E121: Macro update, Fed hike, CRE debt bubble, Balaji's Bitcoin bet, TikTok's endgame & more

00:00:00.000 | What are you eating freeberg? Is that buffalo jerky? What is

00:00:02.600 | that? It's a red pepper. It is not the bolt on

00:00:04.880 | lunch. I got I got pistachios. And I got

00:00:07.640 | Oh, wait, wait, look at this.

00:00:09.480 | branded pistachios. Are these the best pistachios? They're the

00:00:16.600 | best salt and vinegar. Yeah.

00:00:17.920 | Are those unpublished? These guys are so rich. People peel

00:00:24.720 | their nuts. People have been peeling my nuts since the

00:00:26.960 | Facebook IPL.

00:00:27.840 | Oh,

00:00:28.680 | everybody, welcome to Episode 121 of the world's greatest

00:00:50.600 | podcast, the all in podcast with me again, of course, the

00:00:54.400 | dictator himself, Chamath Palihapitiya, the Sultan of

00:00:57.680 | science, David Friedberg, and the rain man himself. Yeah,

00:01:03.280 | definitely. David Sachs, gentlemen, how are you doing?

00:01:06.760 | The world's greatest genuflector.

00:01:08.600 | The world's greatest moderator is here. Oh, this you guys, I

00:01:13.920 | got to tell you something, the grift is on a lot of corporate

00:01:17.080 | gigs for me to moderate. I don't even have to prepare. I just

00:01:20.000 | show up and moderate.

00:01:21.920 | So great. What is an example of such a such a gig?

00:01:24.720 | There's a lot of corporations and conferences that pay a

00:01:28.280 | pretty penny to have the world's greatest moderator come and

00:01:31.400 | interview people. This is like the used car parts Association

00:01:34.200 | of America. I think I did one with like 1000 litigators at an

00:01:40.000 | attorney conference for like the SAS software they all use and it

00:01:42.640 | was a wonderful far side. You know, it's great. This is like

00:01:45.360 | the grift is

00:01:45.800 | do you have to fly commercial? Where they fly private?

00:01:50.760 | It's commercial at this point. Yeah.

00:01:52.240 | What is your what is your rider say? What kind of you want? Do

00:01:55.080 | you ask for spice salted macadamia nuts?

00:01:57.600 | I do not have to build my nuts. No. What I do is I blend the

00:02:02.600 | travel costs into the speaking fee. And then nobody knows when

00:02:06.680 | I'm in or out what hotel I'm staying at or whatever. But

00:02:09.040 | basically, I'm back on the road, folks. I'm back.

00:02:11.760 | Do you get like a trailer? Do you get? You know,

00:02:14.040 | no, no, no. What he's saying is, no, what he's saying is he

00:02:17.040 | gets a $2,500 travel budget. And instead, he comes the day of and

00:02:21.880 | leaves the day of saving and netting himself an extra 2500.

00:02:25.120 | Well, you know, you can optimize if you're saying optimize I did

00:02:29.040 | use I had, you know, during COVID I racked up a million and a

00:02:32.600 | half 2 million of these United points. And I have just been

00:02:35.520 | grinding those United points down. So shout out to United and

00:02:39.040 | the pandemic. All right, there's a lot of news.

00:02:41.520 | So you're right, your mouth's even worse than that.

00:02:43.240 | It's even worse than that for travel expenses when he's not

00:02:45.840 | even paying anything.

00:02:46.680 | Maybe Jason's part of the part of the grifters using the cash

00:02:51.200 | app to commit fraud and murder.

00:02:52.840 | I mean, that Hindenburg report is, I mean, it's a work of art,

00:02:58.800 | but we got to start with the Fed hiking rates by 25 basis points.

00:03:03.160 | And the general feeling in the country that maybe the Fed

00:03:08.240 | doesn't know what they're doing. And maybe it's time for regime

00:03:12.480 | change. The Fed increased rates by 25 basis points yesterday,

00:03:16.040 | Wednesday. So the Fed has increased the federal funds rate

00:03:20.400 | from nearly zero in March of 2022. To now the range of 4.75

00:03:25.840 | to 5% fastest rate hike since the 70s. speculation, the Fed

00:03:29.760 | might pause rate hikes, or even cut due to the recent banking

00:03:35.960 | failures didn't happen. So if you bet that they were going to

00:03:39.400 | pause, you were wrong. If you bet they were going to cut, you

00:03:41.560 | were also wrong. But the market has ripped a bit a day after

00:03:47.080 | I eat which people are trying to figure out in the group chats

00:03:51.080 | doesn't seem like anybody has a theory here. But let's start

00:03:55.000 | with sacks. Maybe an explainer a little bit on how the Fed works.

00:04:00.840 | There's a board there, people serve a 14 year term. I guess

00:04:06.840 | they replace somebody every two years. And Jerome Powell was

00:04:11.560 | placed in 2018 by Trump. And I guess there's a lot of hand

00:04:19.240 | ringing now that they were late on inflation, obviously. And

00:04:24.400 | then they went too fast. And maybe now they're not slowing

00:04:26.520 | down enough. So what's your take on it objectively sex, putting

00:04:29.920 | aside partisanship and, you know, for this administration

00:04:33.040 | versus that administration, just objectively, do they know what

00:04:36.040 | they're doing? And how could they do a better job?

00:04:38.120 | No, I don't think they know what they're doing. They clearly

00:04:40.440 | reacted way too late to the inflation. We've talked about

00:04:42.920 | this before we had that surprise inflation print in the summer of

00:04:46.280 | 2021 5.1%. They said it was transitory. They didn't react

00:04:52.240 | until November, they continued to eat for another six months.

00:04:55.360 | And they've suddenly got hawkish in November of 2021. And they

00:04:58.720 | didn't even start the first rate increase until March of 2022. So

00:05:02.880 | they were really asleep at the wheel and late to react to the

00:05:06.760 | inflation by about nine months. Now I think they're potentially

00:05:10.600 | making the opposite decision, which is they are late to

00:05:14.840 | recognize what stress and distress the economy is under

00:05:19.760 | right now. And pal had there was three choices they could have

00:05:24.600 | made at this meeting, they could have raised rates, which is what

00:05:27.000 | they did. They could have cut rates, which they didn't, or

00:05:29.640 | they could have done nothing basically held pat. And the

00:05:33.560 | argument for raising rates is just that while we have this

00:05:35.800 | inflation problem, we need to keep raising interest rates

00:05:38.200 | until the rates are above inflation, and that will bring

00:05:41.880 | inflation down, then you can start to lower rates. That's

00:05:43.680 | sort of the conventional view. I think the problem with that view

00:05:47.120 | is it ignores that we've just seen a run of bank failures. And

00:05:51.600 | there's tremendous stress building up in the banking

00:05:54.120 | system, from unrealized losses on long dated bonds. Also,

00:05:58.920 | unrealized losses on commercial real estate loans. And we've

00:06:03.360 | barely scratched the surface of seeing that problem. That's I

00:06:05.720 | think, the next shoe to drop in this whole thing. So I think

00:06:09.560 | that the right decision here was to either cut rates or to stand

00:06:14.920 | pat, you may have seen that Elon said, Listen, we should be

00:06:18.080 | cutting rates here. There's way too much latency in this

00:06:20.360 | inflation data, the economy is seizing up. And we don't need to

00:06:24.320 | be raising rates right now, we actually need to be cutting

00:06:26.760 | them. I think that probably, if it were me, looking at the

00:06:31.440 | upside downside of these decisions, I probably would

00:06:33.360 | have just stood pat because, again, we've just seen this

00:06:36.240 | banking crisis, why won't you just wait one month to see,

00:06:39.920 | maybe there is latency in the inflation data, maybe that

00:06:42.320 | banking crisis is not over. Why won't you just stand pat for one

00:06:45.600 | month, you can always raise rates in a month. I think that

00:06:48.280 | this move here could, in hindsight be seen as the straw

00:06:51.440 | that breaks the camel's back.

00:06:52.600 | Chamath, would you have paused and waited to see another card?

00:06:56.560 | And then watch the hand developed? Or do you think

00:06:59.320 | they're doing the right thing by raising or should they have cut?

00:07:01.520 | I think they did the worst thing possible, which is they took the

00:07:04.600 | middle path. If you think about what the Fed has the ability to

00:07:10.400 | do, they obviously have the ability to raise in lower

00:07:13.560 | interest rates. But what we don't talk about is they have a

00:07:16.280 | balance sheet that can absorb assets. For the last 10 or 15

00:07:21.960 | years, we've had a phenomenon called quantitative easing. And

00:07:25.920 | for folks that have don't understand what that means, that

00:07:28.440 | is essentially the Federal Reserve, buying assets out of

00:07:33.760 | the market and giving people money for it so that that people

00:07:36.760 | can then go and buy other things with that money. Last June, they

00:07:41.520 | started what's called quantitative tightening, which

00:07:44.960 | is essentially reversing that policy and restricting the

00:07:48.880 | liquidity in the system. So if you look at those tools, and you

00:07:55.200 | sort of play a game tree on what the Fed could have done, I think

00:08:00.120 | that you have two choices. One is you massively let inflation

00:08:07.200 | run amok, where you have no tools to fix. Or you have massive

00:08:14.880 | illiquidity in the financial system. But you actually do have

00:08:19.000 | tools to fix that, which is through some combination of

00:08:21.840 | quantitative easing and tightening, depending on how

00:08:23.840 | much liquidity you want in the system. So I think actually, I

00:08:27.400 | disagree with sacks, I think they should have done the

00:08:29.560 | opposite, they should have raised 50 bps, it would have

00:08:33.360 | created a little bit more chaos in the short term. But it would

00:08:38.880 | have set us up to understand what was fundamentally broken,

00:08:42.440 | and still give the Federal Reserve the ability to use their

00:08:45.800 | balance sheet and use liquidity in the future to solve the

00:08:49.120 | problem. They took the worst option, which is neither did

00:08:52.440 | they cut, nor did they raise enough. And so this problem that

00:08:57.080 | sacks represents actually is the fundamental problem now, which

00:09:00.480 | is you won't have enough clarity and signal to really know whether

00:09:05.320 | this 25 basis point enough, look, I've maintained now for

00:09:08.320 | nine months, that rates are going to be long, higher than we

00:09:12.160 | like and longer than we want. And so I think it's high time

00:09:15.680 | that we acknowledge that we have a sticky inflation problem,

00:09:20.680 | whose back we have to break. We've known since Volcker era,

00:09:24.800 | what we need to do to do that, which is you need to get interest

00:09:28.320 | rates to be greater than terminal inflation, which means

00:09:32.920 | that a 5% Fed funds rate is insufficient. So we're going to

00:09:37.160 | need to see a print of five and a half 5.75%. And that's when

00:09:43.040 | you're going to have enough contraction, and then the Fed

00:09:45.200 | can come back with liquidity. But if they don't take these

00:09:48.320 | steps, we're going to be in this very choppy, neither here,

00:09:52.440 | neither there situation. And I think that is what causes the

00:09:55.760 | real damage. Because it's the corrosive effects of uncertainty

00:09:59.680 | and what that does to lending to risk taking and I think is

00:10:02.960 | really bad for the economy.

00:10:04.040 | Freiburg, where do you land we have sack saying they should

00:10:07.400 | have stood Pat, which not saying either go hard, take the

00:10:11.160 | medicine.

00:10:11.760 | I don't know. I'm not like an economist on judging the balance

00:10:17.000 | that they're trying to weigh right now. I think everyone's

00:10:21.160 | got a different you can hear a cacophony of opinions on this

00:10:23.560 | one. What I'm more interested in is you know, we talked a lot

00:10:29.040 | about the banking crisis underway. And I know we're going

00:10:32.400 | to talk about this question on commercial real estate in a

00:10:35.480 | minute. But if you look at the yield on the 10 year Treasury, I

00:10:38.320 | think coming out of this past two weeks, you know, the yield

00:10:44.880 | on the 10 year Treasury dropped from 4.1% down to looks like it

00:10:49.160 | closed at 3.4% today, nearly a point 7% decline in the past two

00:10:55.800 | and a half, three weeks. And that's also off of 3.8% since

00:10:59.600 | the start of the year. And remember when we talked about

00:11:02.520 | the impact on asset values of banks, I think, if you look

00:11:07.480 | holistically at the roughly $7 trillion of assets held at

00:11:12.560 | banks, some, you know, whatever the set of banks that are that

00:11:16.160 | we looked at, the average kind of equity ratio is about 15%. So,

00:11:22.640 | you know, a 2%, or sorry, a 3% adjustment over 10 years on the

00:11:28.120 | Treasury impacts the value of a chunk of that portfolio down 25%,

00:11:32.480 | which starts to put you into dangerous territory. And there's

00:11:35.240 | obviously a distribution of what that does to certain banks that

00:11:39.040 | are overweight, you know, 10 year bonds, whether their loan

00:11:42.520 | obligations on mortgages or treasuries, or corporate bonds,

00:11:46.480 | or real estate bonds, a real estate debt. And so the more

00:11:50.440 | encouraging point that I think we should pay attention to is,

00:11:54.600 | does the market tell us that these short term rate actions

00:11:59.480 | are driving down the long the medium and longer term rates in

00:12:04.320 | a way that will improve the balance sheets of all these

00:12:08.400 | institutions that own a lot of this debt, particularly the

00:12:11.560 | banks and funds and so on. And, you know, I'll do the math here

00:12:15.400 | real quick, but just in the last two weeks, the impact on the 10

00:12:17.760 | year Treasury has probably had a pretty sizable impact, you know,

00:12:21.120 | we talked about unrealized losses, it's reduced those

00:12:23.800 | unrealized losses, it's improved them. So I think that that's

00:12:27.360 | like the more important metric to be tracking is, you know, if

00:12:32.240 | you look at all the assets that we're all worried about right

00:12:34.200 | now, are they going up in value or down in value in a way that

00:12:37.800 | introduces more stability into these kind of banking systems

00:12:41.400 | that we care about? And I think right now, it looks like maybe

00:12:43.680 | things are improving. And that might be part of the optimism

00:12:47.280 | around, you know, equity markets and folks buying and so on.

00:12:49.680 | Yeah. And so this is, I guess, where people have started to

00:12:53.120 | talk about the next shoe to drop, we obviously had this

00:12:56.120 | time based liquidity issues with Silicon Valley Bank. Now, the

00:13:01.840 | Wall Street Journal is talking about commercial real estate and

00:13:04.520 | how much debt there is, since COVID. Obviously, people are

00:13:08.400 | doing more remote work, a lot of the skyscrapers, it's not just

00:13:11.280 | San Francisco, but in many locations remain empty or

00:13:14.000 | underutilized. People are now having their leases come up.

00:13:18.680 | Every year, more and more of these leases will become vacant.

00:13:24.120 | And then we'll see if these buildings are worth what people

00:13:29.280 | paid for them. Smaller banks hold around 2.3 trillion in

00:13:31.800 | commercial and real estate debt, including rental apartment

00:13:34.000 | mortgages. Almost 80% of commercial mortgages are held by

00:13:37.440 | banks, according to this Wall Street Journal story, sacks, you

00:13:39.960 | are an owner of some commercial real estate. And you play in the

00:13:44.200 | space, you have a lot of firsthand knowledge. What what is

00:13:47.520 | your putting aside your personal holdings or exposure? What is

00:13:51.920 | your take on what you're seeing? What is the game on the field

00:13:54.440 | right now in terms of commercial real estate in San Francisco and

00:13:57.720 | beyond?

00:13:58.120 | Well, if you talk to the commercial real estate guys,

00:14:01.000 | they'll tell you that the situation is dire. There's two

00:14:04.320 | dire, the there's two problems. First, there's a credit crunch

00:14:07.880 | going on. So there's just no credit available. If you're a

00:14:11.640 | commercial real estate developer, and you have a

00:14:13.640 | building and you want to refinance your construction loan,

00:14:17.240 | or put long term debt on a building, you just can't do it.

00:14:20.640 | I mean, the banks are not open for business. They literally

00:14:23.200 | don't want the business. And I think that comes back to the

00:14:26.200 | fact that banks right now are hunkered down in a defensive

00:14:29.600 | posture. They're seeing deposits flee from their banks, unless of

00:14:33.760 | course, you're one of the top four.

00:14:35.040 | Is that does that freeze on the banks predate the Silicon Valley

00:14:39.320 | bank crisis, and it was exacerbated? Were people having a

00:14:42.440 | hard time getting loans before that?

00:14:44.160 | It predates it, but definitely what you're seeing what you saw

00:14:46.880 | with SVB and these other banks, including Credit Suisse, is

00:14:51.200 | that, you know, banks now are getting much more paranoid. And

00:14:53.800 | that's why you saw that if you look at the discount window,

00:14:58.520 | which is when the banks go to the Fed as lender of last

00:15:02.560 | resorts, and basically post collateral to get liquidity, we

00:15:07.120 | had the biggest spike in discount window borrowing since

00:15:10.560 | the 2008 financial crisis. Yeah, that line on the right side,

00:15:14.640 | that is that is a spike in one week's borrowing. This exceeds

00:15:18.040 | anything that happened in 2008. The warning sign should be

00:15:21.840 | flashing red over something like this. Now, to bring it back to

00:15:25.840 | be clear, that's banks who have real estate exposure, going to

00:15:29.960 | the Fed going to the government saying, Hey, can we get some

00:15:32.480 | money to cover these?

00:15:33.840 | It's not specifically about real estate is more about bank

00:15:36.400 | liquidity. The banks are saying we don't have enough liquidity

00:15:39.040 | right now to cover our needs, which are highly volatile right

00:15:43.720 | now, because basically depositors are moving out of

00:15:47.400 | community and regional and small banks into the big four, so

00:15:52.640 | called systemically important or SIP banks. So what's happening

00:15:56.960 | is that again, banks are hunkering down, they're getting

00:15:59.480 | very defensive, they do not want to make new loans, because they

00:16:03.400 | can't tie up assets, they are trying to stay liquid

00:16:06.160 | themselves. So that's what's happening now in sort of with

00:16:10.120 | respect to new lending. And then on the other side of it, you

00:16:14.160 | have existing loan portfolios, there's something like $20

00:16:16.760 | trillion of commercial real estate debt. And most commercial

00:16:20.640 | real estate lending is done by small banks by community banks.

00:16:24.720 | So they are sitting on these huge CRE loan portfolios. And I

00:16:28.800 | think something like 300 billion needs to be refinanced or is

00:16:32.800 | coming due in the next year. Normally, that's rolled over and

00:16:36.120 | refinanced. There was separately there was a study showing that

00:16:40.000 | unrealized losses these loan portfolios in the banking system

00:16:43.880 | may be around $2 trillion. It was a study that was reported on

00:16:46.880 | by the Wall Street Journal. So in the same way that we had huge

00:16:50.240 | unrealized losses in these long dated bonds, I think we also

00:16:53.720 | have

00:16:54.080 | at Silicon Valley Bank specifically, that's where we

00:16:56.720 | say the worst offender, but it's a systemic problem. I think

00:17:00.280 | similarly, we have huge unrealized losses in commercial

00:17:04.320 | real estate loan portfolios. And this is, I think, even a more

00:17:08.080 | subtle and pernicious problem, because with securities like T

00:17:12.680 | bills or mortgage bonds, it's very easy to know what the

00:17:15.880 | unrealized losses are. The reason why they hadn't realized

00:17:18.920 | losses was not because they didn't know what they were, it

00:17:20.720 | was because of a stupid accounting rule that said they

00:17:22.880 | didn't have to realize the losses if they were, quote,

00:17:25.800 | unquote, holding them to maturity. With these loan

00:17:28.400 | portfolios, we don't know how big the exposure is. And we

00:17:31.800 | won't know until you start seeing some defaults and

00:17:35.040 | repricings of assets.

00:17:37.120 | And real estate is a much more dynamic market, right? You have

00:17:41.120 | to have a buyer there, you have leases, you have leases coming

00:17:44.760 | off at different times, you have sub leases occurring. And you

00:17:48.160 | have the owners of them flipping them right and refinancing them

00:17:51.480 | constantly to buy new buildings. And so

00:17:53.760 | right, and those loans aren't as liquid, right? With a mortgage

00:17:57.760 | bond, those are basically a bunch of loans, mortgage home

00:18:01.880 | mortgages, typically that have been packaged up and turned

00:18:04.040 | into a security and there's liquid marketplace to trade

00:18:06.680 | them. And the case of these loan portfolios, there may not be a

00:18:09.600 | liquid marketplace. So you don't really know how impaired that

00:18:12.960 | loan portfolio is until you actually get to a place where

00:18:17.080 | when will we know what because that's the thing I'm wondering

00:18:19.960 | we I saw a lot of headlines, you know, Pinterest bought themselves

00:18:24.200 | out of their new headquarters in the Bay Area, San Francisco, I

00:18:26.920 | believe, specifically, I heard Facebook got rid of a couple

00:18:29.680 | billion dollars and wrote down some expansion. Amazon is

00:18:32.920 | selling buildings, they had gotten a ton of buildings. And

00:18:35.640 | we saw last week, they got rid of another 9000. They're

00:18:37.800 | planning another 9000. And they can't get people to come back to

00:18:41.240 | the office. So how bad is the overbill? I guess is the

00:18:45.760 | question, because that will be the driver of the value of these

00:18:50.120 | buildings, because if there's too much supply, then what are

00:18:53.080 | these buildings actually worth? Are they worth $90 a square foot?

00:18:55.440 | What if there's no what if Amazon doesn't want more space,

00:18:57.520 | you can see it in the credit default spreads of these banks,

00:18:59.800 | it's in the water table already. So you can Nick, you can just

00:19:02.680 | throw it up. If you look at any bank that's lending, and that

00:19:05.720 | has a portfolio, this is Deutsche Bank's, you know, euro

00:19:09.360 | denominated CDS. But it's the same for Barclays, it's the same

00:19:13.240 | for sock gen, it's the same for a bunch of American banks, there

00:19:17.160 | is a risk in the system that sacks articulated that is now

00:19:20.280 | getting priced in, there are all kinds of loans whose payments,

00:19:24.680 | which the banks need cannot necessarily be insured, which

00:19:28.960 | means that then there could be illiquidity there, there could

00:19:32.840 | be a flow of deposits out from those banks, which would then

00:19:35.320 | make their ability to pay their debt holders lower. You also

00:19:39.880 | have this complicated issue already, where it's really like

00:19:43.720 | the first time in a long, long, long time where debt holders

00:19:47.640 | actually got wiped out in the credit suisse debacle before the

00:19:51.080 | equity holders did. And that's created all kinds of ripple

00:19:55.920 | effects. So this credit bubble is here, and it's being

00:20:02.520 | manifested right now in these very sophisticated parts of the

00:20:05.760 | market. And eventually, they'll ripple to the broader economy at

00:20:11.400 | large. But how a person feels this is, they're not going to be

00:20:15.040 | able to get a car loan or a mortgage or the interest rates

00:20:17.720 | they pay will go up. And then how bondholders will react to

00:20:22.160 | all of this stuff is they'll just start to find different

00:20:25.080 | assets, probably the front end of the curve money market cash,

00:20:29.840 | gold, and they'll just abandon all these assets. And then the

00:20:34.960 | other problem is that it's just really, really bad for risk

00:20:39.360 | assets. So the things that we invest in startups, technology

00:20:45.920 | companies, either in a world of inflation run amok, because the

00:20:49.040 | Fed isn't hiking fast enough, which just destroys future cash

00:20:52.960 | flows, or in a world where the Fed pivots in a moment like

00:20:57.400 | this, and Nick, you can show the second chart, both result in the

00:21:01.120 | same outcome, which is that you just see these massive

00:21:04.120 | drawdowns in the value of risk assets. So we're in a really

00:21:10.400 | complicated moment. And this is why I think again, the Fed

00:21:15.720 | needed to take leadership this past week and actually do the

00:21:20.040 | hard work of either cutting 50 bps or raising 50 bps. And this

00:21:26.400 | middle path is the absolute worst path because trying to

00:21:30.160 | thread a needle in this complicated economy, I think is

00:21:32.640 | just going to be impossible. And then what happens is then the

00:21:35.680 | markets move around them, right, the markets have completely said

00:21:39.400 | we now discredit what you did. And they're basically banking

00:21:44.800 | that the Fed will be forced to cut rates massively in short

00:21:49.240 | course, because the crisis will be so severe that it'll outweigh

00:21:55.200 | the risk of inflation. Think about that.

00:21:58.440 | Yeah. So all this real estate comes on the market. There's no

00:22:03.200 | buyers for it. The mortgages are due. Does that mean a commercial

00:22:06.800 | real estate owner just basically gets foreclosed on and they hand

00:22:10.320 | the keys back to the bank or the banks as this Wall Street

00:22:13.720 | Journal story was sort of alluding to that the Fed will

00:22:17.320 | say, you know what, we'll just extend will backstop this real

00:22:20.920 | estate, which happened in the last bubble. And we hope that

00:22:24.440 | over time, it works itself out and demand returns. Now, of

00:22:28.160 | course, that's different than a post COVID world. So this time

00:22:31.240 | could be different. What happens in the case of 2024 2025? All

00:22:36.920 | of these office spaces are returned and the keys are handed

00:22:40.240 | back?

00:22:40.520 | Yeah, so okay. So Jason, you asked the question, like, how

00:22:43.480 | does this problem manifest? Let me describe from the point of

00:22:45.320 | view of that real estate owner. There's basically two problems.

00:22:49.200 | One is that you have a tenant who's in a long term lease,

00:22:52.480 | five, 710 years, that lease rolls, so that that lease comes

00:22:56.440 | to you. Now, they don't need the space anymore. You know, we know

00:22:59.320 | that take San Francisco, which has got to be the worst market

00:23:02.360 | for Syria in the country right now, that's something like 30 to

00:23:05.480 | 40% of the space is vacant. So that's either space for rent or

00:23:09.560 | space for sublease, because no one's using it. So they put it

00:23:13.160 | back on the market. Well, all those subleases, they're still

00:23:16.240 | paying rent because they have a contract. So what happens is as

00:23:20.280 | those leases roll, and all of a sudden, you don't pay rent

00:23:22.520 | anymore. So you're going to stop or if you still need the space,

00:23:24.960 | you're going to negotiate a much, much lower rent. So now

00:23:28.400 | all of a sudden, the real estate owner can't make their debt

00:23:33.040 | service covenant ratios, the income from the building is

00:23:35.920 | just substantially less, they can't make their debt.

00:23:38.440 | So on that and explain that ratio to folks, you have a

00:23:42.360 | certain amount of debt you own, let's say Salesforce tower. In

00:23:45.760 | Salesforce's case, they're subleasing 125,000 square feet.

00:23:49.880 | Let's say they were into that for 500 million. What is this

00:23:52.680 | debt service ratio? Explain that to the audience

00:23:54.760 | when the bank underwrites the loan, they just figure out the

00:23:58.200 | interest that you got to pay on the loan relative to the value

00:24:00.600 | of the building or the income that is generating. But all

00:24:03.120 | those ratios are upside down now, because the value of the

00:24:06.320 | buildings, the rent has gone down so much because there's so

00:24:08.720 | much vacancy. I mean, when these loans were underwritten, San

00:24:11.480 | Francisco had like a 5% vacancy rate. And now it's like 30 to

00:24:15.480 | 40%. There's just no tenants. And then you know, in parallel

00:24:19.080 | with that, Jason, you've got all these cases where you only have

00:24:22.680 | tenants or leases rolling, you have loans rolling, you know,

00:24:25.480 | again, if the owner of the building has either a

00:24:28.360 | construction loan or like a long term debt, and that needs to

00:24:31.120 | roll, they have to refinance it. And if they can even get credit,

00:24:35.000 | which they may not be able to because of this crunch, they're

00:24:37.000 | gonna be paying a lot more for it. So now all of a sudden, the

00:24:39.800 | income statement for that building doesn't make sense.

00:24:42.000 | Think about it, your borrowing costs are higher, and your

00:24:45.320 | revenue is lower. So now all of a sudden, the buildings

00:24:47.560 | underwater. So where does that end up? Well, they default on

00:24:51.280 | the debt, and the bank ends up owning the building. So then

00:24:53.960 | what happens is you end up with, you know, all of downtown San

00:24:56.720 | Francisco, owned by a bunch of banks, what are they going to do

00:24:59.680 | with it, they don't want to be in the real estate business. So

00:25:01.600 | they have to fire sale those buildings in a bunch of auctions

00:25:05.280 | at rock bottom prices. Because by the way, there's no cash or

00:25:08.080 | liquidity out there. So who are the buyers?

00:25:10.080 | The buyer?

00:25:10.720 | That was like, no, buyers, we have a 30% vacancy rate,

00:25:13.720 | there's no renter. So

00:25:15.360 | so what happens Detroit, like, is it just like a dead city?

00:25:19.320 | And then the tax base collapses the city because so much of the

00:25:21.680 | tax base is dependent on you know, real estate. So listen, I

00:25:25.160 | think they're gonna have to work this out. I don't think they can

00:25:27.320 | just let the free market tickets course here, because you're

00:25:30.040 | gonna end up with a scenario I just painted. So I think what

00:25:33.560 | hopefully would happen maybe is that the banks do some sort of

00:25:37.400 | deal with the real estate owners that you know, they blend and

00:25:41.520 | extend or whatever. But in order to do that, they're gonna need

00:25:44.400 | to be backstop by somebody. And that's the Fed

00:25:46.800 | freebird. What are your thoughts? Just writ large, as it

00:25:49.480 | were on the commercial real estate space, because it's $90.

00:25:52.240 | It was $90 a square foot, right for class A sacks in the city.

00:25:56.360 | Is that the price? What's that gonna be? 60 7080 90 bucks a

00:26:00.480 | foot, depending on what kind of building you're talking about. I

00:26:02.800 | mean, you have all these empty office towers. So look, I never

00:26:06.200 | invest in office towers. I do small boutique kind of brick

00:26:08.640 | and timber spaces in Jackson Square, we're doing okay,

00:26:11.520 | because people still want to be in those spaces. But these

00:26:14.360 | office towers on Market Street, or in Soma, I mean, which is

00:26:19.000 | where all the investment went during the boom, nobody wants to

00:26:22.000 | be in those buildings anymore. And it doesn't help that the

00:26:24.600 | city has allowed this giant, you know, open air drug market to

00:26:28.520 | metastasize right outside their door.

00:26:30.480 | freebird. Yeah, I think it's inevitable, we'll have probably

00:26:33.880 | two to $3 trillion of federal money. You know, spent to

00:26:41.080 | backstop and support the asset. I mean, that's the general theme

00:26:44.400 | here in case everyone isn't paying attention at home is that

00:26:47.720 | the Fed, the US government will continue to print money and

00:26:53.200 | create programs to effectively support asset values such that

00:26:57.640 | there isn't a crippling economic ripple effect. And this is the

00:27:03.760 | dangerous depth spiral of debt. And it's why I always talk about

00:27:07.760 | how concerned I am about global debt levels and particularly

00:27:10.440 | debt levels in the US, but really global debt levels. I'll

00:27:13.360 | say the statistic again, and over and over again, 360% global

00:27:17.600 | debt to global GDP. But, you know, even within some of these

00:27:21.760 | asset classes, a significant amount of debt has been used to

00:27:24.680 | fuel asset prices and to fuel equity value. And then that

00:27:27.920 | equity value gets levered and reinvested. And so the rippling

00:27:30.360 | effect in the economy of declining asset value can be

00:27:33.560 | magnified through leverage. And it unfortunately, debt in general

00:27:40.040 | forces growth, without growth, debt fails. And so when we've

00:27:46.040 | used debt to demand growth, on a macro perspective, it causes,

00:27:51.040 | you know, significant stress and strain on the system when you're

00:27:53.920 | going through periods of like we are right now, which should be

00:27:56.560 | natural recessionary effects from COVID and shutting down the

00:27:59.160 | economy, or natural asset price declines because of that. And we

00:28:03.080 | can't let it happen. Because if it were to happen, the rippling

00:28:05.800 | effect would be crippling. So this is a good example, you'll

00:28:08.560 | probably I don't know what the facility will look like. Maybe

00:28:11.240 | the government passes some congressional bill that says,

00:28:14.280 | Hey, guys, here's $3 trillion to support, you know, all this real

00:28:18.320 | estate is another, you know, 2 trillion to support banks and,

00:28:22.240 | you know, giving them liquidity. Because the other problem, as

00:28:24.920 | you guys know, is most people's most of the population in the US

00:28:29.560 | has most of their assets, their asset value or their equity

00:28:32.600 | value in their home. And those home prices are supported by

00:28:37.000 | residential loan programs. And, you know, if you actually have a

00:28:41.960 | massive write down of the value of that asset class, that's when

00:28:44.800 | you know, everything kind of falls apart. So you know, we

00:28:47.440 | will continue to be buoyed by that, that that kind of

00:28:50.720 | inflationary behavior, unfortunately, biology, I think

00:28:54.680 | has it right, we'll talk about it in a minute, that there has

00:28:58.000 | to be money printing to get out of this hole. I don't know if

00:29:01.160 | it's necessarily in this moment, hyper inflationary, as he

00:29:03.560 | predicts, you know, he uses the Deutsche Mark and the Weimar

00:29:06.920 | Republic as this kind of storyline that this is what's

00:29:09.800 | about to happen in the US. The truth is, it looks a little bit

00:29:12.560 | more like the pound sterling at the end of the British Empire,

00:29:16.120 | where you know, there's certainly an inflationary and

00:29:19.160 | devaluation effect that arises, but it's not it is the reserve

00:29:22.080 | currency of the world today. Let's say it's really hard to

00:29:24.720 | kind of just say, hey, it's going to be hyper inflationary,

00:29:27.000 | and the value is going to go to zero, it's just not going to

00:29:28.520 | happen. So that seems to be the dollar of the dollar. Yeah. So

00:29:32.160 | that seems to be the bet now chum off that some folks are

00:29:36.880 | predicting catastrophizing, hey, this is the end of US

00:29:41.360 | supremacy, the end of the dollar, of course, modern

00:29:43.880 | monetary theory seems to state you can just keep printing

00:29:47.040 | dollars and make a couple trillion dollar coins and

00:29:49.040 | backstop it. And by the way, tarp was profitable modestly for

00:29:53.320 | the United States and the backstop of real estate totally

00:29:56.000 | work. So where do you land on this? Do you think these

00:29:58.440 | backstops and modern monetary theory stating that you can just

00:30:02.400 | print money you own your own fiat currency is going to work?

00:30:04.880 | Or as we pivot to the billion dollar? I'm sorry, the million

00:30:09.400 | dollar apology Bitcoin bet that this is the end of days.

00:30:13.840 | I think it's not the end of days. But I think you're

00:30:16.840 | conflating a bunch of things together. So look, mm t. Yes, I

00:30:20.120 | am. Yes. Was, in hindsight, idiotic. In the moment, it

00:30:24.920 | never quite made sense. But in hindsight, it's clearly

00:30:27.560 | idiotic. And I think that we can properly dispense with that.

00:30:32.240 | But the reason that we print so much money is sort of what

00:30:38.000 | freebrook says, which is that we just want a well functioning

00:30:41.520 | society. And the simplest and shortest way to do that is to

00:30:46.400 | make sure that there aren't any winners and losers anymore. And

00:30:49.640 | the most effective way to do that in the markets is with

00:30:51.880 | money, print a bunch of money, and there are no more winners

00:30:54.560 | and losers. And so everybody can kind of win, some people may,

00:30:58.280 | may win more, but nobody really ever loses. So I think that's

00:31:03.240 | the that's the mo that we're operating under. The thing is, I

00:31:09.320 | don't

00:31:09.440 | something unhealthy to that, Chamath, you're sort of a loony,

00:31:11.960 | but no losers.

00:31:13.280 | That's a more philosophical and a commentary on capitalism and a

00:31:17.240 | bunch of other things. And you're right, I don't think it

00:31:19.240 | makes sense. I do think you need winners and losers to really

00:31:22.960 | make society function well. But the other part of it is like,

00:31:27.080 | does it reinforce? Or does it decay, US dollar hegemony, and I

00:31:32.480 | think it actually reinforces it. And the reason is just very

00:31:36.440 | practically speaking, when you look at how dependent other

00:31:40.320 | people other countries are on the US dollar in times of stress,

00:31:43.920 | they actually become more dependent. And that has a lot to

00:31:47.200 | do with their boring patterns, the amount of dollars central

00:31:50.960 | banks need outside the United States. And so what did you see

00:31:53.440 | in a moment of stress, actually, the Fed opened up swap lines to

00:31:56.880 | all the central banks that they work with their most important

00:32:00.720 | operating partners, so Europe, Canada, Japan, etc, Switzerland,

00:32:04.920 | and they move the liquidity window from weekly to daily, and

00:32:09.160 | they pounded the swap lines. So I don't know, I think that most

00:32:13.000 | people that that kind of like, it's like a boy crying wolf,

00:32:15.840 | maybe at some point, somebody will be right, but you're going

00:32:18.520 | to lose so much money trying to take a point of view around this

00:32:22.320 | topic that it's more practical to just look at dollar flows, and

00:32:26.360 | dollar flows go up in moments of stress, not go down. And they go

00:32:31.040 | up in a distributed manner across the monetary plumbing of

00:32:34.600 | the world.

00:32:35.080 | Right. So let's explain the biology bat since that trended

00:32:38.240 | and he is the boy who, as you're saying, cried wolf this past

00:32:42.640 | week, cry Bitcoin. Yeah, the boy. So a friend of the pod,

00:32:48.240 | apology, on March 17, predicted that Bitcoin will reach $1

00:32:53.200 | million in 90 days, due to us hyperinflation. hyperinflation

00:33:00.240 | is defined as prices going up 50% month over month, just so

00:33:04.400 | we're clear on exactly how dramatic that is. He made the

00:33:08.040 | bet on March 17, against a pseudo anonymous Twitter user,

00:33:12.720 | James Medlock, who said they would bet 1 million that the US

00:33:16.520 | would not experience hyperinflation. So biology sort

00:33:20.440 | of inserted Bitcoin into that bet. It wasn't a Bitcoin bet

00:33:23.280 | that and I think he's done two of these bets. So he's betting

00:33:26.520 | 2 million in total on Bitcoin hitting 1 million by June 17,

00:33:31.000 | which there's probably no chance of that happening or a very tiny

00:33:34.800 | chance I'll ask the panel in a second. Bitcoin was trading at

00:33:37.960 | 25 26,000 at the time, it's now trading at over 28,000. And

00:33:43.800 | Balaji has been on every podcast known to man in the last 72

00:33:47.360 | hours talking about this. I've watched one or two of them. And

00:33:51.040 | it's a pretty out there argument, I think. You can just

00:33:55.200 | type in biology on YouTube and watch any of the 20 he's done.

00:33:58.560 | He believes regional banks are insolvent. He thinks the feds

00:34:02.120 | needs is going to need to print a massive amount of money. Like

00:34:05.800 | we've said here, do more QE and then cut rates all seems

00:34:09.520 | reasonable, but that that will lead to hyperinflation. It's not

00:34:13.240 | reasonable. Wow. No, no, it's not that it's reasonable. We

00:34:16.480 | just print we just printed that they're going to cut rates we

00:34:19.200 | just discussed they're going to eventually cut rates and there'll

00:34:21.040 | be more QA. So that part is reasonable. Just that one

00:34:24.000 | little piece. But then he believes is the part that is

00:34:26.480 | kind of out there, that hyperinflation is going to

00:34:29.280 | devalue the dollar and this is the time he does not and I made

00:34:34.680 | a bunch of I asked him this a bunch of times and he would not

00:34:38.240 | be honest about it, or didn't want to answer my question. I

00:34:41.240 | said, Hey, what percentage are you in Bitcoin? Somebody says

00:34:44.800 | he's 99% of Bitcoin, he will not confirm. And so I was like,

00:34:48.120 | well, if you want 1000 bitcoins, if this goes up, you know, a

00:34:51.600 | very small amount, four or 5%, you're going to pay for the

00:34:55.000 | bets. And are you talking your own book here or not? sacks?

00:34:58.800 | What do you think of this overall bet? Is it a stunt?

00:35:02.080 | Yeah. He's saying like, this is the lifeboats moment. And just

00:35:05.040 | to add to it, he says, you have to leave the United States and

00:35:09.040 | get to Singapore, or a place or if you're going to stay in the

00:35:12.720 | United States, you need to get to Wyoming or Texas or somewhere

00:35:14.960 | that explicitly allows Bitcoin, because the closer you are to

00:35:17.760 | the United States banking system, what happened to Silicon

00:35:20.320 | Valley Bank on that fateful weekend where people couldn't

00:35:23.480 | get their cash and we're going to have to, you know, miss

00:35:26.320 | payroll. He says that's the dry run for the entire US banking

00:35:30.080 | system, sacks.

00:35:31.080 | So first of all, I don't think you can disparage biology

00:35:34.080 | because someone who cries wolf says this repeatedly, and it

00:35:38.000 | makes a dire prediction repeatedly and is wrong. And we

00:35:40.640 | can't say yet that biology is wrong. Do I think that we're

00:35:44.560 | gonna have a million dollar Bitcoin in 90 days? I

00:35:46.320 | personally find that very unlikely, but you can't say yet.

00:35:50.280 | He stuck his neck out making a prediction that will be easily

00:35:55.080 | falsified if he's wrong. Second, the last time that biology made

00:35:59.320 | a dire prediction was COVID. And he was right about that one. So

00:36:04.040 | you can't say that this is just like a doomer who throws out

00:36:07.240 | crazy predictions and is always wrong. He's actually pretty

00:36:09.800 | selective about his now that one predictions. Yeah, there was a

00:36:13.080 | tweet from January 30 of 2020, in which he basically predicted a

00:36:18.040 | pandemic based on a Coronavirus and laid out a whole bunch of

00:36:21.600 | consequences that mostly came true. Which is why we're

00:36:25.640 | talking about this. This is not just some like random person

00:36:28.680 | like he actually has, yes, pedigree and a track record.

00:36:31.800 | Here's my view on it.

00:36:34.320 | Doop and gloop. Yes, him and the same to lab the two of our

00:36:37.920 | opening speakers at all in summer 2023. Those are we are

00:36:41.600 | bookhead speakers.

00:36:42.520 | Book them now anyway, so so look now, what do I think about it? I

00:36:48.280 | I posted my own theory today, which I would call sort of

00:36:51.440 | biology light. Which is okay, look, if you if you think about

00:36:57.880 | the spiking interest rates that we've had, and that's my

00:37:00.000 | things, why should continue quite a bit longer, there are

00:37:02.280 | three main effects that it indisputably has number one,

00:37:06.360 | undercuts the value of long dated bonds. Number two, it's

00:37:09.800 | made lending much more expensive, particularly for big

00:37:13.120 | purchases like real estate. Number three is increased

00:37:15.480 | government lending costs. Okay, now, play that through the

00:37:18.440 | financial system. What does that mean? Well, if the value of long

00:37:21.400 | dated bonds has sharply decreased, well, that's led to

00:37:24.440 | this banking crisis with the unrealized losses that's already

00:37:27.920 | happened. Number two, it's made lending more expensive, the

00:37:30.640 | credit crunch and CRE, where we need to see that. And I believe

00:37:33.960 | that's going to play out as the second crisis of this larger

00:37:36.600 | financial crisis. And then number three is the increase in

00:37:40.360 | government borrowing costs that will eventually play out in

00:37:42.560 | terms of being a government debt crisis of some kind. And I think

00:37:46.600 | it'll involve, you know, a spike in borrowing costs, the federal

00:37:50.200 | level and involve sovereign debt issues internationally, I think

00:37:54.240 | it will involve budget deficits at states and cities. So I think

00:37:58.600 | there's three phases to this financial crisis. We're in phase

00:38:02.520 | one, and I think CRE and government debt are the next two

00:38:05.480 | phases. And I think I think a lot of that lines up with what

00:38:08.440 | biology thinks, where I disagree with him is I don't think we can

00:38:11.720 | know what's going to happen in 90 days, I think that the CRE

00:38:14.200 | crisis is highly deflationary, it's going to create distress

00:38:18.280 | everywhere in the economy, that is going to lead to a massive

00:38:21.360 | reduction in liquidity. I think that the government debt crisis,

00:38:24.480 | assuming the government wants to inflate and monetize the debt as

00:38:28.000 | a way to solve that problem, that will be highly inflationary.

00:38:31.720 | But when these things play out, we can't know, I think that's

00:38:34.920 | what makes this really hard is I think jumping all the way to the

00:38:38.960 | sort of finish line and saying we're gonna have a million

00:38:41.440 | dollar Bitcoin in 90 days, because the US dollar is

00:38:43.480 | worthless. I think that's premature. I think this could

00:38:46.240 | play out over the next couple of years,

00:38:47.640 | we have a real problem if Bitcoin is the exit ramp. Why

00:38:53.400 | an inflationary crisis because it's not accessible enough. It's

00:38:58.120 | not easily transactable for for I'm sorry to be negative to the

00:39:01.920 | Bitcoin maximalists. I'm generally in favor of this kind

00:39:06.080 | of independent storage system that's outside of government

00:39:11.200 | and state control. I think there's just this unfortunate

00:39:13.320 | reality. I mean, we saw what the Wells noticed a coinbase today.

00:39:15.760 | They just arrested that that crypto guy,

00:39:19.560 | go Quan was arrested in Quantum, Negro,

00:39:21.760 | great country, cracking won't let you wire money in or out as

00:39:25.840 | if I think Monday or Tuesday. And so you know, it's clearly

00:39:30.000 | becoming kind of a less accessible system of storage.

00:39:33.920 | No, what's more accessible? Well, I do think that one of the

00:39:36.840 | reasons we're seeing the market move the way it does is because

00:39:39.320 | folks are shifting their risk assets around quite a bit right

00:39:42.000 | now, to figure out where's a good place to put money. I was

00:39:47.120 | talking with a asset manager, you know, this morning, and you

00:39:52.880 | know, they had a very strong point of view, folks are are

00:39:55.320 | moving capital away from what they think are going to be most

00:39:58.800 | impacted by the risk of this kind of massive inflationary

00:40:02.360 | event that may arise or this massive banking crisis that may

00:40:04.840 | arise, or this massive real estate crisis that may arise.

00:40:07.640 | And there are other places to then put your capital. That's

00:40:11.200 | not just Bitcoin. And sure, maybe some of these things are

00:40:13.880 | dollar denominated. But for example, there are many

00:40:15.840 | businesses that sell products in non dollar denominated

00:40:19.200 | currencies globally. And while they report and trade on US

00:40:22.000 | stock exchanges, you're buying a security interest in a business

00:40:24.920 | that generates most of its income, you're referring to

00:40:28.680 | many different companies. And so there are many companies that

00:40:31.680 | get the bulk of their revenue, the bulk of their sales.

00:40:33.800 | Internationally, there are also many companies that will benefit

00:40:37.560 | in an inflationary environment businesses that are tied to

00:40:40.240 | other types of real estate businesses that are tied to

00:40:42.600 | certain capital equipment where consumption will not go down,

00:40:45.760 | unless there's, you know, significant massive, you know,

00:40:48.360 | global socioeconomic shock. And so I think that that's kind of a

00:40:51.920 | lot of what's going on right now. It's less about, hey,

00:40:54.120 | Bitcoin is the only place to go and be safe. And it's more about

00:40:56.840 | let me reallocate my risk assets a little bit, you know, to

00:41:00.240 | places that may be benefit benefit may benefit from, or

00:41:03.920 | maybe better guarded from a massive kind of inflationary

00:41:07.040 | shock. And let me just say, let me say one more thing. I think

00:41:10.720 | one of the biggest risks that is not being talked about is the

00:41:14.160 | debt ceiling vote that's due in June. In June, Congress needs to

00:41:20.280 | pass an increase in the debt ceiling, because the amount of

00:41:25.960 | debt that the US that the federal government is going to

00:41:30.040 | have to take on in order to meet our budget deficit and refinance

00:41:34.080 | our debt and pay our obligations, historically, means

00:41:38.160 | that we're going to have to have more than what we're, you know,

00:41:40.880 | we've approved to date in terms of the total amount of debt. Now,

00:41:44.040 | this has historically been a last minute vote, you know,

00:41:46.920 | crazy, dramatic thing that drives markets nuts. The Hill

00:41:51.960 | had a public opinion piece from Peter work and Mary space, but I

00:41:57.080 | think they make a good point. You know, I've talked to a lot

00:41:59.880 | of folks who are calling in the fixed income market, but also

00:42:04.240 | folks are in the equities markets publicly who are pretty

00:42:07.080 | nervous about this debt ceiling vote. And if it does look like

00:42:11.000 | the Republican Party takes a very hard line, and says,

00:42:15.000 | because this is the current party line, if you don't agree

00:42:18.680 | to massive deficit cuts or spending cuts, and, and really

00:42:24.120 | commit to that, in a bill that we can pass, that Ben also

00:42:28.280 | approves the increase in the debt limit, we are not going to

00:42:30.800 | approve increasing the debt limit. And you know, what this

00:42:34.240 | opinion piece argues, I think is a very good middle of the line

00:42:36.600 | solution, which is, you know, come up with points of view, and

00:42:40.840 | actually document those points of view on making sure that

00:42:45.280 | government spending is effectively accountable, that

00:42:47.400 | there's no more wasteful spending, and that there are

00:42:49.600 | certain programs that both parties can very quickly agree

00:42:52.280 | to, as being, you know, very wasteful. And if you start

00:42:56.000 | there, you maybe get enough across the line, that both

00:42:59.160 | parties kind of say this makes sense, let's do this. And then

00:43:01.880 | we can kind of increase the debt limit. Because in the absence of

00:43:04.360 | that, the US will have to default on debt, this is always

00:43:07.080 | the big threats never happened. And if that happens, or there is

00:43:09.960 | the looming threat of that happening, combined with the

00:43:12.880 | banking crisis combined with, you know, the liquidity crisis

00:43:16.840 | combined with the real estate crisis that may be emerging

00:43:19.600 | here. Let me ask you a question that you can have things really

00:43:22.320 | meltdown. So look, because I think this is the biggest like

00:43:26.120 | black swan, it's not a black swan, but this is the biggest

00:43:28.000 | kind of elephant in the room right now is and sorry, I think

00:43:31.920 | if people in DC could get together today, and if you could

00:43:35.040 | instead of doing the typical last minute 24 hour vote, a day

00:43:38.960 | before the debt ceiling needs to be increased, be thoughtful and

00:43:41.560 | do it. This could be addressed today, it could start to put in

00:43:44.800 | some of the layers of backstop and coverage and protection and

00:43:48.120 | safety that the markets I think really need to manage some of

00:43:51.600 | the trepidation in the in the weeks and months ahead.

00:43:53.680 | I want to jump to the crypto crackdown and get your opinion

00:43:56.160 | on that sex first. But I want to do a clarifying point here with

00:43:58.720 | freeberg you have been in the Ray Dalio end of empires,

00:44:02.920 | empires collapse, and that hey, maybe the US is winding down its

00:44:07.640 | supremacy and apology was pretty much saying, Yep, this is the

00:44:13.120 | moment. Where is there any light between your position of like,

00:44:18.400 | Hey, Dahlia was correct. This is the end of the empire and

00:44:21.040 | apologies like it's the end of the empire right now. Where do

00:44:24.600 | you stand on that?

00:44:25.360 | Freeberg? So I mean, I've always I've been concerned. I've told

00:44:28.520 | you guys this for like three years, and I've obviously

00:44:30.320 | promoted this book for two and a half years. When Dahlia's

00:44:34.080 | points of view, with lots of kind of empirical wisdom behind

00:44:37.400 | it, I think, indicate that the US is on a path and the way we

00:44:41.080 | spend and the way we behave, and the way markets are reacting, I

00:44:44.360 | think, indicates that a lot of what has happened historically

00:44:46.760 | is happening now in the US. Now, it doesn't, I don't know if it's

00:44:52.840 | going to happen overnight, that that's where I would have light

00:44:54.680 | with biology. Okay, the notion of kind of hyper inflation,

00:44:57.960 | again, I think means that, so think about all the US dollar

00:45:04.760 | holders around the world, it would be a shock for the

00:45:08.360 | collective system, it would require the collective system to

00:45:11.920 | collectively agree to get off the dollar very quickly for that

00:45:15.240 | to really happen. Yeah. In the meantime, I do think there will

00:45:18.120 | be inflationary effects. I do think there will be massive kind

00:45:21.120 | of asset value shocks. But I'm not sure there's going to be

00:45:24.760 | this kind of like Weimar Republic, Deutschland, hyper

00:45:27.800 | inflation thing, because it is the reserve currency and it is

00:45:30.240 | so widely held by everyone, it would require collective giving

00:45:34.480 | up. It also seems like there may be you know, we talked a lot

00:45:37.520 | about the petro yuan trade, which I think is critical to see

00:45:39.840 | that actually happen. I think that's going to be the lynchpin

00:45:42.400 | got it. Maybe that catalyzes us. And that seems to be a little

00:45:45.640 | bit tightrope right now, too. It doesn't seem super definitive

00:45:48.560 | that Saudis are embracing China, there's obviously this behavior

00:45:51.920 | with a little saber rattling, but there's, you know, it's not

00:45:55.960 | as definitive right now. I think that that needs to happen to

00:45:58.720 | kind of really catalyze that

00:45:59.640 | let's get our tinfoil hats on here for a second. In relation

00:46:03.920 | to the biology bet, there has been a lot of action against

00:46:06.800 | crypto. Obviously, authoritarian countries took control of

00:46:10.480 | crypto long ago, China, banning it, etc. North Korea, other

00:46:15.560 | other authoritarian places kind of tighten their grip on it. Now

00:46:19.640 | here in the United States, Coinbase got a Wells notice.

00:46:22.160 | That is a warning basically, and giving you a last chance to kind

00:46:25.680 | of respond to the SEC. And this was based on their loaning

00:46:30.000 | programs. And on top of that, a number of other crypto

00:46:34.160 | crackdowns have occurred, we saw celebrities getting smacked down

00:46:37.920 | and getting fines and doing settlements. This has led sacks

00:46:43.360 | to a theory that the United States government wants to break

00:46:48.880 | the back of crypto crypto has done a great job of breaking

00:46:51.760 | their own back with plenty of crypto grifts insider trading

00:46:54.600 | and all kinds of shenanigans with FTX and front running and

00:46:58.680 | painting the tape any grift or criminal activity possible seems

00:47:02.440 | to have been exploited. Do you think that these two things are

00:47:07.080 | in some way coordinated or there's a coordinated effort by

00:47:09.520 | the US government to destroy and kill crypto as an off ramp for

00:47:14.040 | the US dollar while the US dollar is dealing with these

00:47:16.680 | crises?

00:47:17.160 | Well, there's a really interesting article that was

00:47:20.200 | just published on substack by Nick Carter, who I guess, a

00:47:23.640 | guest writer on Mike Solana's substack called pirate wires.

00:47:27.240 | This is a follow up piece to an article he wrote six weeks ago,

00:47:31.040 | where he laid out the an operation by the Biden

00:47:34.240 | administration called Operation choke point, which made the case

00:47:37.400 | that the Biden administration was quietly attempting to ban

00:47:40.200 | crypto. And now, you know, a month later, there's all these

00:47:44.240 | things that are all these steps that the administration is

00:47:47.160 | taking to go after crypto and he you know, he lays out a bunch

00:47:51.320 | in a bullet point list. So the SEC announced a lawsuit against

00:47:54.960 | crypto infrastructure company Paxos crypto exchange crack and

00:47:58.560 | settle with the SEC. SEC Chair Gensler openly labeled every

00:48:02.600 | crypto asset other than Bitcoin security. Senate Committee on

00:48:06.800 | Environment and Public Works held a hearing land basing

00:48:09.320 | Bitcoin. Biden administration proposed a bill that singles out

00:48:12.240 | crypto miners for owners tax treatment. New York Attorney

00:48:15.480 | General declared a theory on which the second largest crypto

00:48:17.840 | asset of security. That's a huge change, by the way. Yeah. SEC

00:48:22.080 | continues to anti consumer protection efforts by doubling

00:48:26.120 | down their attempt to block a spot Bitcoin ETF. OCC let

00:48:30.680 | Crypto Bank protégé his application for a natural

00:48:32.840 | National Trust Charter expire. And then the SEC just sent

00:48:36.760 | Coinbase a well as notice. So I think it's hard to argue that

00:48:40.560 | there isn't a concerted effort now to crack down on crypto by a

00:48:46.280 | wide variety of government agencies and authorities,

00:48:50.400 | starting with Gensler at the SEC, who seems incredibly hostile

00:48:53.720 | to crypto. So now the only question is, is this correlated

00:48:58.560 | with the stress that the banking system is under? Is it just a

00:49:02.480 | coincidence? And that I don't know. But I think the argument

00:49:05.720 | biology would make is that at the same time, they're going to

00:49:09.680 | deflate the dollar, they're going to make it harder for you

00:49:11.800 | to find an off ramp. And he actually brought up a historical

00:49:17.280 | example that I wasn't aware of, I think it's called executive

00:49:19.520 | order 6201, which is FDR, way back in the 1930s, actually had

00:49:24.160 | an executive order that confiscated all the gold private

00:49:27.440 | gold bullion in the country. And they seized the gold bullion,

00:49:30.920 | making the accusation that private citizens were hoarding

00:49:34.880 | too much gold. So in any event, this is the theory. I don't know

00:49:39.240 | whether it's true or not, it could be a coincidence.

00:49:43.000 | Shemoth, you think that this is correlated in any way with the

00:49:46.320 | crisis, or is just the fact that FTX blew up and all these other

00:49:49.960 | things blew up, and the public is really upset that they lost a

00:49:53.040 | lot of money on this and the SEC has got to cover and be a little

00:49:57.760 | bit more active instead of reactive when it comes to

00:50:01.240 | dealing with the crypto losses that consumers had.

00:50:03.680 | That's the latter. I mean, I think that there was a rumor

00:50:06.080 | going around. I don't know how true it is that FTX was days

00:50:12.000 | away from getting a critical approval by the SEC to actually

00:50:17.000 | even further legitimize their US exchange before they went out of

00:50:20.040 | business. So I think Gensler had to pivot very hard from at a

00:50:24.680 | minimum being very pro FTX. And there's all kinds of stories

00:50:28.120 | about his interrelatedness with Sam and his family to very anti

00:50:32.800 | bit or anti crypto in general, that's clearly happened. But

00:50:37.880 | look, I think that this is like a lot of tin hatting, which I

00:50:40.600 | don't think is very productive. If you look at the total number

00:50:44.680 | of non zero Bitcoin wallet addresses in the world, and

00:50:49.720 | let's be extremely generous, and say it's 100 million, there's

00:50:55.520 | still 7 billion people in the world. And so I just think

00:50:59.680 | everybody that tries to speak about the fragility of the US

00:51:04.560 | and worldwide banking system is right. But and that part, I

00:51:09.840 | think is quite lucid and unemotional. But every time they

00:51:13.200 | try to connect it to Bitcoin, they sound like a crazy person

00:51:16.720 | because they're just talking their book.

00:51:18.120 | And that is exactly the case, by the way, with this kid, Nick

00:51:21.600 | Carter.

00:51:22.040 | And the best example, to demonstrate this is in all of

00:51:26.280 | this chaos. If Bitcoin or crypto assets in general were truly a

00:51:31.800 | legitimate off ramp, and salvation from us dollar

00:51:39.160 | hegemony and all of this stuff, why isn't Bitcoin at least at

00:51:43.000 | 35,000 a coin right now, it's barely above 28,000. It really

00:51:47.360 | hasn't moved that much. And I think the real answer is that

00:51:50.840 | most people in Bitcoin are not trying to hedge their existing

00:51:56.960 | fiat currency exposure, they're just picking off people in

00:52:00.480 | retail. They're just trading this thing. I mean, the high

00:52:05.080 | bank, explain how else do you explain an asset that is not

00:52:09.120 | absolutely ripped in the face of all of this terrible news about

00:52:13.160 | the financial system? And I think the answer is because it's

00:52:16.280 | still a cul de sac of users. It's not broadly available, not

00:52:20.960 | broadly adoptable, not broadly used. I still believe that it's

00:52:24.800 | valuable. I was the earliest proponent of Bitcoin. 2011.

00:52:29.360 | Yeah, 2012. So I believe that there's a place for it in one's

00:52:33.720 | portfolio. But I just think connecting these dots misses the

00:52:37.160 | point. And I think the point is much, much bigger than a crypto

00:52:41.040 | off ramp. The point is that we have a lot of systemic shocks

00:52:45.160 | that are building up in the system. We have broken a ton of

00:52:50.200 | the systems that cause the financial infrastructure in the

00:52:54.240 | world to work properly. And we are just starting to uncover how

00:52:57.560 | they're broken. So I think we need to focus our energy on that

00:53:01.160 | and dial down a little bit of the Bitcoin maxi stuff because it

00:53:04.640 | distracts from a really important set of topics that are

00:53:08.520 | more inclusive and actually touch 7 billion people.

00:53:11.000 | We have to do the cleanup work. And just to be perfectly clear

00:53:14.720 | here, Nick Carter is a career crypto. He's on his third fund

00:53:20.760 | is $250 million third fund. According to a quick Google

00:53:24.240 | search, he's a partner at Castle Island Ventures. And I believe

00:53:27.720 | biology believes what he's saying. And at the same time, is

00:53:32.440 | massively in Bitcoin and the $2 million he'll obviously lose in

00:53:36.640 | this bad or the 99.9% chance and he said that already. I think he

00:53:41.240 | believes he's doing a service just like he did believe he was

00:53:44.640 | doing a service with COVID. So I do not doubt his intent. But I

00:53:48.880 | believe it's his book is based on this and the $2 million will

00:53:52.840 | be paid off.

00:53:55.000 | He's a very smart and good guy. My point is put this in the who

00:53:58.000 | cares bucket and get back to the facts. Friedberg mentioned it,

00:54:01.280 | we have a debt ceiling problem that's in the offing. Saks

00:54:04.000 | mentioned it, we have a commercial real estate crisis. We

00:54:07.480 | just talked about the fact that he didn't raise rates enough,

00:54:09.960 | nor did he cut enough. So we're in this weird middle path that

00:54:13.880 | J. Powell we're talking about. So those are the facts on the

00:54:16.680 | ground that I think we should focus on because those will have

00:54:19.160 | implications to how people can borrow, start businesses,

00:54:23.360 | capitalize risk assets. That's a big problem.

00:54:27.280 | I guess the moral hazard comes up sacks. And the critique, I

00:54:31.480 | think that people have had a view, you know, focusing on

00:54:36.400 | bank bailouts, etc. has been, you have been anti bailout. And

00:54:42.200 | now hey, maybe backstopping the deposits, not backstopping the

00:54:47.920 | bank, the shareholders loss, you're very clear about that.

00:54:50.440 | But let's talk about moral hazard here for a minute. Are we

00:54:53.560 | started getting

00:54:54.200 | enough for bail? When did I say I was either

00:54:56.600 | you or not, I just clearly say you're not I'm saying this is

00:54:59.920 | the critique that people have had a view. So I'm giving you a

00:55:02.000 | chance to address

00:55:02.760 | why? Why are you giving him people's critiques of him?

00:55:05.480 | Wouldn't nobody because I want him to talk about the future

00:55:08.840 | moral hazard.

00:55:09.560 | More than seven, six, five, four, two on Twitter.

00:55:12.120 | Okay, I was also thinking about the Wall Street Journal, the New

00:55:18.640 | York Times and everything.

00:55:20.120 | Let me jump in and just clarify, I was really clear that SVB

00:55:23.880 | shareholder should be wiped out their bondholders should be

00:55:26.720 | wiped out their management stock options should be wiped out. In

00:55:30.280 | fact, if it turns out that they should have known the thing was

00:55:33.560 | about to go under, I think their stock sales should be clawed

00:55:35.840 | back. So I'm not in favor of bailing out SVB. I don't care

00:55:38.880 | about SVB.

00:55:39.680 | Yes, of course. Now let's do that for commercial real estate.

00:55:42.320 | No, the question is what you do with deposits and depositors.

00:55:45.360 | Correct. I think there is a real debate about how you treat

00:55:50.880 | depositors in a banking crisis. And I think there are two views

00:55:54.880 | on that. There's kind of an old fashioned view. And then there's

00:55:57.640 | kind of a more modern regulatory view. The old fashioned view is

00:56:01.840 | that if your money is in a bank, and that bank goes under and you

00:56:06.040 | know, you're over the FDIC amount, you lose your money. And

00:56:09.960 | we need people in the system to lose their money because that

00:56:13.200 | creates discipline on the banks. It'll make those depositors do a

00:56:16.600 | better job shopping for the right bank. That's kind of what

00:56:19.560 | I would call the old fashioned hardline view. There's a more

00:56:23.080 | modern regulatory view, which is that, listen, the typical

00:56:27.640 | depositor, even a fairly sophisticated depositor, like a

00:56:30.480 | small business, or even a high net worth individual, they're

00:56:33.960 | not in a position to evaluate the balance sheet of these

00:56:36.600 | banks. How are they going to figure out if there's like toxic

00:56:39.520 | assets that are hidden on the balance sheet of these regulators

00:56:43.120 | didn't see it with Silicon Valley Bank and a lot of these

00:56:45.440 | banks. And you don't really get that much more moral hazard by

00:56:49.440 | putting the depositor on the hook for that. Remember, the

00:56:52.680 | management of the bank already is penalized severely by losing

00:56:56.160 | all their stock.

00:56:57.000 | I'm trying to get to before Chamath interrupted me. I'm

00:56:59.540 | trying to get to the bigger moral hazard picture here, which

00:57:01.800 | is Jason, fuck you before you interrupt me. But the point to

00:57:04.920 | eat your nuts for a sec. The point I'm trying to get to is

00:57:07.520 | should commercial real estate? Should that be bailed out? How

00:57:11.360 | should society look at that next card that you are saying is

00:57:15.040 | going to tip over? How would you handle that piece? Should they

00:57:18.440 | Okay, well, let me just finish the on depositors. So the modern

00:57:21.080 | regulatory view is that when you open a bank account, you shouldn't

00:57:23.720 | have to think about the bank's balance sheet, you just want it

00:57:26.360 | to be safe. You don't want all the brain damage. And, and look,

00:57:30.000 | I think there's a lot of merit to that argument. As it turns

00:57:32.040 | out, I've been trying to look into this, how much would it

00:57:34.360 | cost the system to just fully ensure depositors, it turns out

00:57:38.800 | that we have about 17 and a half trillion in deposits in the US

00:57:43.480 | almost 818 trillion. And one of the misnomers you'll hear as

00:57:47.520 | well, it would cost us 18 trillion to basically ensure

00:57:50.360 | all the depositors. That's not true. Because first of all, 10

00:57:53.600 | trillion people don't even know it's already insured under FDIC.

00:57:56.320 | It's only about seven and a half to 8 trillion that's less than

00:57:59.920 | half is left. Okay. Yes, right. Exactly. It's about it's around

00:58:03.360 | 8 trillion. So

00:58:04.360 | isn't it shocking the innumeracy of people that make these

00:58:07.640 | claims? I know it's crazy.

00:58:09.040 | This is why the podcast is based on any or top 10 in the world

00:58:13.880 | because we're actually breaking down the numbers. Right. So

00:58:16.760 | continue

00:58:17.200 | that the leading proponent of this theory that we should just

00:58:19.280 | basically not bail out but backstop the deposits is Bill

00:58:23.160 | Ackman. And he's been making I think a pretty compelling case

00:58:27.240 | that if you don't protect deposits at small banks, all the

00:58:30.520 | money is going to flow to the top four banks. That's already

00:58:33.000 | in process. Now that's happening. Yeah, we're watching

00:58:35.320 | it happen, right. So I've been trying to figure out how much it

00:58:37.320 | would actually cost us to do that. And what I've realized is

00:58:40.560 | that it's not 18 trillion, it's, it's 8 trillion. But by the way,

00:58:45.400 | that's the amount of deposits, that's not the risk premium. So

00:58:48.760 | if you look at FDIC, at the end of last year, there was about

00:58:51.360 | 130 billion that have been paid in to the FDIC fund by premiums

00:58:57.400 | paid by these banks. So in other words, the insurance premium

00:59:00.840 | paid by banks was about 1.3%. So if you were to now

00:59:05.280 | additionally cover the whole thing, all the deposits, it

00:59:08.920 | would be another roughly 100 billion of premiums paid by

00:59:12.360 | these banks. That seems very manageable to me, actually, the

00:59:15.240 | question is, is the FDIC fund adequate? And I think we're

00:59:19.480 | about to find out it may be the case that a 1.3% insurance

00:59:23.480 | premium, grossly, you know, understated the true risk of

00:59:28.280 | putting your deposit in a bank. And we're about to find out that

00:59:30.960 | the FDIC is inadequate. I don't know the answer to that

00:59:33.280 | question. I think this boils down to the profitability that

00:59:37.040 | an equity shareholder of a bank expects of them. And to your

00:59:41.360 | point, is it viable for large GSIBs to guarantee 100% of their

00:59:51.320 | deposits? Absolutely. The implication of that will be an

00:59:55.440 | enormous hit to their short term profitability and their return

00:59:58.320 | on invested capital, it would just take a massive hit. And so

01:00:01.320 | as a result, the stocks of those banks would fall pretty

01:00:04.640 | precipitously, which would have a real negative impact on the

01:00:08.400 | executives and the CEOs of those banks and the shareholders that

01:00:11.960 | own those bank equities. So I think, ultimately, it'll come

01:00:15.520 | down to that decision, which is that if you do want to protect

01:00:18.320 | the depositor in the American banking system 100% for every

01:00:22.480 | dollar, and do it in a simple way, it will come at the sake of

01:00:26.560 | the equity holders of the banks. And if you're willing to make

01:00:29.360 | that trade off, then you can guarantee 100% of the deposits.

01:00:32.560 | If you do not want to make that trade off, then the equity

01:00:35.760 | holders will still retain more value than they would otherwise

01:00:39.440 | and freeberg we've seen a couple of examples of the market, the

01:00:43.680 | free market looking at the situation and making new

01:00:46.320 | products and services. Wealthfront Mercury Bank both

01:00:49.920 | talked about load balancing across 12 accounts $3 million.

01:00:54.560 | So that would make some people who had over 250 k just

01:00:58.840 | instantly be backstopped and insured. And then where you

01:01:04.160 | know, there's discussion of we talked about last week, hey, why

01:01:07.880 | don't you just have a vault where you pay a bank to hold

01:01:10.680 | your money safely. I got a ton of responses from all in fans,

01:01:13.600 | pointing out multiple banks and services that have been trying

01:01:16.960 | to do this and also crypto solution. So is there going to

01:01:20.480 | be a free market solution you think or when we're starting to

01:01:23.440 | see them emerge? That maybe covers this gap a little bit

01:01:26.240 | freeberg and then what are your thoughts just generally on

01:01:28.120 | should we backstop the banks and the deposit? I'm sorry, the

01:01:30.480 | banks, the depositors to be clear.

01:01:32.040 | So if we just quickly analyze the function of a bank, they

01:01:37.800 | loan money to either residential real estate buyers like

01:01:43.760 | homeowners, or commercial real estate buyers or businesses that

01:01:48.120 | need it. I think the majority of the capital goes to residential

01:01:50.680 | real estate. And if they can't loan enough money, they typically

01:01:55.880 | buy bonds, right, they buy other people's loans in the form of

01:01:59.640 | bond securities, like treasuries or asset backed

01:02:03.520 | securities or other things like that. Or mortgage backed

01:02:06.880 | securities. So they use the cash to make those investments to

01:02:11.280 | make those loans, and then they obviously earn a return on that.

01:02:13.800 | You know, I think we've talked about this in the past, the

01:02:16.560 | thing that that biology, I think has misstated, and it would be

01:02:20.600 | good to have a conversation with him about this publicly. Because

01:02:24.680 | I have listened to some of his interviews in the last couple

01:02:26.840 | days. He says the banks are they don't have the money that you

01:02:32.240 | the depositor thinks that you have. And so what he's saying

01:02:37.320 | kind of implies that there is no money that there is no asset

01:02:40.600 | value there at all. He uses Sam bankman freed and FT x as an

01:02:44.400 | example, that the money that was given to Sam bankman freeds, you

01:02:49.520 | know, exchange fund was used to buy assets that then very

01:02:52.040 | quickly declined in value by 99%. But he held them on the

01:02:56.320 | book at 100%. And then he reinvested the money and all

01:02:59.560 | sorts of other different stuff. And in the case of the loans

01:03:04.080 | made by banks, and the assets that they as a result hold, the

01:03:09.480 | value may have dropped by 25%, in kind of the worst case, which

01:03:14.120 | is, you know, the Silicon Valley bank tenure, Treasury bond

01:03:17.440 | scenario, where they bought, you know, all $20 billion worth of

01:03:20.760 | Treasury bonds. And you know, they took a big hit on that. But

01:03:24.600 | it doesn't mean that there's no asset value, it means that the

01:03:27.320 | value has declined. And typically, there's a buffer

01:03:30.240 | between the asset value that the banks are meant to hold, and the

01:03:33.520 | deposits that they owe back to their customers. And if that

01:03:36.880 | buffer gets exceeded, then the bank is technically has negative

01:03:40.200 | equity. And if all the, you know, depositors said, I want my

01:03:44.040 | money back, and they went and sold those bonds into the

01:03:46.520 | market, they wouldn't be able to make the depositors whole. But

01:03:49.320 | it doesn't mean that depositors end up with zero, it means

01:03:52.200 | instead of getting 100 cents on the dollar, they get 93 cents on

01:03:55.000 | the dollar 88 cents on the dollar, and it would require an

01:03:58.440 | orderly dissolution of the bank's assets selling those

01:04:01.080 | bonds into the market to generate the cash to pay back

01:04:03.600 | the depositors. So the reason we've seen this kind of this Fed

01:04:06.840 | vertical spike number is because assets are moving so quickly,

01:04:10.600 | depositors are moving their value so quickly from one bank

01:04:13.560 | to another, that in order for the banks to make the cash

01:04:16.080 | available to those depositors, they've had to borrow from the

01:04:18.280 | Fed, and then they're going into the market and doing this kind

01:04:20.720 | of, they should be doing this orderly asset sale of the bonds

01:04:23.280 | to generate the cash to pay back the Fed, which is musical

01:04:26.920 | chairs, money, money, causing these problems is musical chairs.

01:04:30.120 | And if the musical chair stop, then we don't have this problem,

01:04:33.280 | correct.

01:04:33.800 | So if people stopped moving deposits around, then you're

01:04:38.520 | right, the banks wouldn't need to borrow money to give

01:04:41.680 | depositors their money and then go do the work of selling the

01:04:43.720 | bonds in the market people free moving their money around

01:04:46.480 | because of the shirt, because it's not a shirt. So here we go.

01:04:49.840 | So you just ensure it and this whole thing stops. So nothing to

01:04:53.760 | just say that, right? Yeah. So here's the thing, Jake, how you

01:04:56.200 | mentioned this case that you hear a lot of people saying,

01:04:59.120 | Well, why don't you just take your two and a half million

01:05:01.280 | dollars and break it up into 10 accounts, which is what people

01:05:04.120 | are doing? Yeah, yeah. Well, look, it's not feasible when you

01:05:06.640 | need to run a big payroll at the end of the month, and you got

01:05:08.560 | payables. It's administratively too complicated. And by the way,

01:05:11.640 | what have you accomplished doing that? You haven't solved

01:05:14.440 | anything. So who hasn't accomplished for the startup? It

01:05:18.080 | has accomplished? I'm just giving them prediction system.

01:05:20.200 | Yeah, why wouldn't you just raise FDIC to two and a half

01:05:22.720 | million or have FDIC be based on the number of employees in your

01:05:26.520 | company or allow a higher class a business class of FDIC that

01:05:31.880 | goes up to say, pro? Yes, exactly. Those 10 million and in

01:05:35.320 | exchange, the quid pro quo has to be that the bank can't put

01:05:39.280 | that money in risky assets.

01:05:41.160 | Why is this not this is so obvious.

01:05:43.160 | The reason I walked through that whole explanation, because I

01:05:47.920 | want to answer your question. I'm sorry it took so long. But

01:05:49.760 | like, I want to highlight that because that is what an

01:05:52.360 | insurance underwriter put aside the FDIC and put aside banks and

01:05:56.160 | put aside the government's role. Yes, that's what an insurance

01:05:58.880 | underwriters job would be. They would look at the volatility and

01:06:02.400 | the pricing on the bonds that the bank holds. And they would

01:06:05.800 | determine ultimately two things, probability of loss and severity

01:06:09.920 | of loss. And the probability is how likely is it that you end up

01:06:12.920 | in negative equity, and that you have people requesting money and

01:06:16.080 | you have to sell those bonds and lost very quickly. And then the

01:06:18.400 | severity is how much would you actually lose. So if, if you

01:06:21.920 | know, the Fed raises rates by 3%, and your entire book is

01:06:25.600 | tied up in 10 year bonds, you see a 25% decline in the value

01:06:29.520 | of your bond portfolio. That's as bad as it gets. If you start

01:06:32.160 | with a 10% buffer. Now, you only have 85% of the money you owe

01:06:35.920 | the depositors. So your loss is 15 cents on the dollar. So the

01:06:39.760 | insurance company would say, what's the probability of that

01:06:41.960 | event happening? How much should we underwrite it for? What

01:06:44.320 | should we charge as a premium to do that. And that's ultimately

01:06:46.720 | how the rates would get set. Now the problem with most insurance

01:06:49.680 | models around this sort of a problem set is that these are

01:06:53.720 | the extreme tail events that have never happened. And so the

01:06:57.240 | insurance to Saksa's point is super cheap, leading up to the

01:07:01.360 | extreme tail event. And then everyone's like, Oh my gosh, we

01:07:05.040 | underpaid for so many years, we didn't realize how severe the

01:07:08.000 | losses could have been, we didn't realize how significant

01:07:10.480 | this was going to be. And as a result, you now see this kind of

01:07:13.720 | multiplying effect, because people are like, Oh my gosh, if

01:07:16.120 | it happened to them, it could happen to me, let's all sell and

01:07:17.800 | it gets worse and worse and worse. And so you know, the real

01:07:20.680 | rate for the insurance going forward, will now have to take

01:07:24.200 | into account this massive risk. But the game theory problem is

01:07:27.000 | as taxes point out, if you just ensure everyone, the cost of the

01:07:30.720 | insurance actually goes way, way, way, way down, because now

01:07:33.320 | you don't have this money movement problem. And so you

01:07:36.280 | know, the point is, the more you ensure at this point, the

01:07:39.360 | cheaper the insurance will actually be. If you're an

01:07:42.800 | actuarial or free market underwriter, you know, free

01:07:45.240 | market kind of, you know, underwriting process on this

01:07:47.720 | thing, because now the probability of having this bank

01:07:50.920 | run goes way, way down. And therefore, the cost of the

01:07:54.040 | insurance should go way down. And so the irony is, if you

01:07:58.320 | actually did, and this is getting super technical, but if

01:08:01.440 | you actually looked at the statistical model and said, how

01:08:04.600 | much is this going to cost to ensure every deposit, it gets

01:08:07.760 | much, much cheaper, the higher the the deposits that you're

01:08:12.240 | willing to ensure would be, that's my sense of what the free

01:08:15.200 | market would do here. And it's certainly what I think the

01:08:17.360 | federal government should probably think about doing if

01:08:19.400 | they're going to continue to play a role in backstopping

01:08:21.520 | banks,

01:08:21.800 | the net net is people. startups right now, are doing five to 10

01:08:28.200 | banks, I'm watching it happen. They're doing all these sweep

01:08:30.440 | accounts, they're doing multiple accounts. So the government, if

01:08:33.640 | it doesn't raise the FDIC limit is basically just creating extra

01:08:36.800 | work for everybody, and it's going to be the same outcome. So

01:08:39.240 | this people are going to the street will find its own use for

01:08:42.120 | technology and how to hack this. And that's what's happening

01:08:44.800 | with these services. Yeah,

01:08:46.160 | real time, this is steel man, the the old fashioned view or

01:08:49.400 | the traditional view of this, they would say that, well, you

01:08:52.800 | want those startups being paranoid, you want those

01:08:55.160 | startups doing the work of disciplining these banks by

01:08:58.360 | moving their money elsewhere, if they detect a problem. However,

01:09:02.560 | the problem with that is you get these bank runs. That is what a

01:09:05.640 | bank run is, in parts, is people moving their money, because

01:09:08.840 | they're fearing that the bank is not doing a good job with their

01:09:12.120 | loan portfolio. So this is why in the let's call it the olden

01:09:16.440 | days before FDIC, we had bank runs and panics all the time.

01:09:20.120 | And that's why FDIC was invented. So there's a hugely

01:09:24.840 | destructive problem that comes along with placing the depositor

01:09:29.960 | in charge of disciplining the banks. And I would argue that

01:09:34.320 | the depositor is not the best person to do it. It's the

01:09:36.040 | regulator, just to kind of layer on what what free bird was

01:09:38.520 | saying. I think there's like a fundamental market failure with

01:09:41.680 | banking, in the sense that the depositor, or the consumer and

01:09:45.960 | the bank think they're getting two completely different things.

01:09:48.440 | When you open a bank account or a checking account, you think

01:09:51.920 | you're getting a checkbook, an ATM card, a place to do payroll

01:09:57.160 | run, you know, and it's a service, it's a service, and

01:09:59.640 | maybe you make a little bit of interest, but it's not even your

01:10:01.840 | main motivation. Okay, that's what you think you're getting

01:10:04.080 | your money, most of all is safe. Because you're not signing up

01:10:07.880 | with a service provider to have any chance of losing your money.

01:10:10.280 | You're not gambling. Right. But now what does the bank think

01:10:12.720 | it's getting? You know what the bank thinks is getting an

01:10:14.920 | unsecured loan, that they can then turn around and invest in

01:10:18.200 | whatever they want, or whatever the law

01:10:19.800 | allows them to. So there's a disconnect between the parties

01:10:21.840 | and the transaction.

01:10:22.760 | Exactly. It's a total disconnect. And moreover, the

01:10:25.320 | way the management of the bank is compensated, is that they

01:10:28.280 | only have to pay back your loan, your deposit basically is

01:10:32.560 | their loan at par. And anything they make on a bet that they

01:10:37.000 | make with that money, they get to keep they get to keep all the

01:10:39.000 | upside, their stockholders and management get to keep that

01:10:41.400 | and those incentives are what are driving this. And that's

01:10:44.040 | what drove the risk in all likelihood at Silicon Valley

01:10:46.200 | Bank, they were getting $200 billion, whatever percentage

01:10:50.160 | point they got some off.

01:10:51.240 | We somehow the executive team was

01:10:54.080 | compensated for their incentive. It's not just them, but the

01:10:56.840 | whole banking system creates the incentive. They're highly

01:10:59.200 | leveraged. The deposits from their standpoint, are leveraged

01:11:03.280 | their leverage 10 to one. So their incentive is to go to the

01:11:06.440 | casino and gamble it because they get to keep all the upside.

01:11:08.880 | And if they lose it, it's basically someone else on the

01:11:12.280 | hook final word.

01:11:14.320 | In early May, the Fed will release their investigation

01:11:19.080 | into signature bank and SVB. Okay, Powell said that this

01:11:23.520 | week. I think it'll be really interesting to see how much

01:11:26.960 | honesty they both put into the report, and then whether the

01:11:32.520 | entirety of that report is made available to the rest of us to

01:11:35.000 | read. But I think SACS has very elegantly summarized what's

01:11:40.280 | happening. And it doesn't take a genius to figure out that this

01:11:45.160 | doesn't make sense. So the question is, what is the

01:11:49.800 | tolerance that we have for changing something that clearly

01:11:54.560 | is mischaracterized? What consumers think they're getting

01:11:59.840 | and what banks are then doing are two totally different

01:12:02.360 | things. And if the Fed actually is really, really honest, and

01:12:08.600 | really lays bare everything that happened, it'll be very hard to

01:12:12.840 | not legislate changes based on it.

01:12:14.600 | And this your best swing at a legislative change would be what

01:12:19.160 | Chama. What is the what is the low hanging fruit? What's the

01:12:21.840 | layup here?

01:12:22.480 | Well, I think we've seen this happening in other markets for a

01:12:25.800 | while, which is that banks have become in fairness to them, much

01:12:31.080 | much better at risk management post Dodd Frank post great

01:12:34.240 | financial crisis. And the result of that is that there's been a

01:12:37.240 | lot of emerging private credit markets because most of bank is

01:12:40.960 | about lending, right? They're not really buying equities,

01:12:43.480 | they're lending money, they're a debtor in possession of

01:12:46.080 | something, right. And there's been a just a massive explosion

01:12:52.360 | of private credit. And it started in the most obvious

01:12:56.000 | areas. It started in things like CLOs, it started in asset backed

01:13:00.240 | securities, solar car loans, credit cards, mortgages, private

01:13:05.160 | equity backed deals. So I think the rational answer is that

01:13:11.840 | banks need to protect 100% of deposits. And that if they want

01:13:18.160 | to have extracurricular activities, if you will, they

01:13:23.480 | need to be able to raise money from investors, put that to work

01:13:28.120 | in a really fair and transparent way, and then share in the

01:13:33.160 | profits between all of the related parties that are

01:13:35.600 | involved in that transaction no different than any other risk

01:13:38.920 | taking organization. And I think that this is now what we've

01:13:43.280 | probably shined a light on is in really odd loophole that just

01:13:48.760 | needs to get closed in 2023.

01:13:50.440 | There's such easy, easy, hygienic changes here.

01:13:54.480 | Like, let's put it a different way. If you raised money for a

01:13:59.360 | liquid hedge fund that had quarterly redemptions, and then

01:14:02.880 | violated the LPA and stuffed it into private companies that had

01:14:06.440 | 10 year illiquidity, there would be hell to pay. Yeah. And vice

01:14:11.400 | versa. If you raise money on 10 year illiquid locked up capital

01:14:15.000 | on the presumption you're going to invest in startups, and then

01:14:17.880 | instead put it in the stock market thinking that you could

01:14:20.120 | flip it and make some money. You would have violated the LPA and

01:14:24.520 | there be held to pay. Similarly, I think what Saks is stating is

01:14:28.080 | that there is a mismatch of what the depositor in this case, the

01:14:32.160 | investor expects, and what the risk manager is doing. And I

01:14:37.520 | think that you have to correct that one way or the other, make

01:14:39.680 | it abundantly clear that we're never going to ensure 100% and

01:14:43.240 | deal with that risk. Or make it 100% and deal with the fallout,

01:14:48.400 | which is largely about wiping out a lot of equity value in

01:14:52.440 | banks.

01:14:52.920 | LPA equals limited partnership agreement, right?

01:14:56.320 | Just to just to clarify one thing, I'm not saying that these

01:14:59.080 | bank managers are all going to the casino and gambling the

01:15:01.040 | money. I think that they are generally more responsible than

01:15:03.680 | that. What I'm saying is that the incentives created by this

01:15:07.920 | crazy system we call banking, create a weird incentive for

01:15:12.160 | them to gamble because they're so highly levered. From their

01:15:15.080 | standpoint, your deposits are their leverage,

01:15:18.360 | everybody but the GSIBs because I think the GSIBs there's so

01:15:21.240 | much scrutiny. If you look at how well run city B of A, Wells

01:15:25.920 | and JPM are relative and contrast them to the sub GSIBs.

01:15:30.440 | It's like night and day. And so the other thing that I think

01:15:34.080 | we've realized is who thought it was a good idea to raise the bar

01:15:38.360 | on eligibility from 50 billion of assets to 200. Clearly, now

01:15:42.760 | that made no sense. It makes more sense to actually

01:15:45.800 | categorize every bank as systemically important, maybe

01:15:50.720 | not globally, but at a minimum to the US economy, because these

01:15:54.080 | people play a vital function in society. And they were allowed

01:15:58.600 | to take a much more aggressive risk posture because they were

01:16:02.480 | able to lobby the government to change the rules.

01:16:04.400 | The CEO of Tick Tock, which claims to be an American

01:16:07.680 | company now, or an international company was in front of Congress

01:16:12.040 | today. His name is show chew. This is the first time he's

01:16:15.280 | really, I think, spoken publicly in an extended period four and

01:16:20.600 | a half hours, he was grilled. And it was absolutely brutal.

01:16:24.440 | It's the first time I've seen a congressional hearing that was

01:16:28.400 | bipartisan in a long time. And he said that, quote, the bottom

01:16:34.360 | line is, this is an American day, this is American data on

01:16:37.760 | American soil by an American company overseen by American

01:16:40.440 | personnel, and then was immediately squirrely when asked

01:16:47.640 | if Chinese employees, including engineers have access to this US

01:16:52.120 | data. And he said, this is a complex subject over and over

01:16:55.960 | again, he was evasive. And this did not look good for Tick Tock.

01:17:02.200 | Well, I think now becomes does it become divested and go public

01:17:06.840 | or does it get shut down?

01:17:08.160 | Saks, I think his goose was cooked as soon as they asked him

01:17:11.560 | the question. In preparation for this hearing, did you consult

01:17:14.680 | with any member of the CCP? And he could not just outright say

01:17:18.200 | no, no. So that's his goose was cooked as soon as he couldn't

01:17:21.680 | just say no.

01:17:22.400 | What do you think about the bipartisan nature of this? And

01:17:24.400 | what do you think the outcome is sex?

01:17:25.600 | Well, this is one of the rare things where it is bipartisan. I

01:17:28.080 | mean, there's there's so much outrage and anger at this. I

01:17:32.720 | think that they should let the company divest it. I think it is

01:17:36.960 | divestiture or shut down for Tick Tock. Since we're not

01:17:40.320 | communists here, I think they should be given the chance to

01:17:42.480 | fully divest to an American owned company. But look, I just

01:17:47.600 | wish that there was as much bipartisan consensus and

01:17:52.600 | outrage directed not just at Chinese spying of Americans, but

01:17:57.080 | on the American deep state spying on Americans, because we

01:18:00.720 | just had hearings showing that the American government conducts

01:18:04.760 | elaborate spying operations, surveillance of Americans on

01:18:08.400 | social media, this was all revealed in the Twitter files.

01:18:10.560 | And we got certainly no bipartisan consensus on that

01:18:15.000 | Republicans were outraged, but Democrats tried to portray it as

01:18:18.040 | some sort of spat between Trump and Chrissy Teigen. I mean,

01:18:20.840 | that's all they wanted to talk about. So I would like to see

01:18:24.320 | this problem comprehensively addressed. And that means I

01:18:28.400 | think, Tick Tock, going into the hands of an American company,

01:18:31.760 | but I also would like more assurances that American

01:18:34.840 | companies will not be working with the deep state to spy on us

01:18:38.200 | in a fringe or a city and Donald Trump, who are two people you'd

01:18:41.560 | never invite to a dinner party? freeberg? What are your

01:18:44.920 | thoughts? Is it going to divest? Should it be forced to divest?

01:18:48.120 | being intellectually honest about it? What are your

01:18:51.480 | thoughts on Tick Tock in America?

01:18:54.360 | Yeah, I think I've shared this in the past, I think they're

01:18:58.240 | probably gonna have to spin this thing out. And if they hold any

01:19:01.200 | equity, if the Chinese parent company holds any equity

01:19:03.720 | interest, it'll probably be non voting shares. And there'll be a

01:19:07.480 | mandate that the majority of the shares and some degree of

01:19:10.040 | oversight.

01:19:10.680 | I believe that's the right thing to do.

01:19:12.200 | From a national security issue for America to force them to do

01:19:16.880 | that.

01:19:17.120 | I don't know, from a national security point of view, I really

01:19:19.520 | don't. I don't have an opinion on national security and Tick

01:19:23.160 | Tock. I don't know. I've always thought that Tick Tock was a

01:19:27.560 | really what's the right word? Like it's like a firefly for,

01:19:34.520 | you know, Chinese invasion. And it feels like, you know, it's a

01:19:38.000 | very easy kind of target for I think what is generally a big

01:19:42.760 | kind of social consciousness right now. So, you know, whether

01:19:46.800 | or not there's actually like, some national security points,

01:19:51.480 | if there were, I'm pretty sure that national security person

01:19:54.520 | would have stood up and said, We need to stop this thing. I'm

01:19:57.080 | not sure I've heard that publicly.

01:19:58.440 | Chabot.

01:19:59.120 | But I will say like, my point of view from like, just seeing the

01:20:04.160 | political behavior is that they're probably going to mandate

01:20:06.440 | that these guys spend this thing out to us investors and, and

01:20:09.560 | that they, you know, don't own any that the Chinese don't have

01:20:12.240 | any equity or management oversight or interest in it.

01:20:14.880 | Chabot in China itself. The Chinese government does not

01:20:20.960 | allow kids to play video games during the week and only three

01:20:23.320 | hours on the weekend. They're using apps like WeChat to

01:20:28.040 | dictate social score and social behavior, whether it's smoking

01:20:31.360 | on a train or not paying your bills. And they are saying they

01:20:37.120 | will not divest. But any buddy who is an investor in a company

01:20:41.880 | that had a chance to go public for 10s of billions of dollars

01:20:44.640 | and eventually take on and people believe that this is a

01:20:47.840 | viable competitor to Facebook and Instagram. This could be a

01:20:51.480 | company worth ultimately hundreds of billions of dollars.

01:20:54.080 | If you were an investor in China, you would want to IPO,

01:20:57.760 | you would want to get liquidity. So if they are refusing to sell,

01:21:01.720 | what does that tell you as a market participated in

01:21:04.840 | participant in somebody who's been a capital allocator for

01:21:07.280 | over a decade,

01:21:07.840 | there's bigger problems in China than even tick tock us

01:21:11.200 | represents for them. I think it's probably what it means. So

01:21:14.280 | it's a pretty bad tell. I don't think divestiture is a real

01:21:18.520 | option. Because when you think about the details of that, how

01:21:22.280 | will the government be satisfied that the code base was separated

01:21:25.440 | elegantly, that there was no malware surreptitiously planted?

01:21:31.480 | How will you actually prove all of this to a degree that

01:21:35.960 | satisfies a legislator. So I think the pound of flesh that

01:21:40.720 | they want is more easily and more salaciously satisfied by

01:21:44.880 | shutting the thing down. So if I had to bet on what happens, I

01:21:49.640 | bet more on that. I didn't think tick tock did a very good job.

01:21:52.760 | And I think that there are some, they were terrible today. And I

01:21:56.680 | think that there are some real issues around how much control

01:21:59.920 | does actually flow back. I don't think that it was definitive. He

01:22:05.000 | needed to be much clearer and adamant that this was an

01:22:10.640 | independent business that didn't have backdoors to China and the

01:22:13.920 | CCP to appease Congress. He didn't do that. No, he was like,

01:22:17.600 | I have to check in on that. I'm not sure. Yeah, I think it was a

01:22:20.680 | little bit of the exact opposite, actually, Saks is

01:22:22.800 | right, like that first question was just the death blow right

01:22:25.440 | from the beginning. It's like, Oh, this is not going to go in a

01:22:28.240 | good place, because they should have been able to see that that

01:22:30.760 | question was going to get asked. And you need to have that asked

01:22:34.800 | and answered philosophy where the only answer is no. The only

01:22:39.120 | answer you could have given is no. And the fact that he wasn't

01:22:41.440 | able to say that it was a bit of a fetter complete as soon as

01:22:45.040 | soon as that was in my mind, I was like, this thing is getting

01:22:47.080 | shut down. Because I don't think there's a shutdown. Yeah,

01:22:49.840 | there's no divestiture plan that can be technically audited in a

01:22:54.640 | short amount of time to appease these folks. They want to pound

01:22:59.600 | the flesh and then separately. The bigger issue that I think

01:23:03.200 | you have to deal with is what does that mean for how other

01:23:07.920 | governments may be pressured to act who want to be on the pro us

01:23:13.360 | camp? And I think that that's a question because

01:23:18.680 | ByteDance and Tick Tock have presence beyond just China in

01:23:21.720 | the US. A third question is, how does the golden vote get used on

01:23:27.200 | the ByteDance board? And what do they do? And do they even want

01:23:30.960 | this thing public explain golden vote, essentially, they'll decide

01:23:33.840 | what happens to that company. And they have that in Alibaba,

01:23:36.960 | they have that I think a 10 cent, I think they have that at

01:23:39.080 | ByteDance. So the Chinese government has a very strong

01:23:42.960 | hand in the direction of these business. And then the final

01:23:45.760 | point is that there's a secondary app that Tick Tock has

01:23:50.800 | called CapCut, which also is enormously popular in the United

01:23:54.800 | States, which is yet another potential backdoor for privacy

01:23:59.320 | or spying violations, whatever the US Congress wants to pin on

01:24:02.960 | them. So I think it's a very complicated moment for that

01:24:08.280 | business and their US asset

01:24:11.040 | sacks. It's pretty clear the CCP is making this decision. If they

01:24:16.120 | decide, let it burn, let it get kicked out of the United States.

01:24:19.400 | What does that do in terms of game theory between the two

01:24:23.360 | countries? And going forward, because obviously, they don't

01:24:26.440 | reciprocate, we're not allowed to have Google, Twitter,

01:24:28.600 | Instagram, whatever in China. So is this just, you know, what

01:24:33.680 | what's what decision you're saying the CCP is making?

01:24:37.080 | Well, the CCP has the golden vote. It's their decision to

01:24:40.560 | divest or not divest. Chamath believes they will not divest. I

01:24:43.960 | believe they will not

01:24:44.600 | Chamath is saying is they're not going to have the choice. I

01:24:47.600 | don't, I don't see what decision the CCP has in this. It's gonna

01:24:51.040 | be

01:24:51.120 | divest. That's right. There. It's not a divesture. Don't

01:24:54.520 | divest. I think it'll be shut down. I think they're getting

01:24:57.040 | kicked out of the United States.

01:24:58.040 | Okay, do you but you believe they're going to divest sacks?

01:25:01.160 | I'm saying that that's what I would support. Just to give them

01:25:05.200 | the chance. What do you think's gonna happen?

01:25:07.360 | I try to be right. I'm not sure. But I think they should be

01:25:10.280 | given the chance. And if you truly can't move the servers to

01:25:14.360 | the United States and vet the code base, I feel like you

01:25:16.840 | could, I think you could have an acquire or figure it out, you

01:25:21.080 | know, vet the code base, move the data centers, make sure

01:25:24.360 | there's no back doors. I think it's not impossible, hard, but

01:25:27.320 | not impossible.

01:25:28.040 | Okay, so let's go with the scenario that it gets kicked out

01:25:32.160 | of the United States is shut down. Are there any second or

01:25:34.720 | third order impacts?

01:25:35.960 | Yeah, it's just ratchets up the tension between the US and

01:25:38.440 | China. But we're already we're already there. Yeah, we're

01:25:42.480 | already there.

01:25:43.000 | No change. All right. Listen, this has been an amazing

01:25:45.240 | episode. Oh, Chamath. Did your 3d rocket company make it to

01:25:50.960 | space? I saw they had a nice little lift off there.

01:25:54.080 | Thank you, Jason. I just wanted to give a shout out this is

01:25:57.680 | like, while all this chaos is happening in the world, it's

01:26:00.680 | amazing to see pretty incredible engineering. So last night, we

01:26:05.480 | did have a successful launch. So relativity has a 85% 3d printed

01:26:11.360 | rocket, which over time, we want to try to get to 95%. But it's

01:26:15.200 | the fuselage, it's the engines. It brings the cost of space

01:26:20.640 | flight down by an order of magnitude. It is a hugely

01:26:25.280 | disruptive idea. And so what they tried to prove was that

01:26:28.640 | they could get this thing into space. And they accomplished a

01:26:32.200 | lot of goals, they got past Max Q, which is sort of the point at

01:26:35.320 | which the atmospheric pressure is the strongest on the

01:26:37.720 | fuselage. So we proved structural integrity, we got to

01:26:41.320 | main engine cut off, we had stage two separation. So a lot

01:26:45.960 | of really important technical milestones were achieved, it

01:26:48.760 | allows them now to unlock a bunch of contracts that allow us

01:26:54.640 | frankly, just to keep going and building, there's still a lot of

01:26:57.080 | work to do from here, we're building now the next generation

01:26:59.840 | rocket, which is called Terran R, and rocket engines, which

01:27:03.400 | can take instead of 1500 kilograms, about 20,000 kilos.

01:27:08.320 | So enormously proud to have been around this journey, my partner,

01:27:14.480 | Jay has been really the key person on it. But I just wanted

01:27:17.920 | to give a huge shout out to Tim Ellis and the team at

01:27:19.680 | relativity. It's super, super, super cool. But they pulled off

01:27:22.480 | just amazing how access to space is being democratized, and the

01:27:27.560 | prices are being lowered so dramatically, what's the impact

01:27:30.200 | that's going to have ultimately freeberg, you think, on

01:27:32.760 | humanity? I mean, obviously, going to Mars is this

01:27:35.760 | incredible feat, technologically, and just mind

01:27:39.760 | blowing. But what do you think the, the net result of all this

01:27:44.400 | space activity is going to be for the human condition and the

01:27:47.480 | species?

01:27:48.040 | I mean, I think there's a vibrant community of startups

01:27:52.160 | and money coming into this space right now, I do think all these

01:27:55.240 | guys are going to have to in order to gain wider spread

01:27:58.120 | capital markets attention, like Elon has had to do with SpaceX

01:28:02.480 | are going to have to find business models that have kind

01:28:06.000 | of near term viability that don't depend on government

01:28:08.640 | contracts, like Starlink, like Starlink. Yeah. And so I think

01:28:13.240 | that's the key question. It obviously, these are very

01:28:15.440 | capital intensive businesses, they have very long horizons to

01:28:19.400 | hit their milestones. So there's certainly capital available in

01:28:24.600 | the early stages to make bets on whether or not they can get

01:28:28.600 | these milestones. But but, you know, the broader kind of

01:28:31.160 | attention and capital markets is going to come from these things

01:28:34.320 | building real kind of businesses that generate value for

01:28:36.760 | consumers and markets. You know, one of the things that I think

01:28:40.960 | can unlock opportunity for this market overall, is low cost

01:28:47.120 | energy, you know, if we can get below, call it one cent to three

01:28:52.680 | cents kilowatt hour of power, call it one cent a kilowatt hour

01:28:55.920 | power, I forgot the exact relationship, you can get very

01:28:58.840 | cheap, you know, hydrogen and oxygen fuel sources. And so,

01:29:03.280 | you know, the it's funny, if you actually play out the scale

01:29:07.120 | factor for space, for the space industry, much of it at scale,

01:29:12.160 | will get driven by the cost of electricity. So it's another

01:29:15.160 | reason why there's going to be, I think, a pretty tight coupling

01:29:17.160 | between the cost of power and ultimately, the vibrancy of the

01:29:21.440 | market.

01:29:21.880 | You mentioned something important. The other key thing

01:29:24.240 | that we proved was that this is a pure methylox engine. So CH

01:29:27.920 | four and liquid oxygen. And it was not just stage one, but also

01:29:32.120 | stage two, which is unique. The only other folks that have tried

01:29:35.400 | to prove that you could have multi stage methylox is China

01:29:38.080 | and their most recent launch failed, but it highly simplifies

01:29:42.040 | the engineering problem at hand. Especially the ground

01:29:46.400 | operations and whatnot, and sort of like filling these rockets

01:29:49.360 | and making them viable. So that was another really big milestone

01:29:52.720 | that just

01:29:53.120 | the producing of that fuel Friedberg requires energy, if

01:29:57.240 | that energy was cheap, it would be cheaper to make and process

01:30:00.600 | that fuel.

01:30:01.160 | That's right. Yeah, there's a pretty, pretty direct tie in

01:30:04.760 | particularly with scale manufacturing on fuel that would

01:30:08.400 | be used in these rocket systems and, and power prices here on

01:30:11.240 | earth. So if and as we get power prices down, either through

01:30:14.880 | scaled renewables, or ideally fusion or some other kind of new

01:30:18.040 | technology, or nuclear fission or something, then the cost of,

01:30:23.880 | you know, fuel and the cost of these space programs goes down.

01:30:27.160 | And that ultimately, I think the real question everyone asks is,

01:30:30.280 | how do you get away from it just being government services,

01:30:32.160 | businesses, which, you know, have a low multiple in markets,

01:30:36.360 | and obviously, you know, high dependency on one or two key

01:30:38.600 | customers? And how do you actually get private markets,

01:30:41.440 | private market products moving? So tourism obviously makes a lot

01:30:45.800 | of sense. Travel, you know, around the earth in 20 minutes

01:30:50.760 | or something, or, you know, some people have talked about mining

01:30:54.120 | or colonies, and you know, who would fund that real estate. It's

01:30:57.240 | unclear right now what the earth traveling is a wild one. Yeah,

01:31:00.520 | I've talked to you on about that. But the idea that you

01:31:02.600 | could have a rocket ship take off from Texas, and then be in

01:31:06.520 | Tokyo, you know, like half an hour minutes later is I can only

01:31:10.880 | I'll speak, I can only speak for myself, but I would really like

01:31:14.840 | to visit Uranus Reaper. All right, everybody. Look at the

01:31:20.240 | player here. He's got layers are for players. sexy. Look at this.

01:31:23.200 | He is he is two layers in Can you get an ascot? It's subtle,

01:31:26.040 | isn't it? He's pulling a Steve Bannon. You got to get more

01:31:28.880 | disheveled. He needs the six pens in the color pens. No shave.

01:31:33.640 | Can you tell us? Do you have a stylist, an actual person you

01:31:37.720 | pay to address you? Nick, can you please put the picture of

01:31:40.760 | Steve Bannon where he wears the multiple?

01:31:42.440 | Do this again.

01:31:45.000 | Need to stop for next show attacking me. It's really weird.

01:31:49.680 | Oh, yeah, Bannon. He thinks you're a venture a vulture

01:31:52.120 | capitalist or something. He's been attacking you.

01:31:54.360 | Bannon was one of the people attacking me on Twitter. I think

01:31:58.800 | on his podcast. I think Yeah,

01:32:00.600 | you seem to have made a lot of a lot of new friends on Twitter

01:32:03.320 | lately. When you pass around half a million followers.

01:32:06.120 | Basically, what happens is you become a politician, you will

01:32:09.560 | know there will always be a fringe element of people who

01:32:12.880 | need to manage their anxiety by venting. And that's what you're

01:32:16.600 | feeling. You will live that now at million use, you know,

01:32:20.320 | followers, 2 million, 10 million, whatever, there's always

01:32:22.560 | going to be a small percentage. J. Cal doesn't know this, because

01:32:25.480 | he has mostly bots that are his followers. It's true. I have an

01:32:28.000 | old account real when you have real people. This is what it is.

01:32:30.840 | You'll get this 1% or less than 1%. And just the number goes up.

01:32:34.080 | So I would ignore it. Don't care. Don't worry about what

01:32:37.080 | user 747 feed the brigadoons don't care what seven user 74786

01:32:41.600 | has to say. Don't worry about it. Yeah, absolutely. I love

01:32:43.960 | you. All right. And I'm looking forward to seeing you on

01:32:45.840 | Thursday. For the rain man himself, David sacks, the

01:32:51.000 | sultan of science and Prince of panic attacks our pal David

01:32:54.480 | Friedberg and the host with the most going to make me what about

01:32:58.200 | me? What about me? I'm going them calling you the host with

01:33:00.560 | the most I'm adding something the host with the most is making

01:33:02.920 | me the she so leaf tempura with Hokkaido and you are the world's

01:33:08.520 | best genuine collector. I am the world's greatest guest. greatest

01:33:12.520 | house guest if you need a house guest to look at your house. Oh

01:33:15.040 | my Italy, Tokyo, Niseko wherever you need a house guest. I'm

01:33:18.240 | ready to come and make it a good time. You're the modern Kato

01:33:20.920 | Kaelin. You're horrible. Absolutely the best. You keep

01:33:23.760 | inviting me every week. You are enjoyable though. Love you boys.

01:33:27.000 | Let's have fun. Bye bye.

01:33:28.680 | Rain Man David sacks

01:33:34.400 | we open source it to the fans and they've just gone crazy.

01:33:40.800 | Love you.

01:33:42.000 | I squeened up

01:33:42.840 | besties are gone.

01:33:51.560 | That is my dog taking a notice your driveway.

01:33:55.080 | We should all just get a room and just have one big huge orgy

01:34:03.480 | because they're all just like this like sexual tension that

01:34:06.320 | they just need to release.

01:34:08.760 | What you're about to be your fee.

01:34:12.400 | [Laughter]

01:34:14.400 | We need to get murky 'cause our fates-

01:34:16.140 | [Outro Music]

01:34:18.720 | [Outro Music]

01:34:26.720 | [BLANK_AUDIO]

E121: Macro update, Fed hike, CRE debt bubble, Balaji's Bitcoin bet, TikTok's endgame & more

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