All right, everybody, welcome back to the All In Pod, episode 174, almost up to 175. I believe there are a lot of folks getting together next week at the All In meetups around the world to watch the show. Unfortunately, J. Cal had an oral incident this week. He will not be joining us.

I guess he cracked a tooth and couldn't make it. So he is sitting this one out, very last minute decision. Specifically, cracked a tooth, eating a bison rib at the Salt Lake in Austin, which is a true story. Freebird, I think we found an image of J. Cal at the Salt Lake cracking his tooth on a rib.

Let your winners ride. Rain Man, David Sattler. And instead, we open sourced it to the fans and they've just gone crazy. All right, so we are going to announce the All In Summit 2024 back to LA. We had such a great time in LA. It was a great location for everyone.

We really appreciated the facilities at UCLA. This year, we're upgrading the experience once again for everyone. So the event's going to be September 8th through 10th in LA. If you haven't seen it, please watch the recap video from last year. We put it up on YouTube. And then there's all the interviews from last year are also on YouTube.

We're going to have another amazing lineup of speakers this year and have a much more kind of upgraded, elevated experience for everyone. Applications are open today. So go to summit.allinpodcast.co to put an application in to join us this year. As you know, we had way more applications last year than spots.

And this year, we're going to have all sorts of upgrades. We're going to have transportation to and from all the events for everyone, a concierge booking service to help you book your rooms and get you set up in LA for the trip. We're doing a full day event on the Sunday, September 8th, followed by two days of content, Dine About Town on the first night, two blowout parties.

It's going to be awesome. So we're really excited about it. We've got a much bigger budget this year. And we're going to try and really make the experience awesome, while also delivering the great content. So really excited to do this again in LA. I appreciate everyone's support of that.

We had a lot of debate internally about where to take it. And we settled on going with what we know and trying to make it a little bit better this year. So anything else you guys want to say about All In Summit? And there's only one kind of ticket this year, right?

That's right. So we're not doing like regular ticket and VIP. We're just doing one ticket for everyone. And everyone's going to get this kind of elevated experience. Should be cool. Saks, just show up. Would be awesome. Hope to see you there. I want to invite a couple of speakers.

Yeah, you've got some good speakers, I saw. Yeah. It's gonna be great. When are we going to start announcing the speakers, Preberg? We will do that in a couple weeks. We already have a bunch booked. And it's gonna be awesome. Oh, that's really exciting. That's awesome. Yeah, I know CP, you wanted to take it somewhere else.

I mean, we were in debate on Vegas, maybe going to some other country. But you went to another country. Where'd you go this week? I was in Paris, France. What were you doing there? There's like a important AI conference. And Jonathan Ross, the founder of Grok and I kicked it off with like a fireside chat for like 45 minutes at the beginning just to get everybody amped up and excited.

Cool. Yeah, it was really good. Anything interesting come out of it? I think the soundbite that made an impact on me was from Jonathan. So I think he did a very good job of explaining where NVIDIA is really strong, which is really in learning, and where NVIDIA is trying to build the business, which is an inference.

But the problem is the features almost compete with each other between learning and inference. And I think that that was good clarification. And then the second thing is he said that if he deploys his roadmap, he'll have 50% of the available inference compute by the end of next year.

Wow. Based on all the needs of like open AI and meta and everybody else, which is a... Wait, but that's a smaller physical footprint. Is that right? And it's just because they can do higher token per second? Less power, higher tokens per second across all the major models. So it would be meaningfully less power and meaningfully cheaper.

So that was a pretty amazing soundbite. But his whole explanation was actually really good. So I mean, if you listen to the spaces we did, I thought it was good. I thought this was even better. So I'm trying to get a copy of the talk because it was taped so that we can kind of post it.

At a minimum, anybody who's interested in studying NVIDIA should listen to what he has to say, because I think the nuances between us and them are really profound. And they were pretty stark the way that he described them. So it was cool. It was great to be in Paris, frankly.

How does NVIDIA respond to this movement or this notion that there is an entirely different chip category focused purely on inference? Do they have inference focused chips in development or a different roadmap that they're going to have to kick up now? I mean, I think it's very hard for them.

It is a structural innovator's dilemma. And why is that? Because they've made some architectural decisions around things like HBM, which is high bandwidth memory, or specific kinds of extremely high throughput optical cables. And why these things matter is that they've gone and bought up the world supply, and they've basically bearhugged these markets as a structural part of their design.

Now, that makes sense, and it's very legal. The problem is that if you architect around it and go through a totally orthogonal design process, we're not subject to any of those supply chain considerations. And I think he explained that really well. I didn't understand it in nearly as much detail as I did leaving.

So I think that's an important takeaway. It's also really important for all the hundreds of chip startups and for these venture investors who are ripping money into these companies to know these differences. Because if you are investing in a company that is subject to HBM in their design decisions, or these specific optical cables, or a whole bunch of other things, you're going to be in a really difficult spot because NVIDIA has bought them all.

So I thought that that was really interesting. The other thing that NVIDIA does brilliantly is what Intel did in the '80s and '90s when they wanted to choke the market for CPU competition, which is that they were able to define a metric that everybody started to pay attention to, which for them was clock speed.

And if you remember, Intel would push Moore's Law, and they would push transistor density and clock speed as the measurement of value. Now, for a lot of consumers, none of us knew any better. And so every time we saw a new chip, we would go through the Pentium upgrade cycle because we thought that's what we were supposed to do.

It turns out that clock speed doesn't really factor into speed the way that you think about it and experience it as an end user using software. And it's the same in AI. And so we talked about that as well. So it's an incredibly important company, NVIDIA is. I think they're performing brilliantly.

They're running many of the same plays that Intel did to try to create total dominance. But there's some very important nuances around power and around supply chain decisions and technology decisions that, frankly, some people would think are unsustainable. And the more I understand them, I would be in that camp as well.

So I thought it was a very important conversation and hopefully we can post it. Yeah, it's cool. And by the way, it's great to be in Paris, too. What do you think of Paris? You know, I have a new appreciation for what's going on in these major cities. I think that all major cities are crumbling.

I don't and I don't mean to be alarmist or very dramatic about that. It's just that I spent a lot of time with entrepreneurs that are in Paris. And they struggle with the same things that the people in San Francisco do. And then I had a couple of conversations with some folks that are entrepreneurs in London who were there.

And they suffer from the same things. Lots of petty crime, lots of garbage, lots of vandalism, lots of drugs. And so no place is perfect. It turns out everybody is struggling from a lot of experimentation gone wrong and how these cities run. That was that was actually my the biggest takeaway outside of the actual AI conference itself.

But that's a Western City problem. You're not I mean, have you visited many cities in China or other parts of Asia? And is that like a Western problem? I have not been to China in six years. I've been to Hong Kong, but I've not been into China for six years.

So I don't know. I would say that India has its own vagaries. So those issues are not the same. I've been to Singapore a couple times. My kids were just in Japan for spring break. So I saw a bunch of the pictures, those cities look relatively the same, very orderly, well run clean.

But yeah, you're right. These Western cities are a bit chaotic. Yeah, sacks. Is this like a Western social liberal manifestation? How cities are being challenged? Generally? Yes. Yes. Like Malay has, I think Malay said this, right? He said, like, all these Western social liberal beliefs are having lifestyle impact and urban centers.

Well, it's hard for me to speak to what's happening in Europe, but we know what's happening in the United States. All the biggest cities are blue, and they're run by a certain ideology. And in those cities, we've had now a decade plus of decriminalization, deprosecution, decarceration. And the impacts of this are obvious.

We also, at least in San Francisco, we have subsidies for people who want to live on the streets and do drugs all day. I mean, it's not prohibited to do that. So all of our public spaces have been taken over by people who are happy to take the whatever it is, $700, $800 subsidy and do drugs all day.

We also had this referendum in California that essentially lowered a whole bunch of felonies to misdemeanors. Basically, if you steal less than $950, that's considered a misdemeanor now instead of a felony. And so there's been a huge increase in crime because of that. You know, shoplifting just doesn't get prosecuted anymore.

And misdemeanors don't get prosecuted anymore. We've had all these SOARs, DAs who don't want to prosecute misdemeanors. So I think if voters had understood that lowering a lot of these crimes from felonies to misdemeanors meant that they wouldn't get prosecuted at all, I don't think they would have done it.

But that's kind of where we are. But are we seeing a rebound from that now, Sax? Is democracy working? Because I know that in San Francisco, we had an election recently, and in the ballots, it seemed to indicate that voters were sick and fed up with the living situation in the city, and they're putting different people in office and have an intention of changing the city charter and changing the laws in the city so that we can reverse this trend.

Is that not where things are? I mean, like, sitting where you sit, like, don't you see San Francisco kind of trying to right itself? And as a result, doesn't democracy work over time? Yeah, it's just that we live in a one-party state, and that one party has been captured by ideologues, and so it's very hard to change.

It is true that in San Francisco, there was an election recently, and the more radical supervisors were defeated. We have, I think, finally a good DA in San Francisco. But these radicals have had a long time to entrench their power, and the party machinery helps keep them entrenched. So I think you can argue that we've bottomed out because the public has recognized the problem, but it's still very hard to fix, and it's going to take a while.

I think for the first time in a long time, I'm more optimistic than not, given the people I've seen that tolerated the conditions historically have reversed course over the last year and have said, "We've got to act, and we've got to do our kind of civic process." Well, time will tell.

You have to remember, when New York City was a chaotic mess in the '70s and '80s, it took two different mayors, and it took almost a decade for that to get cleaned up, but it took the strength of leadership. First, David Dinkins set the framework, and then Giuliani really executed Rudy Giuliani.

And between the two of them, and I think what people call the broken windows theory, they hired a lot more policemen, and they just really cleaned up all of these really bad areas, and then it had this knock-on effect. The problem is, when I'm staying at a hotel in Paris, or when I was speaking to some of my friends who live in London, it's the same thing.

It's like the amount of knife crime is so egregious, as an example, that they tell you, "Don't wear a watch," et cetera. I mean, I don't wear watches anymore when I go out. But what's crazy is they will tell you that you'll get stabbed over a phone, where it's like, "You don't need to stab me for my iPhone here.

Just take the iPhone." So there's a level of lawlessness and petty crime that's affecting tourists that, to me, was very surprising. And so even when I was walking around Paris, I was like, "Should I really feel scared here?" And my reaction was, "No, I've never felt scared in Paris." But then what's ringing in the back of my ears are these warnings from people that have lived there for 10 and 20 years, who've had this stuff happen to them.

That was really surprising to me. So that stuff in San Francisco, as far as I can tell, or any major city in the West, hasn't really been fixed, because you haven't had a shift in leadership yet, where they've really said, "Okay, we're going to double down on policemen and policing, and we're going to amp up the punishment." That hasn't happened.

Well, I was just in Vegas this week, and it doesn't feel... How was your trip? Give us the trip report. Yeah, I went to the Google Next Conference. But I will say, first off, no crime in Vegas. Vegas is Vegas. It's a very different environment. But yeah, I went to the Google Next Conference.

I ended up going out because at O'Halo, we did a partnership with GCP. So we're moving all of our infrastructure and doing a lot of model development on GCP. And it was great. I think there was 30,000 people at this event, which was insane. Have you guys been to any of these, like AWS Reinvent, or the Google Next, or any of these?

No, I have not. What I didn't realize prior to going to this was how much of an ecosystem there is. They take over the whole convention center at Mandalay Bay. And there's hundreds of companies that have built services or build services on GCP that are there, pitching CIOs and CTOs of other companies.

And so it's this real network effect type of business model that I hadn't fully appreciated just how like, deep the network is and how entrenched it is. I also got to go to this thing where I spent a lot of time with CIOs and CTOs at other companies, big companies.

And a big takeaway for me that I also didn't realize was how most of them are not on a single cloud provider. Almost everyone I spoke with is on multiple clouds. So they're all on like AWS and Azure and GCP. And they use different aspects of each cloud. And there's a lot of interoperability between the clouds now, which I had previously my naive concept of this, because I'm obviously not deeply in the space was that a company picks a cloud and they move everything over to that one service provider.

But it turns out that they split, and then they allocate dollars based on the services and the pricing. So it was pretty clear that everyone is, it's like a race to the bottom on pricing for basic commoditizing services in the cloud, like data storage, right? And then whoever has the better higher level services, whoever has access to better models or has a lower price on running models, or on running things like inference.

That's where the money is made. And the gross margin on that is quite different. And I think that's where a company like Google probably has a much bigger advantage because of the uniqueness and the quality of the models that they've developed. But yeah, I just didn't I didn't really appreciate like how much there was also.

So my other big takeaway was the cloud is a wide open competitive market right now. Like there is no AWS lock in in this market. There's no Azure lock in. There's no GCP lock in like you guys. Yeah. The lock in comes from the developer services that they provide.

So both Amazon and Google, and I'm assuming Azure as well, will give you access to incredibly talented engineers who will help you build production code. Yeah. And the ecosystem on how so like a lot of the clouds are competing for the consultants who actually do the work for the big enterprises.

So Capgemini, Deloitte, PwC, they have these massive booths and facilities, and then go and build tools for companies is also a key part of the business strategy. And yeah, I mean, it's such a competitive market. I did not appreciate just like how much of an open game that still was.

Sure. It was a great, great couple days in Vegas. And I got to see some of our friends. We ducked in and saw Helmuth in the Poker Go studio for a minute. Some big tournaments going on at the ARIA. It was fun. We had a good time. Okay, let's move on.

So, you know, on the docket today, we were going to talk about CPI. The March CPI numbers came in from the Bureau of Labor Statistics yesterday, higher than forecast at 3.5% year over year. This is up from 3.2% year over year inflation reported by the Bureau of Labor Statistics in February, higher than expected for three straight months now.

Let's pull up this chart. And as we all know, the Fed did 11 rate hikes in 2022 and 23. And the intention was that we would see inflation come down to their target of 2% and they would start to lower rates. And obviously, we're not seeing that inflation is remaining hot.

Things are getting more and more expensive. I pulled together some of the numbers on year over year price increase. Housing is up 5.7% year over year. Transportation costs are up 10.7% year over year. And the highest car insurance is up 22.2% year over year. So the expectation has been that the market will do rate cuts.

Larry Summers came out and said you have to take seriously the possibility that the next rate move will be upwards rather than downwards. I guess, Saks, let me let me ask you first for your commentary on how this plays into the election cycle. I know Biden was expecting a rate cut or several rate cuts going into the election, which usually helps the case of the incumbent.

Maybe you can comment on where the election cycle might be influenced by this inflation report. Well, I think it's definitely bad news for Biden. I was expecting a Fed put this year. And really, the whole market was. The market was expecting three rate cuts this year, which would have been really good news for Biden.

And I think this latest inflation print was kind of a dagger to the heart of that expectation. And I think the Wall Street Journal put it best. It said here, Wednesday's report had been hotly anticipated because Fed leaders had been willing to play down stronger than anticipated inflation readings in January and February as reflecting potential seasonal quirks.

But a third straight month of above expectations inflation data erodes that story and could lead Fed officials to postpone anticipated rate cuts until July or later. So it's not just the fact that this inflation print was higher than expected. It was also higher than expected in January and February.

But people were willing to kind of overlook that, saying, well, maybe it was just kind of a quirky reading. But now we've had three straight months, it's pretty clear that the narrative that we had going into this year, which was that inflation was on its way down, that it peaked at 9% as the official rate, I think, in 2022, and then it was going down every month through all of 2023.

And I think the expectation going into '24 was it would keep going down and we'd get these rate cuts. Well, after three straight months of inflation being more persistent and stickier than people expected, I think that narrative is basically dead. So I think the new narrative now is it's going to be rates are going to be higher longer.

And I think Larry Summers is reflecting that view. Larry's going further. He's not just saying that rates are going to be, you know, at the current rates for longer, he's saying they might actually increase. And that's a risk. Yeah, last summer, he said, and this was last summer. So almost a year ago, he was saying, the market's got it totally wrong.

We're actually going to need much higher rates than the market's anticipating for much longer, as well, than the market is anticipating. And so did Mario Draghi, they both said the same thing. No one paid attention to him, everyone ignored it and assumed that this was going to be a quick rebound to normalization.

It's clear that, you know, once again, Larry has proven himself to be fairly prescient. Larry Summers has, for the most part, been spot on from this on this whole inflation question going all the way back to 2021. Remember, 100% in Q1 of 2021, Biden's first quarter in office, the big legislative push was for the $2 trillion COVID relief bill is the so called American Rescue Plan.

And Larry Summers said that it was it risked inflation, it was an inflationary bill. It was unnecessary. Yeah, we didn't need it. The economy was already coming back, and we didn't need it. And Biden was risking inflation. But of course, inflation was only at 2% at that point. So the administration kind of poopooed Larry and said, you know, this is Larry Summers being Larry or whatever.

And sure enough, we were at 5% inflation by that summer. And you have to wonder if Biden had listened to that advice. Would he be in a different position right now going into the election? I think probably he would have been. And you got to wonder for what I mean, what did that $2 trillion accomplish?

I mean, COVID was winding down. I mean, these were the last bit of stimmy checks and payments to these pharma companies. And I mean, it was basically a grab bag and it was passed on straight party lines. And it was just totally unnecessary. I mean, the economy certainly didn't need it.

And so here we are. And I think that a lot of people, including the markets thought that Biden was kind of out of the woods that this year, we'd see the final leg of inflation going back to normal, but that's not going to happen. And I think, you know, going beyond the political ramifications, I think there could be several other knock-on effects that we should talk about.

I mean, one is for the consumer. This means that the cost of borrowing is going to be higher for longer. That makes it harder to buy a house. Mortgage payments are higher. That also means if there's fewer home sale transactions, that means the price of housing could come down.

So there could be a correction in that market. Second, if you want to buy a car, your car payments higher. And if you have loans, your personal interest is going to be higher. And this is why I think consumers feel like they're worse off than the economic data would otherwise reflect.

And Larry Summers actually had a tweet storm about this about a month ago, where he calculated that if you included the cost of borrowing in inflation, that inflation was much higher than people thought and that it actually peaked not at 9%, but at 18%. So Larry had an excellent tweet storm on that.

And he said that the cost of borrowing, which used to be calculated in inflation but is not anymore, was the reason why consumer sentiment about the economy was depressed. He said that that accounted for about 70% of it. So people should be feeling better off because GDP growth is good and unemployment is low, but they're not because inflation is so high.

And if you include cost of borrowing, the inflation is even higher. So I think this is really bad news for Biden. But it's a story that's been going on now for three years. It's not just this one inflation print. Right. It's funny. Yesterday, Biden said, during a press conference with Japanese Prime Minister Kishida, that he's sticking with his prediction of a rate cut before years end, but there might be a delay, which I think is obviously, you know, based on what the data showing and what folks that seem to know and have been pretty good predictors are saying is unlikely.

We were supposed to get one in April. We were supposed to get one in June. Oh, yeah. Remember, the Fed Open Market Committee in December stated that they expected three rate cuts this year. And I think the market, in some cases, were predicting as high as four or five.

Right. And now we may not have any and we may actually see a rate hike if you were to follow. Well, if we see a rate hike before the election, I think Biden is toast. Yeah. But I mean, I think Summers gave that maybe a 15 to 20% chance, which is it's still not the most likely scenario.

But it's possible. But it's possible. And no one was counting on that in December. Chamath, if you're a Fed governor, and obviously, the Federal Reserve Board of Governors sets the rates, they meet and they make these decisions. How influenced are they politically? How influenced are they by this election cycle?

And, you know, historically, this is meant to be a fairly independent board. But there's been a lot of consternation over the last few years that this board acts like almost a political apparatus, particularly in election years. You mean when they're not plagiarizing? Well, tell us what you're talking about.

It turns out that before I answer your question, that was a joke. Nick, you can please show the tweet. But there was an article that came out that said one of the Fed governors has apparently massively plagiarized most of the work that got her to the position of being Fed governor.

Yeah. So the same thing that happened to the president of Harvard. So TBD, what happens to that Fed governor? But it seems, you know, my observation there was just more that it's like the preferred method of defenestration now of academics and the apparatchik, right? Before, if you had right leaning views or centrist views, you get run out of town and get fired.

Now, all of those folks are using the search engines to basically figure out really quickly that you plagiarized a large quantity of your academic work, and that your scholarship is is a little bit more speculative, which then brings into question, why do you get the right to help set the policy of the most important economy in the world?

Well, anyways, so that that was that joke. But so I think that you're asking the absolute right question. I think that the Fed has become increasingly politicized. And I do think that there are actions that foreign governments take to influence the election, but I do not think it's what most people think.

When I say that most people's ideas goes to like some darkroom conspiracy theory and misinformation. And I think that's a little bit naive. I think the more obvious way in which other governments can impact the US election is exactly how SAC said, which is they know that if inflation ticks high, and interest rates are up, and consumers are under pressure and meaningfully displeased with the economy, they'll vote out the sitting administration.

And so what can other governments do? They can do what they're doing. So Nick, I love this like, explanation and pre charts, Nick chart number one, please. What is this? So this is a core driver of inflation, which is the price of energy. And what you see here is that since the beginning of the year, oil prices have gone up, which ultimately will translate to into a higher cost of doing business, right?

Running your factory, keeping the lights on, keeping your home warm, getting from point A to point B, all of these things go up, which ultimately get reflected in prices, which is what inflation is. And so that's a very bad trend. Obviously, we had a lot of really good stuff happen through the course of last year, but it's largely reversed itself.

So it's important to double click into this and figure out, well, who's driving this? Is it just a random act? Or is it a systemic set of decisions? And it turns out it's systemic. So if you go to the next chart, what this shows you is what the US has been doing.

So the United States has clearly created an incentive to flood the economy with oil, which the laws of supply and demand would say prices should go down. And by bringing prices further down, they would have further brought down inflation, and they would have pulled forward these rate cuts that we had been expecting from the Fed.

The problem is that the rest of the world actually said, no, hold on. And that's what you can see on the next chart. So for every time we were trying to increase production, all of these other countries have been cutting production. And this is the change in the OPEC plus crude production targets of 2024.

So what you see here is for every barrel of oil, the US would pump out of the ground, more than that one barrel of oil would get actually restricted by all of these countries on this list, which is just to show you that these countries have a very specific view about how they want that energy market as and that's just one market, but it's an input a key input into inflation and rates to work.

So you're saying that the OPEC has a price per barrel price target, and they're able to manipulate production to maintain that price target. So while the US is trying to lower the price per barrel, these other countries are are able to have a stronger influence and balance out to get when you when you make these cuts like this prices will go up because OPEC plus is meaningfully bigger, the sum of all the parts of OPEC plus is meaningfully bigger than just the United States on its own.

And so the United States may amp up a few 100,000 barrels a day. But if OPEC cuts by a few million barrels a day, you see what you saw in that first chart, which is the price will go up. And that's largely why prices have gone up. So I think why this happens is because when they see the United States, trying to manage inflation and manage global rates, right, because us rates are not just for the United States, they're the, they're the trendsetter for everything else.

I think that in part, there's a decision that this rate philosophy, the economic philosophy, the political philosophy, if they wanted to support that, what they would do is actually also keep prices where they were or increase production. By reigning in production, what you're essentially doing is voting against that entire apparatus.

Right? So OPEC, and all of those countries, and those decisions are not made by an oil minister, let's be honest, they're made by the leaders of those countries, whose decision then gets reflected by the minister of petroleum or oil in all of these countries, is a vote against Biden, and the United States government and the politicization potentially of the Fed.

And then the last comment is just that when you look at the reverse repo rate, which is a fundamental measure of liquidity, what you also see is liquidity very quickly getting sucked out of the system, which is also generally a system health check that the Fed uses to make sure that the system is operating as required.

So in totality, what I see is that there is a structural disillusionment with the current administration, and where people can make decisions in their own best interests, versus the collective interests of the United States in a broader framework that the US may represent are voting against it. And so this is why the idea of a persistent inflation rate is a lot more credible than it was six months ago.

And I think, sorry, just the last point, and I think it's just what Zack says, which means that we're probably now on balance 50/50 between a hike and a cut. And I think if you don't see this thing change in the next three months, you're going to see 75/25 for a hike of at least 25 basis points.

And I do think David's right. I don't see how the sitting administration in any government will be able to withstand the onslaught of electoral displeasure, if rates are four and a half, five and 6% going into November. Timoth, if that is, I think everything you said makes sense going into this election rates are high and and or going higher.

What is the Biden administration do? The fact is, they are very likely going to come up with a strategy to try and win votes that will likely involve some sort of stimulatory process would be my guess. And that stimulatory process may look something like more student loan forgiveness, more debt forgiveness, Kamala Harris.

She had a whole speech about debt. And here's here's the irony, the actions that the administration is likely to take to support themselves in the election cycle are likely going to further fuel inflation. And that's the biggest concern and worry I have is that there's almost this inevitable set of behaviors that are coming down the pipe here over the next few months because of the inflation report that are actually going to make things worse, not better.

I mean, to your point, Biden just announced a new student loan forgiveness plan. Remember, the Supreme Court invalidated his last one. So now he's trying again. And it would potentially give loan forgiveness to something like 30 million borrowers. So yeah, they're going to try and buy votes. But I think it's already very late in the game to be trying to do that.

I think that's what they've been doing over the past few years. I mean, Biden has been a huge spender. You know, he passed the COVID relief bill, he passed the Inflation Reduction Act, which was a ridiculous name for was it 750 billion of, of more spending. And there was the CHIPS Act, which was well, yeah, and there's the CHIPS Act and the infrastructure bill.

And then remember, he wanted four and a half trillion of build back better on top of that. And he wanted even more, he didn't get any event. I think that this is a classic case of Biden spent the last three years making his bed and now he's gonna have to sleep in it.

And if in fact, inflation is persistent, sticky and not going away, and he doesn't get rate cuts, again, this may cost him the election. But, but look, I want to move beyond the political aspect of this and just talk about some more of these knock on effects, because we talked about the impact on the consumer.

There's also an impact on investors, there's an impact on the government, and there's an impact on on the banks. So let's just deal with the banks for a second. We've talked about on the show how commercial real estate developers are hanging on by their fingernails right now. You know, they, they basically borrowed huge amounts of money to buy commercial real estate, when rates were really low, and they did so at high valuations.

Now there's been a huge correction on that market, and they cannot pay back those loans. And they can't get refinance. So what's happening? Well, they're working with the banks to restructure those loans to tack on the interest they can't pay now, to the end of the loan. And then the bank will hope and pretend that they'll be able to get paid back one day.

It's called extend and pretend. Well, the extended pretend strategy could work if you believe that rate cuts are coming really soon, because you just need to hold on until the rate cuts are here, then you can get refinanced at lower rates. But if rates are going to be higher longer, that strategy is not going to work.

And you're going to see more and more real estate sponsors throwing in the towel. And banks are going to end up foreclosing on these properties, and you're going to see more and more fire sales. There's a really dramatic example just the other day in St. Louis, a building that was bought a few years ago for $200 million just fire sailed at $2 million.

I mean, 99% reduction. This is like dot com crash level reduction. That's for the equity, right? Yeah. No, this is like the price of the deal. I mean, I assume the equity was completely wiped out. Yeah, I guess they sold it for three and a half million. Are you sure that's not the equity?

That's got to be the equity. There's no way that's the- No, it's just the price of the building. Okay. I don't know. I mean- With the debt. It's got to have the debt attached to it for that, yeah. I mean, either way, it's a total wipe out for the equity holders.

Yeah, yeah. But it's also going to be a wipe out for the bank that made that loan originally, or that bought that loan when it was repackaged into CMBS or whatever it was. So I would expect that if rates stay higher longer, that's going to create tremendous stress on commercial real estate, and therefore on the regional banking system that made all these loans to commercial real estate developers.

So that's knock-on effect number one. Knock-on effect number two is the government's cost of borrowing. The 10-year rate's already risen to 4.5% now. And if rates stay higher longer, as more and more of the government debt rolls, it's going to end up getting refinanced at higher rates. And the need to refinance all of this government debt is going to continue to put pressure on the bond markets.

And I think this is why Larry is fundamentally pretty bearish on rates going down is the government's financing costs are so huge, and they continue to grow. We're adding something like a trillion dollars of new debt every 100 days. There've been some reports of this. Yeah, 7.6 trillion is getting refinanced of old debt in the next 12 months.

Right. And that 7.6 is sitting around 2%, and now it's going to get bumped up to close to 5%, which adds an incremental $210 billion a year of debt service expense just on the debt that's getting refinanced in the next 12 months, not to mention the deficit, not to mention, et cetera, et cetera, et cetera.

Right. So the government was extending and pretending as well. I mean, they were hoping that rates would go down fast enough that when all of this massive government debt rolls and needs to be refinanced, it'd be done at lower rates. So the interest costs wouldn't swamp us. We're already, I think, at over a trillion dollars now of annual interest expense for the federal government.

We are. Yeah, and it's going to rise to 1.6 trillion. So it's going to be 60% greater than our defense budget, just servicing the old debt. We're basically in a classic debt spiral where we're borrowing. Our annual deficit is we're at 2 trillion plus now. So we're not paying back the principal on the debt.

We're not even paying back the interest on the debt. We're borrowing money to pay off all the interest and then some on top of that. So that's a huge problem for the federal government. And then I think the last piece of this is investors. If you pull up this Fred chart on the Fed funds rate over the very, very long term.

So what this chart shows, if you just zoom in on this, is the Fed funds rate basically over the last, I don't know, like 75 years. And you can see that it peaked in the early 1980s when Volcker decided to break the back of inflation by jacking up interest rates to like 18%.

And it was very painful. We had a pretty severe recession and I think it was '81 or '82. But then the economy came roaring back by '83 and Reagan got elected in '84. In any event, that began a period of declining and low interest rates for investors, again, starting in the mid '80s.

And it continued all the way through, I mean, especially through I think the post-GFC period and then this COVID period where we had zero interest rates for a long period of time. And you can see the last spike we've had was when the Fed decided to jack up rates to 5% in response to inflation.

So the fact that we've got this persistent sticky inflation suggests that this whole, you could call it really almost a 40-year period of declining and low interest rates may be over. And when interest rates are going down, it creates a huge tailwind to the stock market and the bond market because the discount rate is lower, so stocks and bonds are going to be more valuable.

Well, if we're in a long-term environment that's more inflationary and rates have to stay higher longer, that's not great news for investors. It hurts the stock market and it creates in the private investing world like VC and real estate, it creates a much higher hurdle rate. So it's harder for private investors to justify fundraising.

So I think it's too early to say that this 40-year trend is over, but I think it could be. And the reason for that is just the huge pressure of government borrowing, crowding out private investing and this sort of ever-present need to keep issuing more and more debt at higher and higher rates to make it more attractive is going to create, I think, very bad conditions for investors.

So Chamath, let me ask you if you concur, given that today where we're sitting as of recording right now, towards the end of market on Thursday, April 11, the NASDAQ is sitting at an all-time high, and the NASDAQ is up 1.6% today. Following this inflation report yesterday, what's the disconnect in the market on why investors are buying equities, given that we're likely going to have persistent higher rates, and as a result, multiples should compress, particularly in growth stocks, and why the NASDAQ is kind of firing up?

I think it's important to look at what stocks are actually lifting the NASDAQ, just like what stocks are lifting the S&P 500. And we've seen this. There's a massive dispersion. There's like seven or eight companies that matter and 500-odd companies that don't matter much. And so the reason why things go up in an environment like that is, irrespective of the economy, money managers are paid to deploy money.

And I don't know if you guys saw this, but Nick, maybe you can find it. I linked to it in my newsletter last Sunday, which was an article about the fact that the global amount of total available equities to buy is shrinking, right? So if you think about that, what that means is that the number of dollars is growing, right?

Linearly, and in some years, it seems exponentially, but then the end, so then a certain percentage of that finds its way into the equity markets. But when the equity markets continue to shrink, and there's fewer and fewer things to buy, prices will still go up, irrespective of the underlying justification.

So I think that the thing is, you can't look at these things as a sign per se. You know, if you look at commodities as a different example, Nick, I sent you this. Commodities are up, broadly speaking, 30% since the beginning of the year. I think the reality is the following.

Countries are feeling increasingly uncomfortable with the decisions that the United States are making, whether that's its position to keep funding the war in Ukraine, whether that it's the continued instability in the Middle East, whether it's posturing with China, whatever it is. And so every country is now making a very different calculation about what they want to do.

And I think how it gets reflected is that they're optimizing for their own economies. And what that yields is each of them trying to make as much money as they can in the short term. And as a country that is a net importer, we are going to feel the price of those decisions as inflation.

And I think Sachs is right. Like, that's where we have to start figuring out how we rebalance these decisions from a foreign policy and economic perspective. Because if you don't change something here, all of these countries are basically going to be like, "We're on our own. We're going to optimize for ourselves." These countries are basically voting in a way that says we are not being led in a way that we trust.

And that unfortunately falls at the feet of the sitting president. Yeah. Well, look, I'm hopeful, as we all are, that work in the tech industry, that new tools and AI and other technologies would have a massive driver on productivity, which net-net could help even this out. That's the one last great hope.

Sitting here, AI obviously viewed as being highly disruptive by non-technologists and deeply concerning, and particularly in DC. But what is that thing that Bill Gates says, things are overestimated in the short term and deeply underestimated in the long term? I think that that's what AI is. That's right. And so AI is a bunch of, no offense, probabilities and statistics today.

Okay? And so we talked about this last time, so we should debunk this whole thing of like, there's some glowing brain somewhere that's capable of doing everything. Doesn't mean that we shouldn't underestimate it, being capable of this in five or 10 years, which is probably the window in which we have some form of AGI, but today it's not that.

And so the great leaps in productivity, Freeberg, that you're talking about are probably a three to five year phenomenon, not a three to five months. So what SAC says is right, which is how does the sitting administration buy votes today? Stimulatory methods. It'll have to make a ton of promises.

The problem is it can't really work its way into the economy fast enough come the November election. And so that's where I think they're in a really tough spot, which means that then, and I hate to be the bearer of bad news, but this is where you have a lot of these wag the dog kind of scenarios that come to mind, because then the only way to really galvanize a populace is to distract them.

Yeah. Well, look, let's talk a little bit more about AI, because I do think that regardless of the near term and longer term implications, there is a peaking of fear, peaking of interest, both different spelling of the word peak. Adam Schiff yesterday proposed a bill, sorry, earlier this week called the Generative AI Copyright Disclosure Act, in response to, I think, over 100 musicians signing a letter saying they're concerned that their copyrighted works are being used to train AI models.

And Nick, if you'll pull up the text from the bill that I pulled out here real quick, we can take just a quick look. It's a very short bill. It's only five pages long. And it defines a generative AI model that's a combination of computer code and numerical values designed to use artificial intelligence to generate outputs in the form of text, images, audio, or video, and that it substantially incorporates one or more models as a system, and it's designed for use by consumers.

And what the bill then asks is that anyone developing these models has to submit to a register run by the federal government, a list of all of the data that they use that might be copyrighted to train the model and that this becomes a precursor to being able to legally develop and use AI models that you actually have to register the training data.

So I have a rant on this, which I'm going to preserve for the end given my rights as moderator here today. But I'd love the reaction from Sachs first on Schiff's proposed bill to moth. And we'll run this one around the horn pretty quick. Well, first of all, I think it's too soon for this legislation.

I mean, the first thing that needs to happen is we need to get the question of fair use arbitrated by the courts. We've talked about this before. People publish lots of information on the internet. And I guess technically, it's copyrighted, but it's been published in a completely public way.

And humans are obviously allowed to read it and use it to generate their own work. I think there's a question about whether AIs are allowed to learn from it as well. And I would argue that they should be to some degree under fair use. Maybe if you're talking about copyrighted songs, I don't know if that's different.

Anyway, these questions need to be arbitrated. And once we know that, then we'll know whether there's a need for a rights clearinghouse of some kind, which may not be a bad idea. I actually got pitched by a founder recently to create a rights marketplace with copyright holders on the one side or rights holders could be musicians, could be movie studios, could be anyone who owns content, and then AI companies on the other that want to license that content for training purposes.

And I actually thought it was a pretty good idea. So my point is just that there are entrepreneurs working on solving this problem as well. And I guess what I'm saying is, I'd like to see fair use figured out. And I'd like to see what the private solutions are going to be before we try to legislate this problem away from really a point of ignorance, because we're so early in the development of this market.

Now, I think one of the questions you have to ask here is, why did Adam Schiff introduce this bill? And who is Adam Schiff? Adam Schiff is a powerful California congressman who is the candidate for US Senate right now. And he's expected to win. He's ahead of Steve Garvey, who's the Republican candidate by like 30 points.

Schiff is, in addition to being a vicious partisan who's known for for Russiagate, he also is a prodigious fundraiser. And when he's not in front of the cameras, he's very effective in closed doors appealing to the key special interests in California that matter. And my guess is that he's not carrying water here for the 100 musicians who signed that letter.

He's carrying water for the big studios, the big Hollywood studios, including music labels, but also the movie studios. And he's an LA based congressman. Yeah, I mean, that's who he's representing. Now, at the same time, my guess is that he's run this by the big tech companies, and he's probably got their blessing to some degree, because like Bill Gurley always points out, they like rules like this, because of regulatory capture, they can comply with them.

But the little guy, the entrepreneur who's trying to create something new has a much harder time complying with these regulations. So this is basically a big special interest group sort of deal that I think he's he's putting forward. Do you think this becomes law? Not yet, but it's paving the way for something.

And it's more like his promotional effort during his campaign effectively. Well, I mean, his move it legislatively, but yeah, I mean, the big LA powers that be like this, and they love this. Yeah, yeah. Any reaction to this bill? I think there was an article in The Verge that I posted.

It turns out that OpenAI transcribed over a million hours of YouTube videos to train GPT-4. My takeaway when I read this was, well, if Google's not going to sue OpenAI, then this is a moot point. Because you're talking about one of the most valuable companies in the world with one of the most valuable sources of training data in the world.

And so if that if it's true that there was a copyright violation, and Google just lets us go, what's anybody else supposed to do? What chance does these group of singer songwriters have? And you know, no offense to Adam Schiff, but he's not going to be able to do anything.

So if this multi trillion dollar company doesn't draw a line in the sand, then none of this matters. And everybody's going to train on everything. I think, like, my big takeaway on all this is that there's a real deep misunderstanding on what these models really are, and what they're doing.

The assumption, I think, naively, is that they take in a bunch of data, and then they spit that data back out. And in some cases, maybe slightly transformed. But the truth is that the models don't actually hold the data that they're trained on. They develop a bunch of synthesized predictors, that they learn what the prediction could or should be from the data.

And this is similar to how humans operate. Can you pull up the article, Nick that I posted? This article is from last May. And you guys may remember this case. I can't remember if we talked about it on the show. But Ed Sheeran was sued by the estate of the writer of the Marvin Gaye song, Let's Get It On, for infringement in his song Thinking Out Loud.

And he actually prevailed in court, where he went through with the jury, how he comes up with how he runs his creative process, how he came up with the song, and how he does his work. And as you know, Ed Sheeran, and nearly every musician or every artist listens to other people's music, looks at other people's art, and they synthesize that data, they synthesize that knowledge and that experience into their own creative process to output what in their mind is a novel creation.

And I think that AI works in a similar vein in that it's not actually storing the images, it's not actually storing the music of third parties. It's learning from that process. We all like musicians learn on classical music, they listen to and play other pop artists music. And then they learn things that they like things that they don't like things that fit together well, certain intonation, syncopations, and that's how they develop their own tracks.

And so I think that the assumption in AI is that it's almost guilty until proven innocent is what's going to really challenge this technology, getting mainstay appeal and being useful in the way that it could and should be that the de facto is that it's learning and training is copyright.

I don't I don't buy that. I don't buy that. No, let's use the data. No, that that just because you're learning like a human, it's not copyright infringement. And I'm sorry, let me let me make my last statement, which is that I do think that similarity is measurable. And that is copyright infringement.

So I would rather than focus on how you train the model, I would encourage legislators to find, as Saks points out, a better process to define what makes one thing distinct from another, run that analysis, and then use that analysis to determine uniqueness. And that analysis is ultimately what should determine whether there is copyright infringement versus the how was the model trained exercise, which is wrought with challenges, as you guys know, how do you determine weightings?

How do you determine whether this was even relevant in the model? We don't even know if the models ignore the data or use the data in their synthesis or in their weightings. It's all very opaque. And so it's almost like, hey, here's a list of stuff that I read.

But I may not have even paid attention to 95% of it. When I was reading it. We don't know. And so I'd rather focus on is there copyright infringement in the output? Does the output mimic an original copyrighted source? And if it does, then that's where the infringement should lie, not on the How did you do it?

I think that you're creating an impossible standard. Is it 5%? The same? Is it 8%? The same is that 14%? Where's your threshold? Is it different than training? How's that different than training? If I'm JK Rowling? Am I not allowed to read other authors copyrighted books for fear that by reading it, I will now use their copyrighted material in my novel book?

No. Okay, stick with that example. But we can also use the Ed Sheeran example. Nick, can you play this video? I could play you every song in the pop charts right now over four chords. You name any song and I'll play it in the four chords. So these, these are the chords.

Messenger. Your friend because you only need the light when it's burning low. Only miss the song when it starts to snow. Only know your lover when you let it go. Let it be. I'm walking away Craig David. Greg David. I'm walking away from the troubles in my life. Last one.

Let it be Beatles. When I find myself in times of trouble. Why is that important? Obviously, it's not illegal for Ed to have learned these four chords. But if he tries to produce those songs and calls them something else, that's clearly somebody else's IP. Similarly, I think that if you don't give people the right to say, yeah, of course, the letters A, B, C, D, E, F, G, all the way to Z are not my invention.

It's the alphabet. I don't control that. I don't control words and their meanings. But when I put one word in front of another in front of another purposefully, and I create something that has value to me, I should have the right to protect that. And I think that's the fundamental question.

Should you not have a right to protect it? Should you allow somebody else to take that? And in some opaque way, and undefinable way, make a system that could compete with that thing and have no repercussions. I think that that's what people need to decide. And I'm fine, by the way, one way or the other.

Yeah, in the Ed Sheeran case, he was saying the exact copyrighted lyrics. And he was singing the exact copyrighted melody. He was just playing the harmony with four chords. I mean, that was kind of the point he was making. And in the case of all the copyrighted material, you're stating, I want to protect it from showing up in the end product of someone's creative process.

I shouldn't care about them listening to my song in their creative process. Everyone always references how Oasis sounds like the Beatles, right? Those guys love the Beatles, they listen to the Beatles, so much of their music mimics and sounds like the Beatles, but the Beatles aren't going to file infringement suits against them.

They were inspired by the Beatles, that was part of their creative process. And so I would argue that the output should really be where we assess this stuff. And it's going to take a lot of cases, you're creating an impossible standard where no any individual person will have the economic wherewithal to fight this.

And so it's basically seeding all creativity to the board. And I don't get what is what is the standard of measuring how someone is training their creative process? Your standard is I got to go I don't think I got to go listen, I got to go you got to tell me every time you as an artist, listen to a song, and then I'm going to determine whether or not you are listening to copyright music and making your own music.

That's basically what we're asking for here with this. That's not what I don't I'm not talking about the bill. I'm talking about this idea that if you train a system that can actually automate a task for you, based on some learning that's unique, you should be able to uniquely protect your ownership.

For example, we have a different set of ways in order to protect processes that are unique to you, which is, you can have a patent, or you can have a trade secret. But if you strip all of this stuff away, where some system can in an automated way do anything for you, and replicate a whole bunch of work that it sits on top of to be able to do that without any repercussions.

I think that that's a very important explicit decision. And what I'm saying is, you cannot expect individual people to go and fight these little battles against these big multi hundred billion dollar companies. If the big multi hundred billion dollar companies and trillion dollar companies don't fight the other multi hundred billion dollar and trillion dollar companies, what they're effectively saying is none of this is worth anything.

Copyrights are worth nothing. And I'm okay with that decision. But it should be an explicit one. And it's not going to happen the other way where some five page law from a guy who's trying to get elected is not the thing that's going to make the difference. The difference is, if Google doesn't sue open AI, it means copyright is worthless.

And by the way, that article didn't just point the finger at Google. It pointed the finger at meta where there were explicit decisions to say, Yeah, no, let's just violate the copyright. It's, it's okay. And if it's okay, then it's okay. Saks, you're the independent arbiter here. Any summary?

Well, somebody's gonna litigate it. Somebody's gonna get gonna litigate it. You're right, it'd be surprising if Google didn't want to, given how valuable their YouTube content is, and a competitor, you know, slurped it up to train their model. But somebody will will litigate this, it could be the songwriters, who knows.

And then we're gonna we're gonna get some messy arbitration around fair use, and it's probably gonna work its way up over the different circuit courts, you'll probably get different judgments. And finally, the Supreme Court will resolve it. And then we'll kind of know where things stand. And then and then there'll be a legislative fix.

I don't know where it's going to end up. I mean, I know what Jay cow would say if he were here, I'm sure he's like chomping at the bit be part of this conversation. He would say that creators deserve to get paid for their AI rights. And that if you want to make money training a model on their content, you got to compensate them.

I also I buy I buy your argument too, which is you're not really violating their their rights for the model to to read their content and analyze it, which is what it's really doing as long as it doesn't output a violation of their copyright. And that's what all artists do.

That's what all humans do. The creative process is one of initially synthesis. You learn from other people's works, you learn from the environment around you, you learn from the world that you're exposed, there was compensation in those other models. There was not you don't of course, Oasis never paid the Beatles to listen to their music.

They know that's not true. They listened on the radio, they may not have paid, but some advertiser paid for an ad. The radio station had to pay ASCAP and BMI, there was publishing rights, there was all kinds of other rights. So that's not true what you're saying. I'm not what I'm what I'm saying is it's not copyright just because somebody got paid.

So that singer songwriter did get paid, they may not have getting paid by the listener. But in this example, nobody's getting paid. Look, I think there's three potential outcomes here. Okay, outcome number one is that Freiburg wins. And the courts decide that this is fair use. And these AI companies aren't in violation of copyright infringement is measured in the work of art that is produced, not in the process by which it is generated.

Right? Okay, so that's solution number one. I think solution or outcome number two is that the courts throw a big wrench into it or a bill like schist bill, which is largely punitive, throws a big wrench into it. And I think what happens then is new AI companies have a really hard time accumulating training data.

And so the incumbents who already have all the training data, they may have to pay a fine, there'll be some slap on the wrist. But now you've created a real moat and barrier to entry. And so secretly, they're going to love it. And it's going to be a big problem, I think, for the open source movement.

So that's outcome number two. And then outcome number three is you create some sort of rights clearinghouse, kind of like exists in the recording industry, where if you want to cover somebody's song or perform somebody else's song, there's already predefined terms on which you can use those rights. And then there's a compensation mechanism for that.

So you don't have to go negotiate every single deal that you want to do, you can just use the song, you can use the rights, and there's again, compensation for that. That would be like the compromise, I could see that alternative number three existing, in which case, the incumbents probably like that, because they again, they want there to be a barrier to entry.

They want to make it hard for the guy in the garage, to pony up the capital necessary to create a new model. But at least that would be a somewhat functional system, it wouldn't be outcome number two, which would totally put the kibosh on the use of training data.

So in any event, I don't know which one of the three it's going to be. But those are the three potential outcomes I see happening here. Have you guys seen you do you dio? No, it's like a new music gen AI system. It is friggin unbelievable. Is that the notes thing or the notes another thing?

I think the notes another thing this one just came out, it was apparently rumored for a while ex DeepMind employees started you do it's been this kind of like hot stealth company. For a couple of months, people have been talking about it as rumored to be the best music AI.

But here is someone that said, Dune the Broadway musical, and this is what it output. Go ahead. That's crazy. You can hear the layers of music, the layers of the tracks, the smoothness, the tempo, obviously, like there's just so many layers to this. Nick, can you pull up another one?

Some of these are just incredible, because it spans genres. It spans styles. It's like so beautiful, like the way it's put together every every piece feels somewhat emotional. It's unique. It really doesn't feel like you're just listening to someone printing copyright music. funky dance pop song. Create a birthday song for my friend urban.

Create an Irish folk tune with violin and instrumental. It's pretty incredible. And I think it shows the state of the art is such now that this is going to become a real challenging question from a legislative point of view. Given how far ahead these technologies have gotten, and I think that musicians, artists, consumers are going to start to use these tools in a really prolific way, given how good they are now.

I heard from someone that just sat for hours, creating tracks that they listened to on UDO the other day. And so you basically just playing your own music all day long. It's really incredible. Anyway, exciting time. Hopefully all the lawsuits and the legislators don't get in the way of all this innovation, because it's moving really fast.

And we should just kind of see where it goes before trying to clamp down. Totally. Guys, I want to talk about, as you know, this like emerging trend that we've been talking about offline about drones in warfare. Recently, we saw small drones controlled by the Houthis attack cargo vessels in the Suez Canal.

It led to rather large scale supply disruptions, economic value destruction. We've seen videos, sex, I think you have one, we can pull it up and take a look of Ukrainian controlled drones flying into destroy tanks and large warehouses in Russian held territories, causing 10s of millions of dollars of damage.

I think we're seeing the acceleration of the changing face of warfare technology, lots of these small form factor, low cost autonomous physical agents. And I think there's a bunch of implications both with respect to war, but also how we spend money on defense, and how Silicon Valley is involved in response.

tax, I'd love to hear your points of view. Maybe you can highlight for us some of the things you've been seeing in the utilization of these new technologies and in the war, given our your our in house work correspondent, and you obviously do some work in Silicon Valley. Go ahead.

I've heard a lot about the impact of drones just by watching the coverage of the Ukraine war. I was listening to an interview with an American mercenary who's fighting on the side of Ukraine, and he described how ubiquitous these drones were on the battlefield. Now he said that you literally can't get out of a trench to go to the bathroom because a drone will basically get you.

And he said they're buzzing around, they sound like mosquitoes, because they're kind of just everywhere on the battlefield. Both Ukraine and Russia have them. And several months ago going into this year, as long as he said that this would be the big game changer for Ukraine, they're going to make a million drones.

I don't think it's worked out that way. It turns out that as many drones as Ukrainians have been able to put on the battlefield, the Russians have even more, because they're able to mass produce them in factories, they've got bigger drones, better drones. And I think the most important variable in the war so far, with respect to drones is that the Russians have pretty advanced electronic warfare.

And so they've been able to jam a lot of the Ukrainian drones, whereas the reverse has not been true for the Ukrainians. So I would say that drones have been a huge factor in the war. But so far, the balance there is tipping towards the Russians as it is in so many other areas as well.

But to your larger point, there's no question this is the future of warfare. And you're seeing that it's creating a lot of opportunities for asymmetric warfare. So for example, with the hoodies, they've been firing cheap missiles and drones at our at our ships in the Red Sea, and we've been having to spend $2 million air defense missiles shooting down $2,000 drones.

So if that continues, and we don't have a good response to this problem, it's going to really change the balance of power. I don't know if this was at our summit, or if I heard this later from some senior person in the military, who said that aircraft carriers are outdated technology, like they don't make sense anymore.

And we're going to see a shift towards lots of small, autonomous drone like systems on the battlefield taking out targets. And as a result, if you gain theory this out, the necessity for defense systems against large amounts of swarming drone like systems. And then, you know, what do you actually have to do with your existing military architecture to play into this kind of new tactical system?

And then that's going to require a massive evolution in technology. And is the United States prepared? Should Silicon Valley play should be, we should I maybe Nick, you can throw up this the first link that I sent you. But eight years ago, I came to this conclusion. And I invested in this company called sail drone, which is autonomous drones in the seas, our customers include the US Navy, the chairman of our company actually is Admiral Mike Mullen, who is a former chairman of the Joint Chiefs of Staff.

But these drones are capable of going into some of the most dangerous places in the world, and collecting enormous amounts of surveillance data and information that otherwise takes the United States government lots of time and lots of money, and is pretty scattershot. And instead with these things, you can be constantly in hotspots.

And if you go to the next one, so much so that you know, we've deployed some of these drones in the Middle East, and there was a point at which the Iranian Navy intercepted two of our drones and pick them up. And this was kind of like a global thing a few years ago.

But I really believe in this trend. And I think that we have an enormous responsibility to be funding these things. These are really complicated systems to build, obviously, and they take lots of time. So these are not overnight successes, Friedberg, and they take lots of money, which is hard to come by as well.

But these are absolutely the right kinds of businesses, because eventually, at a minimum, you're building systems that can measure and collect enormous amounts of really critical data, so that people can make better decisions, which hopefully is measured in saving life, right. And then over time, you actually get to a military that should be much cheaper, much safer, and has fewer people in general on our side and on our enemy sides on the front lines, which means fewer casualties.

And I think that that's the whole value of this entire movement. It's cheaper, it's way better. It's much more useful. And it gives the respective armies that use these things or militaries rather, a fuller picture so that you can make decisions that have enormous consequences. Yeah. And in February, the Department of Defense on a panel in Arlington, Virginia, briefed reporters and industry folks on their interest in growing their partnerships in Silicon Valley, to access the necessary technologies that are going to rewrite the face of warfare.

I don't know about you guys, but I've seen kind of two sides of this in Silicon Valley. A good number of venture capitalists and entrepreneurs and technologists think that it's morally incorrect to support warfare technology. And then there are a few that are going blazing ahead with supporting this new evolution and these technologies.

Do you guys see the same? And is there going to be kind of this? It's a big step to weaponize these things, right? So Saildrone, we have a very good, big, thriving, successful business. These machines aren't weaponized by any stretch of the imagination. And so I think that that comment is more genuflecting and virtue signaling than it is real.

Because in order to even be legitimately considered for some kind of like armed, unmanned product, you have to be deep inside of the bowels of the DoD and Pentagon and have been working with them for years, don't even be taken seriously. So the startups that are like eschewing those deals are not even close to those deals.

And the startups that are close to them are probably being much more quiet and thoughtful and hush hush, because the path to do that isn't legitimate unless you've been in business with these folks for 10 plus years. Yeah, I think it's, it's more commentary on the fact that if this is where an organization, the Department of Defense that has a trillion dollar annual budget is going to be allocating resources, that technology is going to need to come from somewhere.

And the investors in Silicon Valley, that are making these investments are likely going to outperform those who are not. Does that sound reasonable to you, Sax, that there is this shift underway? And that, again, those who have shied away from defense technology are, you know, necessarily going to be left out of a, you know, kind of a new industry that's emerging in Silicon Valley?

Well, I guess the way I put it is that the US government spends over $800 billion every year on defense. And it's not clear what we're getting for that money. Because in Ukraine, for example, we've run out of artillery shells, we've actually we've run out of patriots, we've run out of javelins, we're on a stinger.

So we're spending all this money, we're not getting a lot for it. And part of the reason is because the defense industry is consolidated down to these five prime defense contractors who are basically an oligopoly. And we have this cost plus procurement system where they just raise their prices every year and the government pays it.

So I think all of us want the United States to have an effective defense. I mean, I want us to use our military power more wisely. I don't like all these stupid wars we keep getting in. But I do want the United States as an American to be the most powerful country.

I do want us to get the best value for our defense dollars. And the only way that's going to change is if the defense industry gets disrupted by a bunch of startups doing innovative things. And there's no question that I think drones are the future of warfare. To your point about autonomy, I think that is where this is going next is that right now, the drones are typically controlled by, you know, somebody with like a VR headset, tele operated, operated and their FPV, this first person vision drone, and you basically strap some sort of explosive on to it, and then you drive it into whatever your target is.

Yeah. Those types of drones are easier to disrupt by electronic warfare, because if you can disrupt the signal from the tele operator, then the drone basically doesn't know what to do. And so you're right, the next step here is autonomous systems that can be programmed with a target and can find it on its own, make decisions on its own.

And then they also build in some shielding against some of this like jamming technology or this EW electronic warfare technology. So that's where all these things, that's where the battlefield is of the future is headed. And, you know, in a weird way, if you think about humans becoming a smaller and smaller piece of the battlefield, and autonomous drones becoming a larger and larger piece of it, these wars become resource wars, and that's right, actually, technology wars.

That's right, which which may or may not be good. I don't know. But by the way, so this is the point I wanted to make, if you pull up this chart, if that is where warfare is headed, is a large number of small autonomous systems that go and find a target and try and execute a mission.

And, you know, in the case of Ukraine, saying they want to have a million, China might say, I want to have 100 million, all of these systems are dependent on lithium ion battery systems. Today, 79% of lithium ion battery production comes out of China. The US is only 6.2% of global lithium ion battery production.

And China has talked about scaling up drone manufacturing to a level that the US simply cannot even contemplate in its industrial architecture today. So it seems to me that if that is where warfare tactically is headed, that China has a huge leg up, and is going to become a critical point of dependency for the United States to develop an arsenal necessary to be competitive in this this kind of next evolution of warfare.

I will say that, like, if you then game theory this out, like how do you defend against these autonomous electronic systems, there's a technology called EMP or electromagnetic pulsing, where, as you guys know, if you run a very high current electric field, you can actually send out and emit a pulse that then when it hits electronic circuits far away, induces a high electric current in those circuits and short circuits them.

So EMPs are a defense system that allow you to take out electronic systems. And this has been, you know, kind of a part of warfare, since probably the 1960s 50s, but targeted EMPs and targeted systems for eliminating all of these autonomous systems becomes a new defense technology that I know several startups in Silicon Valley that have been funded with a lot of capital by folks that we all know very well, that are kind of pursuing this, we don't have a choice.

Because I think the point is that if you just make me just post this photo, we have an enormous human capital problem with the military, which is there's just not enough folks enlisting anymore. So we don't have any choice except to automate and become drone dependent. Just tell us these numbers.

This is a chart from the Department of Defense that shows military enlistments looking back from about the 1970s, through today. And these are two lines that are just going from the upper left to the lower right. And so we're at all time lows with respect to the number of people that actually want to join the military.

And so if we are supposed to, as Zach said, be this very sharp fighting force, then all of the money that we're spending needs to get allocated into things that can be remotely operated. We don't have a choice. Yeah. I mean, so Freeberg, you asked the question, how do we defend against these drones?

Yes, there's EMP technology. If you want to use an EMP, you better make sure there's not any planes nearby, because it will take them out of the sky, you better make sure. By the way, there are now, you can target EMPs in a narrow cone, which is part of the technology evolution.

Yeah, you better make sure you don't hit any of your own stuff, because you'll fire the electronics on those unless you EMP harden them, which by the way, will happen. I mean, if the US gets really good at sending out EMP pulses, then our opponents will start EMP hardening their drones.

But anyway, yes, it's a category of defense. So is electronic warfare. The one defense investment I've made is actually in this idea of how do you defend against drones. And it's a startup where I led the seed round called Allen Control Systems, and they have a product called Bullfrog, which is a gun turret that uses a standard M240 machine gun.

But it's got a scanner next to it, next to the machine gun that is searching the sky for enemy drones. And it uses computer vision to recognize them, and then it just shoots them down like very quickly. And it seems to me this is, it's maybe not the only way of doing it, but it's a really good way of doing it because you can mount these things to a vehicle.

I mean, imagine in the future, that we have these autonomous drones everywhere that are basically assassination drones. How are you going to stop them? I mean, how do you move the President of the United States around? I mean, in his caravan, you're going to have to have, you know, his caravan is going to have to have some sort of electronic warfare system on it to basically prevent drones, but it's gonna need some sort of last line of defense where you can actually shoot a drone out of the sky.

Or he stays in his basement. So Sax, you don't have any moral trepidation around investing in defense technology, just to be clear? Well, you know, I'd have to think twice about investing in a weapon. This is more of a defense technology. This is defensive in nature where you're trying to take out a drone that would be attacking one of our bases or installations or convoys.

So this is fundamentally defensive in nature. And look, I want America to be the most powerful country. I'm an American, I'm patriotic. So I don't want our troops to be hit by enemy drones. So no, I don't have any moral problem with this. I do have a problem with all the stupid wars the United States gets into, but that's on a policy level.

I feel like that's separate from the question of do we want our guys to be protected? Yes, we do. And Chamath, you don't care, you would invest in defense technology companies. No, I care. I think that I would probably have to think twice about making weapons. I'm not sure that I'm really interested in that.

But like I said, eight years ago, my thought was we need to move to just looking at those trends, we need to move to an entire surface area of unmanned autonomous vehicles. And I really liked this idea of a class of machine that's there to surveil and collect all the important data so that you can make better decisions.

And it's taken us eight years, but we're firmly entrenched now. I think the fact that both of you highlight a degree of trepidation, and you guys are like fairly outside of the middle bounds of how Silicon Valley would think and make decisions indicates like why so much of Silicon Valley has deep concerns about investing in defense technology.

And the US, despite having the best technology, may be challenged by the fact that our Silicon Valley technologists and investors are held back on pursuing these evolutions because of a moral suasion. And I think it is something that the Department of Defense has highlighted. No, I want to be clear though, it's never like we've been faced with that choice.

And the reality is like, if the choice is stay small, or scale up and be really big, you know, it's hard to turn away from that decision. But that choice isn't a realistic one. This is why I was saying, I think it's, you can come into it with the moral framing.

But I do think that Sachs is right, which is, if you believe that America should be the most important country in the world, and you have the ability to help it be that, eventually, some of those decisions will come in contact with this kind of decision. And usually, though, it takes many, many years before that's realistic.

And to be honest, from what I've seen, the opportunity to pursue that is generally so financially remunerative that everybody's like, Okay, I think we have to do you know, I don't have a problem with investing in a company like and roll. I mean, America needs defense companies in order to maintain its defense.

And the problem right now that we have is there's these five prime companies that are antiquated and really expensive. And we need startup disruptors to that. So I'm not like, morally opposed to it. And in fact, I think it's probably a good thing. I think my concern would be, I don't really want to be part of the military industrial complex.

I feel like it might, like, corrupt my views on things like I don't want to know you want war, you'd be girding for Yeah, like, I don't want to be I don't want to feel that's your dimension. That's Yeah, right. I don't want to feel an incentive to be like these generals who go on CNN and Fox News and justify every single war.

That's my biggest fear as well. It's like, it's one thing to be investing in a bunch of companies where we're sitting around hoping for cheaper clicks on Facebook and Google. It's an entirely other thing to sit on the board of a company and hope for war. That's a horrible place to be in.

On that point. That's a great point to wrap on, guys. This has been fun. A little more flat than it would normally be with Jay cow. We miss him. We wish him well, we hope his tooth recovers. And we will be back with your it's like that scene in Dune where he eats his tooth and releases that poison gas.

That's right. Get better soon. J. cow. Please, if you're interested in the summit, summit that all in podcast.co. Click Subscribe on YouTube. I've been given notes to say that for the chairman dictator Chamath Palihapitiya, the rain man David Sachs, I am your Sultan of science day Friedberg. We will see you guys next week.

We open source it to the fans and they've just gone crazy. We should all just get a room and just have one big huge orgy because they're all just useless. It's like this like sexual tension, but they just need to release it. I'm going all in. I'm going all in.