's the psychology of somebody who tries to do this? I'm not even gonna try to figure out Sachs.

I'm not even gonna try to figure out Sachs. I'm not even gonna try to figure out Sachs. I'm not even gonna try to figure out Sachs. They're already a billionaire. They've already got their jet. They could go anywhere. They could have anything. They could buy any home. They could go on any vacation.

That's the thing I never understand about these people is like, this has got to be some crazy sociopathic behavior. Jekyll, did you always want a jet? By the way, the guy-- I just got a business select on Southwest. When you started your career, what did you want? The Knicks.

That's what I still want. Well, when you started, you wanted a house, right? And then you got the house and you wanted the home in Tahoe, and then you-- You want the Knicks. The vacation home, and then you want the jet. And then, I mean, I don't know why this is confusing.

Well, no, but I don't want it enough to put my entire freedom at risk or to cheat. Apparently, this dude was a Christian. I'll put that in quotes because I don't-- I mean, I don't know. Doesn't sound like Christian behavior, bro. Ran Bible study and stuff in the mornings.

He lived in some modest house in Jersey, blah, blah, blah. But he was a bit of a freaky deke. What does that mean? So weird. I mean, the guy couldn't get enough. By the way, the dude was pinched in two. 2012 for insider trading and had to pay a settlement and might give back everybody's money.

He got pinched. It's crazy. And it is what it is. You know, you never ran on your friends. I got pinched. He got pinched. Yeah, he got pinched. When you grow up in the streets, you know that. What happened to this guy? I got pinched. He got pinched. When you grew up in the streets.

The guy ate cheese. He didn't run out. He ratted on his friends. He ran out of the Medjigo. He tried to steal some Medjigo. He got pinched. And he ratted on his friends. Now the CFO got pinched too. They flipped him. This is super deranged. Speaking of deranged. Transitions.

Where are we going? Where are we going? You know what someone needs to do? Someone needs to take all of JCal's transitions from the last couple of shows and just put them together in a row. Yeah, just a supercut. Speaking of crazy. Speaking of deranged. Okay, speaking of deranged.

Yeah. On Wednesday, the Department of Homeland Security. Speaking of billions. Announced a disinformation governance board. Disinformation governance board. According to the announcement, the board will immediately, immediately begin focusing on millions. Misinformation aimed at migrants at the US Mexican border. The board will be led by disinformation expert Nina Jankiewicz.

He has researched Russian misinformation tactics and online harassment. This is also the woman who sings show tunes on TikTok. JCal, I feel like you should be running our disinformation board. You always have such a strong opinion. You have such a nose for what's BS and what's not. Here's what's going on here.

So first of all, this woman claims to be an expert in disinformation. Let's evaluate that claim. She was an active pusher of the Steele dossier, which turns out is disinformation for which people are now under indictment. She also was active in trying to censor the Hunter Biden laptop story, which as it now turns out was not disinformation.

It was absolutely true as acknowledged by the New York Times, the Washington Post. You would think that these blemishes on her record might disqualify her from being an expert on disinformation, but actually in the view that people are hiring her, these are actually good. They're actually qualifications because they are not interested in the truth.

The reason this department is set up and what they mean by disinformation is they have hired her to push partisan political points. That's what's going on here. That's what disinformation is. Now, it used to be that if you disagreed with somebody, you just say, listen, I disagree with you or maybe you're an idiot, whatever, you're wrong.

But now the way that these debates are set up and the way they work is they don't just say you're wrong or that's not true. They try to label you as disinformation so you can get you censored. And the point of hiring this disinformation czar is basically to censor the disinformation, basically to shut down the debate.

That is basically the whole point of the censorship. Do you think there's any timing here with Elon by Twitter? Yes, of course. There was a great tweet about this. I mean, I love conspiracy sacks, by the way. I don't think it's conspiracy theory. There was a great tweet about this that we live in a future where it's like a mashup of George Orwell and Ayn Rand.

Because here you are. You have Elon Musk, the heroic lone entrepreneur trying to rescue freedom of speech. At the same time, you have this Orwellian ministry of truth being created by the federal government. I mean, no awareness of naming. Yeah. It's just bizarre. But the disturbing thing about it is- Disinformation governance board is such a dystopian name.

The thing about it that's a little bit scary here, I know you play the video of her doing show tunes and it seems sort of silly, but the thing that's scary is that this is under the homeland. Homeland Security Department. That's another weird wrinkle. Why is that there? It's the most militarized department in our government.

So it's really scary to put the ministry of truth under the department that has all the soldiers and all the weapons. Ministry of truth is not the name of it, but it's close. Pretty darn close. Now, why is it there? I'll tell you why. Because this was built up to.

Ministry of truth. Shout out George Orwell. A couple of months ago, there's a news story that we might have covered on this pod where the Homeland Security Department redefined disinformation to comprise. They said it represented an escalation of the terror threat level. So in other words, they basically said that this information was tantamount to terrorism.

Remember that? Didn't we talk about that? This is the payoff to that. First, they define. They basically define the other side as being disinformation of the debate as being disinformation. Then they define disinformation as basically terrorism. Then they have the Homeland Security Department, which is supposed to be responsible for terrorism.

Create this ministry. Of truth. This is what's going on here. It's really weird. Just to remind everyone there was concern in the last election. I'm going to play devil's advocate as I often find myself doing here. That just to try and explain the world. That's the reason I often play this role because I try to understand the world.

But there was a real concern that the Russian government was using information warfare and propaganda through social media proven to influence voting. And that that is considered a security threat to the integrity of our elections. Therefore, this is a homeland security issue. And there is a question mark, of course, that everyone has on how far they're going to go.

Once you set this precedent, when would they ever stop in terms of quote unquote policing information and policing what's true and managing internal propaganda and internal media delivered to us by the government? That's the other side of the coin. But the primary side of the coin, the initial side, the initial representation that I'm that I think folks do have concerns around is how do we keep foreign actors from creating misinformation campaigns that go viral and influence elections and sex?

I don't know if you think that that's a concern we should or shouldn't have, but how would you address it if you were the president? And that was the challenge to like, how do we stop that from happening? The foreign actors interfering in our elections is certainly a concern we should have if it was actually happening on a big scale or in a meaningful way.

There's the qualifier. I mean, this is basically look, this is basically a hoax. Okay. John Durham is basically out there making indictments right now, proving the extent of this hoax. It started with the whole Steele dossier, which was a piece of campaign opposition research that was manufactured by Hillary Clinton's campaign.

The lawyers who basically produced it are under indictment. And that's where this whole thing of Russian disinformation came from. And the only proof for that thesis is that supposedly the Russians bought $100,000 of Facebook ads on Facebook. So I'm not denying that that occurred, but it was, it was relatively minor.

It was a drop in the bucket of all the activity going on around the last election. Wait, wait, to be clear, to be clear, that was just the ads that were bought with, with like credit cards that said like FSB on it. Like, but who way to go Facebook security team?

You probably, you know, didn't count all the number of credit cards that were stolen. I'm pretty sure the Russians are capable of stealing John Smith's credit card and using that to buy ads as well. Well, I looked at those ads. I used to see those ads. They were ludicrous.

They weren't going to convince anybody of anything. I mean, they had like Jesus and the devil. arm wrestling each other. And the Jesus figure was basically set and the, the, you know, it was just absurd. I mean, the Jesus figure was saying that. Okay. Wait, to be clear, it happened and you've now stepped back your position on like, it just wasn't at scale to your opinion.

I think, I think, look, the, the scale interference in the election was committed by big tech. I mean, they censored the Hunter Biden story two weeks before the election. It turns out that's a completely true story that Hunter Biden has extensive business dealings with the president. And that's not just in Ukraine, the country we are now.

Yes. But we are now deeply involved in a war there. And that story, the electorate had the right to take that into account. Big tech censor that story. There was a reason for that. May I respond to that? Just to give people like making a very difficult decision. You have to remember Trump asked Putin on stage to hack Hillary's emails and they did.

Then he asked the Ukraine to take action against the Bidens or he wouldn't give them support. He was impeached for that. If you put yourself in the, and I'm not saying Twitter made the right decision here, but there was, and there was also sexual material, you know, people's nudes, which, and hacked material and nudes are against the terms of service.

So I think two things happened concurrently. One, listen, the people working at Twitter are 98% liberal. They don't want Trump. They saw it as an existential threat. And then two, they don't want to link to hacked material. Oh, really? Well, hold on a second. Hold on. During the whole Canadian trucker.

Let me finish this point. No, I have to finish my point. The third point. And then I'll let you go. I'll let you go. Is that in addition to all that Hunter Biden is completely a grifter. Go. Okay. I agree with you on that one. So look during the whole Canadian trucker thing, remember when all the people who contributed to those Canadian truckers, they got docs.

I mean, basically there was a hacker who leaked all the people who had donated and social networks were happy to print all that information. So this idea that they censor hacked information is nonsense. The lives of TikTok account just got docs by Taylor Lorenz look, whether you think that was a good idea or not.

The point is these principles are invoked very selectively when there's a story they want to suppress and the New York times and the Washington post have both not come out and said that the laptop was real. It's been authenticated. The story was real. And this whole idea that it was disinformation that was just invented.

I mean, it was just invented. Well, no hacked. It wasn't that it was just a ratio that it was potentially hacked and you, and Trump nothing was hacked. Here's the thing. Trump set the stage for that. And the, uh, the, the people at Twitter and Facebook. Who also made these decisions.

They were informed by three later agencies, department of justice and, and FBI, et cetera. Hey, this is potentially hack material designed to interfere with the election. Listen, it also is true that Biden is a jank events and other democratic party operatives just made up out a whole cloth. That the hunter Biden's story was disinformation.

It was true. It's been acknowledged as true. The Washington post is true. I mean, I think this is true. So hold on. So it goes to my point. Can improve. No, it's not about improving it. Look, well, no, no, I, you didn't fear my sentence. I think this is where.

Social media can improve, which is if they had to explain every one of these decisions, they make in full in transparency. I think that's something Elon could bring to this party, which is if you're going to block something, we need to know why. And they'd never explain why and who made the decision.

And I think that that transparency would benefit situations like this. If the DOJ or FBI told them, this is hacked material. Then they got to go to the DOJ and say, Hey, you got to give us cover here. If this is in fact hack material, you told us not to print it.

We're not going to print it, but it was just bizarre that one publication got dinged like the New York post. It didn't. It screamed on the old newspaper in America, the oldest newspaper in America. It's also not the bastion of like, it doesn't matter. That's not for you to decide.

It's not for Twitter to decide. It's a legitimate publication that had a true story. And I don't disagree. And it was relevant to the election and the American people should have been able to take that into account. And people like Nina Jankovic or whatever, our new czar of the ministry of truth.

She was out in the forefront, basically calling that story disinformation. Meanwhile, she's pushing the steel dossier, which really was. I think if that story was confirmed, would Biden have won? I don't know. I don't know the answer to that, but the point is that it shouldn't have been suppressed.

That was, that was election interference. Now, Elon came out this week and specifically tweeted that, that that was basically a mistake. Bad call. Jack also said it was a bad call. Jack said it was a mistake too. And Elon repeated the same thing that they shouldn't have done that.

I think everybody can agree it's a bad call in hindsight. Yeah, of course. In hindsight. Right. But what was the reaction to what Elon said? He was accused by virtue of criticizing the policy decision that Twitter made, that that was supposedly targeted harassment of the legal counsel at Twitter who made the decision who gets paid $17 million a year to make those decisions.

Do you guys see this debate? This happened last year, this last week. So the point is that if you criticize somebody who's on a certain side of the debate, that's harassment, but he'd even mentioned her by name. This is how absurd this discourse has gotten. Can I make a prediction?

Yes. Prediction's great. I think people misunderstand Elon's incentives for buying Twitter. I haven't talked to him about this, so I'm just making a complete subjective prediction. I think he's going to buy Twitter. I think he's going to clean it up. I think he's probably going to generate something like a 2x on this.

We talked about how that's like a 2x. I think he's going to do something like a good terminal valuation in six or seven years that basically puts that asset worth at around $100 billion. In the meantime, he's going to open source as much as possible. I think he's going to make it very difficult for misinformation and disinformation to get very far.

He said he's going to authenticate every human being that uses the platform. He said all of these things publicly already. Then here is the masterstroke, and again, this is just me speculating. I think he's going to donate it into a foundation and a trust. I think he's going to do something like a 2x.

I think he's going to do something like a 2x. I think he's going to do something like a 2x. I think he's going to do something like a 2x. I think he's going to do something like a 2x. I think he's going to do something like a 2x. I think he's going to do something like a 2x.

I think he's going to do something like a 2x. I think he's going to do something like a 2x. I think he's going to do something like a 2x. I think he's going to do something like a 2x.

E78: VC fund metrics that matter, private market update, recession, student loans, Bill Hwang arrest

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